<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                          ____________________________

                                   FORM 10-Q


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


For  the quarterly period ended June 28, 1998

                                       OR

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

For  the transition period from                to                   
                                --------------    ---------------
                          Commission File No. 1-12962

                              GRAND CASINOS, INC.
             (Exact name of registrant as specified in its charter)



               Minnesota                         41-1689535
----------------------------------------      -------------------
      (State or other jurisdiction               (I.R.S. Employer
       of incorporation or organization)          Identification No.)        

           130 Cheshire Lane              
         Minnetonka, Minnesota                   55305
----------------------------------------  -------------------
(Address of principal executive offices)      (Zip Code)

                                 (612) 449-9092
              (Registrant's telephone number, including area code)


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 
         ----                      ----

As of August 3, 1998, there were 42,293,145 shares of Common Stock, $0.01 par
value per share, outstanding.


                                  Page 1 of 32
<PAGE>   2

                                  

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                        
                                     INDEX


                                                                     Page of
                                                                     Form 10-Q



     PART I.   FINANCIAL INFORMATION
               ----------------------


               ITEM 1.      FINANCIAL STATEMENTS

                            Consolidated Balance Sheets as of            3
                            June 28, 1998 and December 28, 1997

                            Consolidated Statements of Earnings          4
                            for the three months ended June 28, 1998
                            and June 29, 1997

                            Consolidated Statements of Earnings          5
                            for the six months ended June 28, 1998
                            and June 29, 1997

                            Consolidated Statements of Cash Flows        6
                            for the six months ended June 28, 1998
                            and June 29, 1997

                            Notes to Consolidated Financial Statements   7

               ITEM 2.      MANAGEMENT'S DISCUSSION AND                  14
                            ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

     PART II.  OTHER INFORMATION
               ------------------

               ITEM 1.      Legal Proceedings                            22

               ITEM 4.      Submission of Matters to
                            a Vote of Security Holders                   31

               ITEM 5.      Other Information                            32

               ITEM 6.      Exhibits and Reports On Form 8-K             33



   
                                      -2-

<PAGE>   3

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION> 
                                                                               (UNAUDITED)           *
                                                                             JUNE 28, 1998     DECEMBER 28, 1997
----------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>     
ASSETS
Current Assets:
 Cash and cash equivalents                                                         $92,847              $238,635
 Current installments of notes receivable                                            7,367                 6,856
 Accounts receivable                                                                21,239                15,644
 Deferred income taxes                                                              12,602                13,399
 Other current assets                                                               15,751                15,087
----------------------------------------------------------------------------------------------------------------
Total Current Assets                                                               149,806               289,621
----------------------------------------------------------------------------------------------------------------
Property and Equipment-Net                                                       1,034,020               941,022
----------------------------------------------------------------------------------------------------------------
Other Assets:
 Cash and cash equivalents-restricted                                                8,120                 4,967
 Securities available for sale                                                      15,372                13,110
 Notes receivable-less current installments                                         25,955                26,979
 Investments in and notes from unconsolidated affiliates                             8,142                 8,180
 Debt issuance and deferred licensing costs-net                                     21,625                26,000
 Other long-term assets                                                             29,615                23,858
----------------------------------------------------------------------------------------------------------------
Total Other Assets                                                                 108,829               103,094
----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                    $1,292,655            $1,333,737
================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 Accounts payable                                                                   $9,745               $12,947
 Current installments of long-term debt                                                 60                 3,509
 Current installments of capital lease obligations                                       -                97,376
 Accrued interest                                                                    5,291                 5,817
 Accrued payroll and related expenses                                               25,551                25,555
 Income taxes payable                                                               10,180                     -
 Other accrued expenses                                                             36,582                22,398
----------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                           87,409               167,602
----------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
 Long-term debt-less current installments                                          566,481               566,434
 Deferred income taxes                                                              97,192                97,085
----------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities                                                        663,673               663,519
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                  751,082               831,121
----------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
 Capital stock, $.01 par value; authorized 100,000 shares;
   common stock issued and outstanding 42,291 and 41,966
   at June 28, 1998 and December 28, 1997, respectively                                423                   420
 Additional paid-in-capital                                                        416,566               413,631
 Net unrealized losses on securities available for sale                             (1,548)               (2,947)
 Retained earnings                                                                 126,132                91,512
----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity                                                         541,573               502,616
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $1,292,655            $1,333,737
================================================================================================================
</TABLE>

 * FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                     - 3 -






<PAGE>   4

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
                   (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                                    (UNAUDITED)
                                                                                 THREE MONTHS ENDED
                                                                          --------------------------------

                                                                          JUNE 28, 1998      JUNE 29, 1997
                                                                          -------------      -------------

----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                <C> 
REVENUES:
  Casino                                                                       $121,090           $113,628
  Hotel                                                                          12,602              9,514
  Food and beverage                                                              18,072             16,347
  Management fee income                                                          19,717             19,814
  Retail and other income                                                         3,606              3,488
----------------------------------------------------------------------------------------------------------
Gross Revenues                                                                  175,087            162,791
  Less:  Promotional allowances                                                 (12,801)           (11,954)
----------------------------------------------------------------------------------------------------------
NET REVENUES                                                                    162,286            150,837
----------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES:
  Casino                                                                         40,609             39,587
  Hotel                                                                           4,096              2,291
  Food and beverage                                                               9,647              8,534
  Other operating expenses                                                        3,258              3,390
  Depreciation and amortization                                                  13,948             12,410
  Lease expense                                                                   5,356              4,676
  Selling, general and administrative                                            48,149             40,993
----------------------------------------------------------------------------------------------------------
    Total Costs and Expenses                                                    125,063            111,881
----------------------------------------------------------------------------------------------------------

EARNINGS FROM OPERATIONS                                                         37,223             38,956
----------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSE):
  Interest income                                                                 2,785              2,981
  Interest expense                                                              (10,118)           (11,971)
  Other                                                                            (583)              (125)
----------------------------------------------------------------------------------------------------------
    Total other expense, net                                                     (7,916)            (9,115)
----------------------------------------------------------------------------------------------------------

Earnings before income taxes                                                     29,307             29,841
Provision for income taxes                                                       10,567             11,525
----------------------------------------------------------------------------------------------------------

Earnings before Extraordinary Charge                                             18,740             18,316
Extraordinary Charge-Net of Taxes                                                (1,560)                 -
----------------------------------------------------------------------------------------------------------

NET EARNINGS                                                                    $17,180            $18,316
==========================================================================================================

Basic Earnings per Share before Extraordinary Charge                              $0.44              $0.44
Basic Loss per Share - Extraordinary Charge                                      ($0.04)             $0.00
----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE                                                          $0.40              $0.44
==========================================================================================================

Diluted Earnings per Share before Extraordinary Charge                            $0.43              $0.43
Diluted Loss per Share - Extraordinary Charge                                    ($0.04)             $0.00
----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE                                                        $0.39              $0.43
==========================================================================================================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                       42,136             41,890
==========================================================================================================

WEIGHTED AVERAGE COMMON AND DILUTED
  SHARES OUTSTANDING                                                             43,378             42,782
==========================================================================================================
</TABLE>

                                     - 4 -
<PAGE>   5

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
                   (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                                       (UNAUDITED)
                                                                                    SIX MONTHS ENDED
                                                                           -----------------------------------

                                                                           JUNE 28, 1998         JUNE 29, 1997
                                                                           -------------         -------------

--------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>      
REVENUES:
  Casino                                                                        $247,272              $222,308
  Hotel                                                                           22,472                16,576
  Food and beverage                                                               35,943                30,952
  Management fee income                                                           42,748                38,868
  Retail and other income                                                          6,572                 6,425
--------------------------------------------------------------------------------------------------------------
Gross Revenues                                                                   355,007               315,129
  Less:  Promotional allowances                                                  (26,256)              (22,122)
--------------------------------------------------------------------------------------------------------------
NET REVENUES                                                                     328,751               293,007
--------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES:
  Casino                                                                          81,932                78,067
  Hotel                                                                            7,192                 4,110
  Food and beverage                                                               18,517                16,519
  Other operating expenses                                                         6,159                 6,451
  Depreciation and amortization                                                   28,011                23,961
  Lease expense                                                                   10,750                 9,181
  Selling, general and administrative                                            102,846                84,899
--------------------------------------------------------------------------------------------------------------
    Total Costs and Expenses                                                     255,407               223,188
--------------------------------------------------------------------------------------------------------------

EARNINGS FROM OPERATIONS                                                          73,344                69,819
--------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSE):
  Interest income                                                                  6,852                 6,694
  Interest expense                                                               (21,815)              (22,617)
  Other                                                                             (888)                 (313)
--------------------------------------------------------------------------------------------------------------
    Total expense, net                                                           (15,851)              (16,236)
--------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                                      57,493                53,583
Provision for income taxes                                                        21,313                20,686
--------------------------------------------------------------------------------------------------------------

Earnings before extraordinary charge                                              36,180                32,897
Extraordinary charge-net of taxes                                                 (1,560)                    -
--------------------------------------------------------------------------------------------------------------
Net Earnings                                                                     $34,620               $32,897
==============================================================================================================

Basic Earnings per Share before Extraordinary Charge                               $0.86                 $0.79
Basic Loss per Share - Extraordinary Charge                                       ($0.04)                    -
--------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE                                                           $0.82                 $0.79
==============================================================================================================

Diluted Earnings per Share before Extraordinary Charge                             $0.84                 $0.77
Diluted Loss per Share - Extraordinary Charge                                     ($0.04)                    -
--------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE                                                         $0.80                 $0.77
==============================================================================================================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                        42,101                41,859
==============================================================================================================

WEIGHTED AVERAGE COMMON AND DILUTED
  SHARES OUTSTANDING                                                              43,229                42,609
==============================================================================================================
</TABLE>

                                     - 5 -
<PAGE>   6

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     (UNAUDITED)
                                                                                   SIX MONTHS ENDED
                                                                          JUNE 28, 1998        JUNE 29, 1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Earnings                                                                   $34,620              $32,897
 Adjustments to reconcile net earnings to net cash
  provided by operating activities:
  Depreciation and amortization                                                  28,011               23,961
  Equity in loss of unconsolidated affiliates                                       225                  200
  Deferred income taxes                                                            -                   1,250
  Changes in operating assets and liabilities:
       Current assets                                                            (6,828)              (3,927)
       Accounts payable                                                          (3,202)              (5,641)
       Accrued expenses                                                          23,887               (1,106)
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities                                        76,713               47,634
-------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Payments for property and equipment                                           (117,837)            (101,590)
 Increase in notes receivable                                                    (2,728)                -   
 Proceeds from repayment of notes receivable                                      3,241                3,905
 Decrease (increase) in cash and cash equivalents-restricted and other           (3,153)               3,626
 Increase in other long-term assets                                              (6,510)              (3,878)
-------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities                                          (126,987)             (97,937)
-------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock-net                                       2,938                  641
 Debt issuance costs and deferred financing costs                                 2,379                  (79)
 Proceeds from issuance of long-term debt                                          -                  45,088
 Payments on long-term debt and capital lease obligations                      (100,831)             (10,000)
-------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities                             (95,514)              35,650
-------------------------------------------------------------------------------------------------------------

Net decrease in cash and cash equivalents                                      (145,788)             (14,653)
Cash and cash equivalents - beginning of year                                   238,635              147,254
-------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR                                         $92,847             $132,601
=============================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid during the period for:
  Interest - net of capitalized interest                                        $30,519              $27,325
  Income taxes                                                                     -                  17,301
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                     - 6 -





<PAGE>   7


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 28, 1998
                                  (UNAUDITED)



NOTE 1  UNAUDITED FINANCIAL STATEMENTS

        Grand Casinos, Inc. and its subsidiaries (collectively "the Company")
        develops, constructs, and manages land-based and dockside casinos and
        related hotel and entertainment facilities.  The Company owns and
        operates two dockside casinos on the Mississippi Gulf Coast and one
        dockside casino in Tunica County, Mississippi, and manages two
        Indian-owned casinos in Minnesota (the management contract with Grand
        Casino Mille Lacs in Onamia, Minnesota, expired on April 2, 1998) and
        two Indian-owned casinos in Louisiana. Related hotel, health spa/salon,
        and convention center facilities at Company-owned Grand Casino Gulfport,
        located in Gulfport, Mississippi, and hotel and health spa/salon
        facilities at Grand Casino Tunica, located in Tunica County,
        Mississippi, are currently under construction.  In addition, a casino
        expansion and a new hotel at Indian-owned Grand Casino Coushatta,
        located in Kinder, Louisiana, are currently under construction.

        The accompanying unaudited consolidated financial statements include the
        accounts of Grand Casinos, Inc. and its wholly-owned and majority-owned
        subsidiaries.  Investments in unconsolidated affiliates representing
        between 20% and 50% of voting stock are accounted for on the equity
        method. All material intercompany balances and transactions have been
        eliminated in the consolidation.

        The consolidated financial statements have been prepared by the Company
        in accordance with generally accepted accounting principles for interim
        financial information, in accordance with the rules and regulations of
        the Securities and Exchange Commission.  Pursuant to such rules and
        regulations, certain financial information and footnote disclosures
        normally included in the consolidated financial statements have been
        condensed or omitted.  In the opinion of management, all adjustments
        (consisting of normal recurring adjustments) considered necessary for
        fair presentation have been included.

        Operating results for the six months ended June 28, 1998, are not
        necessarily indicative of the results that may be expected for the
        fiscal year ending January 3, 1999.  Operating results for such six
        months include management fees from the Company's management of Grand
        Casino Mille Lacs.  The contract pursuant to which the Company managed
        Grand Casinos Mille Lacs expired on April 2, 1998.

        The consolidated financial statements should be read in conjunction with
        the consolidated financial statements and notes thereto included in the
        Company's annual report on Form 10-K for the year ended December 28,
        1997.

                                     - 7 -


<PAGE>   8

                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)





NOTE 2  ACCOUNTING PRONOUNCEMENTS

        The Company adopted FASB Statement No. 130, "Reporting Comprehensive
        Income", effective December 29, 1997.  Statement No. 130 establishes
        standards for reporting and display of comprehensive earnings and its
        components in financial statements; however, the adoption of this
        Statement had no impact on the Company's net earnings or shareholders'
        equity.  Statement No. 130 requires minimum pension liability
        adjustments, unrealized gains or losses on the company's
        available-for-sale securities and foreign currency translation
        adjustments, which prior to adoption were reported separately in
        shareholders' equity, to be included in other comprehensive earnings.
        Total comprehensive earnings (loss) for the six months ended June 28, 
        1998 and June 29, 1997 were $1.4 million and ($1.9) million,
        respectively. Differences between comprehensive earnings (loss) for 
        these periods were due to unrealized holding gains and losses on
        securities available for sale.

        During April 1998, the Accounting Standards Executive Committee of the
        American Institute of Certified Public Accountants (AICPA) issued
        Statement of Position 98-5, "Reporting on the Costs of Start-Up
        Activities" (SOP 98-5).  SOP 98-5 requires companies to expense as
        incurred all start-up and preopening costs that are not otherwise
        capitalizable as long-lived assets.  SOP 98-5 is effective for financial
        statements for fiscal years beginning after December 15, 1998.  The
        Company expects to adopt the Statement effective January 3, 1999.  The
        effect of the adoption is not expected to be significant.  Start-up and
        preopening amounts capitalized as of June 28, 1998 totaled $1.2 million.
        The Company expects that all such costs will be fully amortized prior to
        the end of 1998.

        In March, 1998, the American Institute of Certified Public Accountants
        issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
        Costs of Computer Software Developed or Obtained for Internal Use."  The
        statement is effective for fiscal years beginning after December 15,
        1998. The statement defines which costs of computer software developed
        or obtained for internal use are capital and which costs are expenses.
        The effect of adoption is not expected to materially effect the
        Company's financial position or results of operation.

        In June 1998, the Financial Accounting Standards Board issued
        Statement of Financial Accounting Standards No. 133, "Accounting for
        Derivative Instruments and Hedging Activities." The Statement
        establishes accounting and reporting standards requiring that every
        derivative instrument (including certain derivative instruments
        embedded in other contracts) be recorded in the balance sheet as either
        an asset or liability measured at its fair value.  The Statement
        requires that changes in the derivative's fair value be recognized
        currently in earnings unless specific hedge accounting criteria are
        met.  Special accounting for qualifying hedges allows a derivative's
        gains and losses to offset related results on the hedged item in the
        income statement, and requires that a company must formally document,
        designate, and assess the effectiveness of transactions that receive
        hedge accounting.  Statement 133 is effective for fiscal years
        beginning after June 15, 1999. The Company has not yet quantified the
        impacts of adopting Statement 133 on its financial statements and has
        not determined the timing of adoption of Statement 133.  However, the
        statement could increase volatility in earnings and other comprehensive
        income.



                                     - 8 -

<PAGE>   9

                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



NOTE 3  INTEREST COSTS

        The Company's policy is to capitalize interest incurred on debt during
        the course of qualifying construction projects at Company-owned
        facilities.  Such interest costs are amortized over the related assets'
        estimated useful lives.  For the six months ended June 28, 1998 and June
        29, 1997, approximately $8.2 million and $3.7 million, respectively, of
        interest cost was capitalized.

NOTE 4  NOTES RECEIVABLE

        Notes receivable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   June 28, 1998             Dec. 28, 1997
                                                                   -------------             -------------
        <S>                                                      <C>                         <C>  
        Notes from the Coushatta Tribe with
        interest at a defined reference rate plus
        1% (not to exceed 16%), receivable in
        monthly installments through
        January 2002                                                  22,235                 22,722

        Notes from the Tunica-Biloxi Tribe with
        interest at a defined reference rate plus
        1% (not to exceed 16%), receivable in
        monthly installments through June
        2001                                                          10,497                 10,409

        Other, less allowance for doubtful accounts
        of $3,050 and $3,050, respectively                               590                    704
                                                                 -------------             -------------
                                                                     $33,322                 $33,835
        Less current installments of notes receivable                 (7,367)                 (6,856)
                                                                 -------------             -------------
        Notes receivable-less current installments                   $25,955                 $26,979
                                                                 =============             =============

</TABLE>

NOTE 5  LONG-TERM DEBT



        On November 30, 1995, the Company completed its public offering of
        $450.0 million of eight year 10.125% first mortgage notes due December
        1, 2003. The first mortgage notes are secured by substantially all the
        assets of Grand Casino Biloxi and Grand Casino Gulfport as of November
        30, 1995, Grand Casino Tunica assets included in Phase 1 development as
        described in the indenture pursuant to which the first mortgage notes
        were issued, capital stock of Stratosphere Corporation owned by the
        Company, and certain notes receivable due the Company from Tribes.


                                     - 9 -


<PAGE>   10

                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)

NOTE 5 LONG-TERM DEBT (CONTINUED)

        The first mortgage notes require semi-annual payments of interest only
        on June 1 and December 1 of each year commencing June 1, 1996, and
        continuing until December 1, 2003, at which time the entire principal
        plus accrued interest is due and payable.  The first mortgage notes may
        be redeemed at the Company's option, in whole or in part, anytime after
        December 1, 1999, at a premium, declining ratably thereafter to par
        value on December 1, 2002.

        On May 10, 1996, the Company completed a $120 million capital lease
        facility through BA Leasing & Capital Corporation.  The five-year
        capital lease facility, with varying interest rates ranging from 1.75%
        to 2.50% over the LIBO Rate, was used to fund the continued development
        of the Company's Grand Casino Tunica project, located in northern
        Mississippi, just outside of Memphis, Tennessee. Approximately $90
        million of the loan was used for furniture, fixtures and equipment for
        the 340,000 square foot casino complex. The balance of approximately $30
        million was used to construct a 600-room hotel at Grand Casino Tunica.

        On March 31, 1998, the Company used cash proceeds received from the
        $115.0 million, senior unsecured note offering which closed on October
        14, 1997, (described below) to pay off the $94.6 million balance of 
        principal and interest, remaining under the $120.0 million capital
        lease facility. Unamortized debt issuance costs of $1.6 million, net of
        tax, were classified as extraordinary charge relating to early
        extinguishment of debt.
        
        On September 30, 1997, the Company completed a $100.0 million revolving
        loan facility through BA Leasing & Capital Corporation. The five-year
        revolving capital lease facility, with interest rates ranging from 1.75%
        to 2.50% over the LIBO Rate, will be used for the continued development
        of Grand Casino Tunica and Grand Casino Gulfport, as well as other
        general corporate purposes.  As of June 28, 1998, no advances relating
        to this financing had been made.

        On October 14, 1997, the Company completed a $115.0 million, 9.0%,
        seven-year, senior unsecured note offering due 2004. The majority of the
        proceeds from the offering were used to refinance the $120.0 million
        capital lease facility (described above) on March 31, 1998. The notes
        require semi-annual payments of interest only on April 15 and October 15
        of each year commencing April 15, 1998 and continuing until October 15,
        2004, at which time the entire principal plus accrued interest is due
        and payable.

                                     - 10 -

<PAGE>   11


                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



NOTE 5  LONG-TERM DEBT (CONTINUED)

        The notes may be redeemed in whole or in part, anytime after October 15,
        2001, at a premium, declining ratably thereafter to par value on October
        15, 2003.

NOTE 6  COMMITMENTS AND CONTINGENCIES

        STRATOSPHERE CORPORATION

        As of July 31, 1998, the Company owns approximately 37% of the common
        stock issued by Stratosphere Corporation ("Stratosphere"). Stratosphere
        and its wholly-owned operating subsidiary developed and operate the
        Stratosphere Tower, Hotel and Casino in Las Vegas, Nevada.  In January
        1997, Stratosphere and its wholly-owned operating subsidiary filed for
        reorganization under Chapter 11 of the U.S. Bankruptcy Code.

        In October 1997, the Company announced that it had not been able to
        reach an agreement with holders of a significant portion of
        Stratosphere's first mortgage notes for a consensual reorganization of
        Stratosphere that would involve the Company's participation.  The
        Company also announced that it had no intention of participating in any
        plan of reorganization for Stratosphere.

        A reorganization plan for Stratosphere has been confirmed by the
        Bankruptcy Court, but as of June 30, 1998 is not yet effective.  The
        confirmed reorganization plan provides for cancellation of the
        Stratosphere common stock owned by the Company when the reorganization
        plan becomes effective.

        In March 1995, in connection with Stratosphere's issuance of its first
        mortgage notes, the Company entered into a Standby Equity Commitment
        Agreement (the "Standby Equity Commitment") between Stratosphere and the
        Company.

        The Company agreed in the Standby Equity Commitment, subject to the
        terms and conditions stated in the Standby Equity Commitment, to
        purchase up to $20.0 million of additional equity in Stratosphere during
        each of the first three years Stratosphere is operating (as defined in
        the Standby Equity Commitment) to the extent Stratosphere's consolidated
        cash flow (as defined in the Standby Equity Commitment) during each of
        such years does not exceed $50.0 million.


                                     - 11 -

<PAGE>   12

                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


        STRATOSPHERE CORPORATION (CONTINUED)

        Based on provisions of the U.S. Bankruptcy Code that the Company
        contends apply to the Standby Equity Commitment, the Company has
        asserted that the enforceability of the Standby Equity Commitment is in
        question.  Both the Official Committee of Noteholders in the
        Stratosphere Bankruptcy case (the "Official Committee") and the current
        trustee under the indenture pursuant to which Stratosphere issued its
        first mortgage notes (the "Trustee") have asserted that the Standby
        Equity Commitment is enforceable.

        The enforceability of the Standby Equity Commitment is the subject of
        litigation to which the Company is a party in (i) the Stratosphere
        bankruptcy case (as a result of a motion brought by the Official
        Committee), and (ii) the U.S. District Court for the district of Nevada
        (as a result of an action brought by the Trustee).  In February 1998,
        the Bankruptcy Court ruled that the Standby Equity Commitment is not
        enforceable in the Stratosphere bankruptcy proceeding as a matter of
        law.

        The Stratosphere reorganization plan contemplates formation of a new
        limited liability company that will own certain alleged claims that
        Stratosphere and other parties may have against various other parties,
        including the Company and/or officers and/or directors of the Company.
        As of July 31, 1998, the Company has not been served with any documents
        evidencing the commencement of any legal action based on such claims.

        LOAN GUARANTY AGREEMENTS

        The Company has guaranteed two loan and security agreements entered into
        by the Tunica-Biloxi Tribe of Louisiana for $14.1 million for the
        purpose of financing casino equipment, and for $16.5 million for the
        purpose of purchasing a hotel and additional casino equipment. The
        agreements extend through 1998 and 2000, respectively, and as of June
        28, 1998, the amounts outstanding were $1.0 million and $10.1 million,
        respectively.

        The Company has also guaranteed loan and security agreements entered
        into by the Coushatta Tribe of Louisiana for $22.3 million for the
        purpose of financing casino equipment.  The agreements are for three
        years and have various maturity dates through 1998, and as of June 28,
        1998, the amounts outstanding were $0.5 million.




                                     - 12 -

<PAGE>   13

                      GRAND CASINOS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)




        LOAN GUARANTY AGREEMENTS (CONTINUED)

        In addition, on May 1, 1997, the Company guaranteed a loan agreement
        entered into by the Coushatta Tribe in the amount of $25.0 million, for
        the purpose of constructing a hotel and acquiring additional casino
        equipment.  The guaranty will remain in effect until the loan is paid.
        The loan term is approximately five years.  As of June 28, 1998, $11.3
        million has been advanced, and is outstanding.

        The Company has entered into a master hotel development agreement with
        Casino Resource Corporation for the Grand Casino Hinckley Inn adjacent
        to Grand Casino Hinckley.  The Company has guaranteed the mortgage for
        the hotel which had an unpaid principal balance of $2.3 million as of
        June 28, 1998.  On June 29, 1998, the mortgage was paid in full and the
        Company was released from its guaranty.

        OTHER

        The Company is a defendant in various pending litigation.  In
        management's opinion, the ultimate outcome of such litigation will not
        have a material adverse effect on the results of operations or the
        financial position of the Company.  See Part II - Item 1.  Legal
        Proceedings of this Form 10-Q.


NOTE 7  SUBSEQUENT EVENTS

        On June 30, 1998, the Company announced that it will separate its
        non-Mississippi business (principally its Indian casino management 
        business) from its Mississippi gaming operations in a tax-free 
        distribution to shareholders, and simultaneously merge its Mississippi 
        gaming operations with the gaming operations of Hilton Hotels 
        Corporation (NYSE:HLT).  The transactions are subject to shareholder 
        and regulatory approvals and are expected to be completed by
        year-end 1998. 











                                     - 13 -

<PAGE>   14


                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  (UNAUDITED)




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        ---------------------------------------------  
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
        ---------------------------------------------

        OVERVIEW


        The Company develops, constructs and manages land-based and dockside
        casinos and related hotel and entertainment facilities in emerging and
        established gaming jurisdictions.  The Company's revenues are derived
        from the Company-owned casinos of Grand Casino Biloxi, Grand Casino
        Gulfport, and Grand Casino Tunica, and from management fee income from
        Grand Casino Hinckley, Grand Casino Avoyelles, and Grand Casino 
        Coushatta and, prior to April 2, 1998, Grand Casino Mille Lacs.

        Pursuant to the Mille Lacs, Hinckley, Avoyelles, and Coushatta
        management contracts, the Company receives a fee based on the net
        distributable profits (as defined in the contracts) generated by Grand
        Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and
        Grand Casino Coushatta.  The management agreement for Grand Casino Mille
        Lacs expired on April 2, 1998.  The Company believes that the management
        agreement for Grand Casino Hinckley, which expires in May 1999, will
        not be renewed.

        The Company commenced operations in August 1990, and opened its
        Company-owned casinos, Grand Casino Gulfport, Grand Casino Biloxi and
        Grand Casino Tunica in May 1993, January 1994 and June 1996,
        respectively.

        The Company's limited operating history may not be indicative of the
        Company's future performance.  In addition, a comparison of results from
        year to year may not be meaningful due to the opening of new facilities
        during each year.

        The Company's growth strategy contemplates expanding existing operations
        and establishing additional gaming operations.  The successful
        implementation of this growth strategy is contingent upon the
        satisfaction of various conditions and the occurrence of certain events,
        including obtaining governmental approvals and increased competition,
        many of which are beyond the control of the Company. The Company expects
        that Grand Casino Biloxi and Grand Casino Gulfport may be affected by
        the addition of new competition on the Mississippi Gulf Coast.


                                     -14 -

<PAGE>   15


                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)

        OVERVIEW (CONTINUED)

        On June 30, 1998, the Company announced that it will separate its Indian
        casino management business from its Mississippi gaming operations in a
        tax-free distribution to shareholders, and simultaneously merge its
        Mississippi gaming operations with the gaming operations of Hilton
        Hotels Corporation (NYSE:HLT).  The transactions are subject to
        shareholder and regulatory approvals and are expected to be completed by
        year-end 1998.

        The following discussion and analysis should be read in conjunction with
        the consolidated financial statements and notes thereto included in the
        Company's Annual Report on Form 10-K for the year ended December 28,
        1997.

        Revenues from owned casinos are calculated in accordance with generally
        accepted accounting principles and are presented in a manner consistent
        with industry practice.  Net distributable profits from Grand Casino
        Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and Grand
        Casino Coushatta are computed using a modified cash basis of accounting
        in accordance with the management contracts.  The effect of the use of
        the modified cash basis of accounting is to accelerate the write-off of
        capital equipment and leased assets, which thereby impacts the timing of
        net distributable profits.

        Earlier this year, the Louisiana legislature considered various
        proposals for state constitutional amendments and/or legislation that
        would impose certain taxes, including excise taxes, on certain
        activities conducted on Indian reservations.   Certain of the proposals
        were to become effective after the expiration dates of the existing
        compacts between the State of Louisiana and the Indian tribes that own
        and operate casinos in the State of Louisiana.  None of the proposals
        was adopted.

        RESULTS OF OPERATIONS

        SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 29
        1997

        Earnings Per Common Share and Net Earnings

        Basic and diluted earnings per common share were $.86 and $.84,
        respectively, for the six months ended June 28, 1998 before a $.04
        extraordinary charge per share related to early extinguishment of debt.
        This compares to basic and diluted earnings of $.79 and $.77 per common
        share for the prior year's comparable period.

                                     -15 -


<PAGE>   16


                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)

        Earnings Per Common Share and Net Earnings (Continued)

        Earnings increased $1.7 million to $34.6 million for the six months
        ended June 28, 1998 compared to the same period in the prior year. Net
        earnings for the six months ended June 28, 1998 includes a $1.6 million,
        net of tax, extraordinary charge relating to early extinguishment of
        debt.

        Revenues

        Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
        generated $ 247.3 million in gross casino revenue and $65.0 million in
        gross hotel, food, beverage, retail and entertainment revenue during the
        six months ended June 28, 1998 as compared to $222.3 million in gross
        casino revenue and $54.0 million in gross food, beverage, and retail
        revenue for the prior year's comparable period. At Grand Casino Tunica,
        gross revenues increased $19.1 million for the six months ended June 28,
        1998 compared to the same period in the prior year.  The increase is
        attributable to increased hotel occupancy and average daily rate along
        with increased guest counts from a full six months use of the Convention
        Center, which opened in July of 1997.  Combined gross revenues for Grand
        Casino Biloxi and Grand Casino Gulfport increased $16.9 million for the
        six months ended June 28, 1998 compared to the same period in the prior
        year. The increase in gross revenues is primarily related to the
        500-room Biloxi Bayview Hotel, which opened during the first quarter of
        1998. Management fees increased $3.8 million to $42.7 million for the
        six months ended June 28, 1998 compared to the same period in the prior
        year, despite the fact that the Mille Lacs contract expired April 2,
        1998.

        Costs and Expenses

        Total costs and expenses increased $32.2 million from $223.2 million for
        the six months ended June 29 1997 to $255.4 million for the six-month
        period ended June 28, 1998.  Casino expenses were $81.9 million for the
        six-month period ended June 28, 1998 compared to $78.1 million for the
        comparable period last year.  The increase of $3.9 million relates
        primarily to additional casino expenses for Grand Casino Tunica, which
        had a $13.7 million increase in casino revenues for the six month period
        ended June 28, 1998.  Food and beverage expenses increased $2.0 million
        to $18.5 million for the six-month period ended June 28, 1998.

        Selling, general, and administrative expenses increased in the amount of
        $17.9 million from $84.9 million for the six months ended June 29, 1997
        to $102.8 million for the six months ended June 28, 1998.

                                     -16 -

<PAGE>   17


                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)


        Costs and Expenses (Continued)

        Contributing to this increase were increased selling, general, and
        administrative expenses at  Grand Casino Tunica of $6.0 million from the
        six months ended June 29, 1997 to the six months ended June 28, 1998,
        relating to the opening of the 600-room hotel and the convention center,
        and an increase in employee benefit costs.  In addition, corporate
        expense increased $10.4 million from the six months ended June 29, 1997
        to the six months ended June 28, 1998. This increase is primarily
        attributable to reserves relating to the corporate office relocation and
        litigation reserves.

        Other

        Interest income increased slightly from $6.7 million to $6.9 million for
        the six months ended June 28, 1998 over the comparable period last year.
        In addition, interest expense decreased by $.8 million to $21.8 million
        for the six months ended June 28, 1998.  The decrease is the result of
        additional interest expense relating to the $115.0 million senior
        unsecured notes and the capital lease facility which were outstanding
        during the first quarter of 1998, offset by an increase in capitalized
        interest for the six month period ended June 28, 1998.  Capitalized
        interest was $8.2 million and $3.7 million for the six months ended June
        28, 1998 and June 29 1997, respectively.

        THREE MONTHS ENDED JUNE 28, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE
        29, 1997

        Earnings Per Common Share and Net Earnings

        Basic and diluted earnings per common share were $.44 and $.43,
        respectively, for the three months ended June 28, 1998 and June 29,
        1997.  Net earnings decreased $1.1 million from the three months ended
        June 29, 1997 to $17.2 million for the three months ended June 28, 1998.
        Net earnings for the three months ended June 28, 1998 includes an
        extraordinary charge of $1.6 million, net of tax, related to early
        extinguishment of debt.

        Revenues

        Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
        generated $121.1 million in gross casino revenue and $34.3 million in
        gross hotel, food, beverage, retail, and entertainment revenue during
        the three months ended June 28, 1998.

                                     -17 -


<PAGE>   18

                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)

        Revenues (Continued)

        During the same period in the prior year, Grand Casino Biloxi, Grand
        Casino Gulfport and Grand Casino Tunica generated $113.6 million in
        gross casino revenue and $29.3 million in gross hotel, food, beverage
        and retail revenue.

        The increase in gross revenues is attributable to increased revenue at
        all properties.  Grand Casino Tunica's gross revenues increased $4.6
        million to $52.0 million, an increase of 9.6%, for the three months
        ended June 28, 1998.  Contributing to this increase at Grand Casino
        Tunica was the Convention Center, which was not open during the second
        quarter of 1997, but was open the entire second quarter of 1998. In
        addition, other new amenities added in the Tunica market appear to have
        increased the overall Tunica market capacity.

        Combined gross revenues for Grand Casino Biloxi and Grand Casino
        Gulfport increased $7.8 million for the three months ended June 28,
        1998, compared to the same period in the prior year.  Contributing to
        this increase was the opening of a 500-room hotel at Grand Casino Biloxi
        in mid-February 1998.  Finally, the Company's management fees from
        Indian-owned casinos were flat at $19.7 million for the three months
        ended June 28, 1998, compared to the same period in the prior year,
        despite the expiration of the Grand Casino Mille Lacs contract on April
        2, 1998.

        Costs and Expenses

        Total costs and expenses increased $13.2 million, from $111.9 million
        for the three months ended June 29, 1997, to $125.1 million for the
        three months ended June 28, 1998.  Casino expenses were $40.6 million
        for the three-month period ended June 28, 1998, compared to $39.6
        million for the comparable period in 1997.  This increase of $1.0
        million relates to additional operating expenses to produce a $7.5
        million increase in casino revenue for such three-month period, compared
        to the same period in the prior year. Food and beverage expenses
        increased $1.1 million to $9.6 million for the three-month period ended
        June 28, 1998.

        Selling, general, and administrative expenses increased $7.1 million
        from $41.0 million for the three months ended June 29, 1997, to $48.1
        million for the three months ended June 28, 1998.  Grand Casino Tunica's
        selling, general, and administrative expenses increased $3.0 million, as
        a result of the opening of the 600-room hotel and the convention center,
        and an increase in employee benefit costs.

                                     -18 -


<PAGE>   19

                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)

        Costs and Expenses (Continued)

        In addition, combined selling, general, and administrative expenses for
        Grand Casino Biloxi and Grand Casino Gulfport were constant as compared
        to the prior year.  Corporate expenses for the three months ended June
        28, 1998 increased $4.1 million from the same period in 1997.  The
        increase in corporate expenses is primarily related to the relocation of
        the corporate headquarters and litigation reserves.

        Other

        Interest income of $2.8 million for the three months ended June 28, 1998
        was flat when compared to the same period for the prior year. Interest
        expense decreased by $1.9 million to $10.1 million for the three months
        ended June 28, 1998. The decrease is the result of the $115.0 million
        senior unsecured notes being outstanding during the three month period
        ended June 28, 1998, offset by an increase in capitalized interest for
        the same period.  Capitalized interest was $4.2 million and $1.3 million
        for the three months ended June 28, 1998 and June 29, 1997,
        respectively.

        CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY

        At June 28, 1998, the Company had $92.8 million in cash and cash
        equivalents. On March 31, 1998, $94.6 million was used to pay off an
        existing capital lease facility and related interest resulting in an
        extraordinary charge of $.04 per share.

        Net cash provided by operating activities totaled $76.7 million for the
        three month period ended June 28, 1998, compared with $47.6 million for
        the three-month period ended June 29, 1997.  During the six-month
        periods ended June 28, 1998 and June 29, 1997, the Company's capital
        expenditures totaled $117.8 and $101.6 million, respectively.  Capital
        expenditures related primarily to constructing new 600-room hotels at
        Grand Casino Tunica and Grand Casino Gulfport and completion of a new
        500-room hotel at Grand Casino Biloxi.

        At June 28, 1998, the Company's long-term debt included 10.125% first
        mortgage notes due 2003 in the amount of $450.0 million and 9% senior
        unsecured notes in the amount of $115.0 million due 2004 (which the
        Company incurred in connection with the refinancing of an existing 
        capital  lease facility). The first mortgage notes are redeemable on
        December 1,  1999, or thereafter based on a stated premium that
        declines ratably to  par value.
        
                                     - 19 -

<PAGE>   20


                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)


        CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY (CONTINUED)

        The senior unsecured notes are redeemable on October 15, 2001, or
        thereafter based on a stated premium that declines ratably to par value.

        At March 29, 1998, $93.9 million remained outstanding on the capital
        lease facility and was classified as a current liability on the March
        29, 1998 balance sheet. The balance was paid in full on March 31, 1998
        using proceeds from the $115.0 million senior unsecured notes. The
        Company also has available a $100.0 million revolving capital lease
        facility for continued development of Grand Casino Gulfport and Grand
        Casino Tunica.  As of June 28, 1998, no advances relating to this
        financing had been made.

        Pursuant to the Company's covenants related to the 10.125% first
        mortgage notes and the 9% senior unsecured notes and to provide funds
        for the growth of the Company, no cash dividends are expected to be paid
        on common shares in the foreseeable future.

        FORWARD-LOOKING STATEMENTS

        Certain information included in this Form 10-Q and other materials filed
        or to be filed by the Company with the Securities and Exchange
        Commission (as well as information included in oral statements or other
        written statements made or to be made by the Company) contains
        statements that are "forward-looking" as defined under the Federal 
        Private Securities Litigation Reform Act of 1995.

        Forward-looking statements are those which include statements regarding
        projections, plans and objectives, and future economic performance,
        together with statements regarding any assumptions pertaining to such
        projections, plans and objectives, and future economic performance.
        While these forward-looking statements reflect the best judgment of the
        Company, based on information available on the date when such statements
        are made, such statements are all subject to risks and uncertainties
        that could cause actual results to vary from the forward-looking
        statements made. Those variances could be significant.

        Such forward-looking statements involve risks and uncertainties that
        could significantly affect future results, and accordingly, such results
        may differ from those expressed in any forward-looking statements made
        by or on behalf of the Company.


                                     - 20 -

<PAGE>   21



                      GRAND CASINOS, INC. AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
                                  (UNAUDITED)



        FORWARD-LOOKING STATEMENTS (CONTINUED)

        These risks and uncertainties include, but are not limited to, those
        relating to development and construction activities, dependence on
        existing management, leverage and debt service (including sensitivity to
        fluctuations in interest rates), changes in competitive conditions,
        domestic or global economic conditions, changes in federal or state tax
        laws or the administration of such laws and changes in gaming laws or
        regulations (including the legalization of gaming in certain
        jurisdictions).  In addition to any specific risks and uncertainties
        mentioned or discussed in this Form 10-Q, the risks and uncertainties
        discussed in detail in the Company's 1997 Form 10-K provide information
        which should be considered in evaluating any of the Company's
        forward-looking statements.  In addition, you should be aware that the
        facts and circumstances which exist when any forward-looking statements
        are made and on which those forward-looking statements are based may
        significantly change in the future, thereby rendering obsolete the
        forward-looking statements on which such facts and circumstances were
        based.
























                                     - 21 -


<PAGE>   22

                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                               OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

        The following descriptions are summaries of the status of each of the
        following legal proceedings as of July 31, 1998.  More complete and/or
        updated information may be obtained by reviewing the court files
        pertaining to such proceedings.

        COHEN - STATE ACTION

        In August 1995, Harvey Cohen brought a legal action in the District
        Court for Clark County, Nevada -- Harvey J. Cohen, et al. v.
        Stratosphere Corporation, et al. - Case No. A349985 -- against various
        defendants, including Grand Casinos Resorts, Inc., a wholly owned
        subsidiary of the Company.  Cohen alleges securities law violations and
        various state law claims in connection with the initial public offering
        (the "IPO") for Stratosphere Corporation ("Stratosphere").  Cohen
        brought the action as a class action, and alleges that the defendants
        deprived the plaintiffs of the opportunity to purchase Stratosphere
        common stock in the IPO.

        The action was, by agreement of the parties, stayed pending a decision
        in a similar action brought by Cohen in 1994 in U.S. District Court for
        the District of Nevada.  Cohen alleged securities law violations and
        various state law claims in the federal action.  The federal action was
        dismissed by the U.S. District Court, and that dismissal was affirmed by
        the U.S. Court of Appeals.

        The Clark County action was dismissed in June 1998.

        SLOT MACHINE LITIGATION - NEVADA

        In April 1994, William H.  Poulos brought a legal action in the U.S.
        District Court for the Middle District of Florida, Orlando Division --
        William H. Poulos, et al. vs. Caesars World, Inc. et al. - Case No.
        39-478-CIV-ORL-22 -- in which various parties (including the Company)
        alleged to operate casinos or be slot machine manufacturers were named
        as defendants.  The plaintiff sought to have the action certified as a
        class action.

        A subsequently filed action -- William Ahearn, et al. vs. Caesars World,
        Inc., et al. - Case No. 94-532-CIV-ORL-22 -- made similar allegations
        and was consolidated with the Poulos action.

        Both actions included claims under the federal Racketeering-Influenced
        and Corrupt Organizations Act and under state law, and sought
        compensatory and punitive damages. 

                                     - 22 -


<PAGE>   23


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)


        SLOT MACHINE LITIGATION - NEVADA (CONTINUED)

        The plaintiffs claimed that the defendants are involved in a scheme to
        induce people to play electronic video poker and slot machines based on
        false beliefs regarding how such machines operate and the extent to
        which a player is likely to win on any given play.

        In December 1994, the consolidated actions were transferred to the U.S.
        District Court for the District of Nevada.

        In September 1995, Larry Schreier brought an action in the U.S. District
        Court for the District of Nevada -- Larry Schreier, et al. vs. Caesars
        World, Inc., et al. - Case No. CV-S-95-00923-DWH (RJJ). The plaintiffs'
        allegations in the Schreier action were similar to those made by the
        plaintiffs in the Poulos and Ahearn actions, except that Schreier
        claimed to represent a more precisely defined class of plaintiffs than
        Poulos or Ahearn.

        In December 1996, the court ordered the Poulos, Ahearn and Schreier
        actions consolidated under the title William H. Poulos, et al. vs.
        Caesars World, Inc., et al. - Case No. CV-S-94-1126 - DAE (RJJ) - (Base
        File), and required the plaintiffs to file a consolidated and amended
        complaint.  In February 1997, the plaintiffs filed a consolidated and
        amended complaint.

        In March 1997, various defendants (including the Company) filed motions
        to dismiss or stay the consolidated action until the plaintiffs
        submitted their claims to gaming authorities and those authorities
        considered the claims submitted by the plaintiffs.

        In December 1997, the court denied all of the motions submitted by the
        defendants, and ordered the plaintiffs to file a new consolidated and
        amended complaint.  That complaint has been filed. The Company has filed
        its answer to the new complaint.

        STRATOSPHERE SECURITIES LITIGATION - FEDERAL

        In August 1996, a complaint was filed in the U.S. District Court for the
        District of Nevada -- Michael Caesar, et al. v. Stratosphere
        Corporation, et al. -- against Stratosphere Corporation and others,
        including the Company.  The complaint was filed as a class action, and
        sought relief on behalf of Stratosphere shareholders who purchased their
        stock between December 19, 1995 and July 22, 1996.  The complaint
        included allegations of misrepresentations, federal securities law
        violations and various state law claims. 

                                     - 23 -



<PAGE>   24


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)


        STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)

        In August through October 1996, several other nearly identical
        complaints were filed by various plaintiffs in the U.S. District Court
        for the District of Nevada.  The defendants in the actions submitted
        motions requesting that all of the actions be consolidated.  Those
        motions were granted in January 1997, and the consolidated action is
        entitled In Re:  Stratosphere Corporation Securities Litigation - Master
        File No. CV-S-96-00708 PMP (RLH).

        In February 1997, the plaintiffs filed a consolidated and amended
        complaint naming various defendants, including the Company and certain
        current and former officers and directors of the Company. The amended
        complaint included claims under federal securities laws and Nevada laws
        based on acts alleged to have occurred between December 19, 1995 and
        July 26, 1996.

        In February 1997, various defendants, including the Company and the
        Company's officers and directors named as defendants, submitted motions
        to dismiss the amended complaint.  Those motions were made on various
        grounds, including the Company's claim that the amended complaint failed
        to state a valid cause of action against the Company and the Company's
        officers and directors.

        In May 1997, the court dismissed the amended complaint.  The dismissal
        order did not allow the plaintiffs to further amend their complaint in
        an attempt to state a valid cause of action.

        In June 1997, the plaintiffs asked the court to reconsider its dismissal
        order, and to allow the plaintiffs to submit a second amended complaint
        in an attempt to state a valid cause of action. In July 1997, the court
        allowed the plaintiffs to submit a second amended complaint.

        In August 1997, the plaintiffs filed a second amended complaint. In
        September 1997, certain of the defendants, including the Company and the
        Company's officers and directors named as defendants, submitted a motion
        to dismiss the second amended complaint.  The motion was based on
        various grounds, including the Company's claim that the second amended
        complaint failed to state a valid cause of action against the Company
        and those officers and directors.

        In April 1998, the court granted the Company's motion to dismiss in
        part, and denied the motion in part.  Thus, the plaintiffs are pursuing
        the claims in the second amended complaint that survived the Company's
        motion to dismiss.

                                     - 24 -


<PAGE>   25



                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)


        STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)

        In June 1998, the Company submitted a motion for summary judgment
        seeking an order that the Company and the Company's officers and
        directors are entitled to judgment as a matter of law.

        STRATOSPHERE SECURITIES LITIGATION - STATE

        In August 1996, a complaint was filed in the District Court for Clark
        County, Nevada -- Victor M. Opitz, et al. v. Robert E. Stupak, et al. -
        Case No. A363019 -- against various defendants, including the Company.
        The complaint seeks relief on behalf of Stratosphere Corporation
        shareholders who purchased stock between December 19, 1995 and July 22,
        1996.  The complaint alleges misrepresentations, state securities law
        violations and other state claims.

        The Company and certain defendants submitted motions to dismiss or stay
        the state court action pending resolution of the federal court action
        described above.  The court has stayed further proceedings pending the
        resolution of In Re: Stratosphere Securities Litigation.

        GRAND SECURITIES LITIGATION - FEDERAL

        In September and October 1996, two actions were filed by Company
        shareholders in the U.S. District Court for the District of Minnesota
        against the Company and certain of the Company's current and former
        directors and officers.

        The complaints allege misrepresentations, federal securities law
        violations and other claims in connection with the Stratosphere project.

        The actions have been consolidated as In Re:  Grand Casinos, Inc.
        Securities Litigation - Master File No. 4-96-890 -- and the plaintiffs
        filed a consolidated complaint.  The defendants submitted a motion to
        dismiss the consolidated complaint, based in part on the Company's claim
        that the consolidated complaint failed to properly state a cause of
        action.

        In December 1997, the court granted the Company's motion to dismiss in
        part, and denied the motion in part.  Thus, the plaintiffs are pursuing
        the claims in the consolidated complaint that survived the Company's
        motion to dismiss.  Discovery has commenced.


                                     - 25 -


<PAGE>   26


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)

        DERIVATIVE ACTION

        In February 1997, certain shareholders of the Company brought an action
        in  the Hennepin County, Minnesota District Court  -- Lloyd Drilling, et
        al. v. Lyle Berman, et al. - Court File No. MC97-002807 --  against
        certain current and former officers and directors of the Company.  The
        plaintiffs alleged that those officers and directors breached certain
        fiduciary duties to the shareholders of the Company as a result of
        certain transactions involving the Stratosphere project.

        Pursuant to Minnesota law, the Company's Board of Directors appointed an
        independent special litigation committee to evaluate whether the Company
        should pursue the claims made in the action against the officers and
        directors.  The special litigation committee completed its evaluation in
        December 1997, and filed a report with the court recommending that such
        claims not be pursued.

        The Company provided the defense for the Company's current and former
        officers and directors who were defendants in the action pursuant to the
        Company's indemnification obligations to such defendants.

        In January 1998, the Company submitted a motion for summary judgment
        based on the special litigation committee's report.  In May 1998, the
        court granted that motion, thereby dismissing the plaintiffs' claims.

        STRATOSPHERE VACATION CLUB LITIGATION

        In late April 1997, the Company and Grand Casinos Resorts, Inc.
        ("Resorts"), a wholly-owned subsidiary of the Company, were made
        defendants in an action in District Court in Clark County, Nevada --
        Richard Duncan, et al. vs. Bob and Jane Doe Stupak, et al. - Case No.
        A370127.  The plaintiffs alleged that the defendants, including the
        Company and Resorts, engaged in acts that constitute "consumer fraud"
        under Nevada law in connection with vacation packages which the
        defendants claim to have purchased from Bob Stupak.  The plaintiffs also
        alleged "unjust enrichment", breach of contract and other claims under
        Nevada law. The plaintiffs sought to pursue their claims as a class
        action, and asked for various remedies including compensatory damages
        and punitive damages.

        In April 1998, the court preliminarily approved a proposed settlement of
        the action.  The terms and conditions of the settlement are described in
        a settlement agreement filed with the court.  In June 1998, the court
        dismissed the action pursuant to the settlement.

                                     - 26 -

<PAGE>   27


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)



        STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION

        In June 1997, the Official Committee of Noteholders (the "Committee") in
        the Chapter 11 bankruptcy proceeding for Stratosphere Corporation
        ("Stratosphere") pending in the U.S. Bankruptcy Court for the District
        of Nevada (the "Bankruptcy Court") filed a motion by which the Committee
        sought Bankruptcy Court approval for assumption (on behalf of
        Stratosphere's bankruptcy estate) of the March 1995 Standby Equity
        Commitment (the "Standby Equity Commitment") between Stratosphere and
        the Company.

        In the motion, the Committee sought Bankruptcy Court authorization to
        compel the Company to fund up to $60 million in "capital contributions"
        to Stratosphere over three years, based on the Committee's claim that
        such "contributions" are required by the Standby Equity Commitment.

        The Company opposed the Committee's motion.  The Company asserted, in
        its opposition to the Committee's motion, that the Standby Equity
        Commitment is not enforceable in the Stratosphere bankruptcy proceeding
        as a matter of law.

        The Bankruptcy Court held a preliminary hearing on the Committee's
        motion in June 1997, and an evidentiary hearing in February 1998 on the
        issues raised by the Committee's motion and the Company's opposition to
        that motion.

        In February 1998, the Bankruptcy Court denied the Committee's motion,
        and determined that the Standby Equity Commitment cannot be assumed (or
        enforced) by Stratosphere under applicable bankruptcy law.

        STANDBY EQUITY COMMITMENT LITIGATION

        In September 1997, the successor trustee (the "Stratosphere Trustee")
        under the indenture pursuant to which Stratosphere Corporation issued
        Stratosphere Corporation's first mortgage notes filed a complaint in the
        U.S. District Court for the District of Nevada - - IBJ Schroeder Bank &
        Trust Company, Inc. vs. Grand Casinos, Inc. - File No. CV-S-
        97-01252-DWH (RJJ) - - naming the Company as defendant.

        The complaint alleges that the Company failed to perform under the
        Standby Equity Commitment entered into between Stratosphere Corporation
        and the Company in connection with Stratosphere Corporation's issuance
        of such first mortgage notes in March 1995.

                                     - 27 -


<PAGE>   28


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)



        STANDBY EQUITY COMMITMENT LITIGATION (CONTINUED)

        The complaint seeks an order compelling specific performance of what the
        Committee claims are the Company's obligations under the Standby Equity
        Commitment. The Stratosphere Trustee filed the complaint in its alleged
        capacity as a third party beneficiary under the Standby Equity
        Commitment.

        In November 1997, the Company submitted a motion requesting, among other
        things, that the court dismiss the complaint.  As of June 30, 1998, that
        motion is pending.

        STRATOSPHERE PREFERENCE CLAIM

        In April 1998, Stratosphere served on the Company and Grand Media &
        Electronics Distributing, Inc., a wholly-owned subsidiary of the Company
        ("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
        recovery of certain amounts paid by Stratosphere to (i) the Company as
        management fees and for costs and expenses under a management agreement
        between Stratosphere and the Company, and (ii) Grand Media for
        electronic equipment purchased by Stratosphere from Grand Media.

        Stratosphere claims in its complaint that such amounts are recoverable
        by Stratosphere as preferential payments under bankruptcy law.

        In May 1998, the Company responded to Stratosphere's complaint. That
        response denies that Stratosphere is entitled to recover the amounts
        described in the complaint.  Discovery has begun.

        STRATOSPHERE REORGANIZATION PLAN

        The Stratosphere reorganization plan contemplates formation of a new
        limited liability company that will own certain alleged claims that
        Stratosphere and other parties may have against various other parties,
        including the Company and/or officers and/or directors of the Company.
        As of June 30, 1998, the Company has not been served with any documents
        evidencing the commencement of any legal action based on such claims.






                                     - 28 -


<PAGE>   29


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)


        TULALIP TRIBES LITIGATION

        In 1995, the Company entered into discussions with Seven Arrows, L.L.C.
        ("Seven Arrows"), a Delaware limited liability company, regarding
        possible participation by the Company in a proposed casino resort
        development on land in the State of Washington held in trust by the
        United States for the Tulalip Tribes.  The Company and Seven Arrows
        entered into a letter of intent providing for the negotiation of a
        revision to the Seven Arrows limited liability company agreement by
        which the Company (or a subsidiary of the Company) would become a member
        of Seven Arrows.  Those negotiations were not completed, and such a
        revision to the limited liability agreement was not signed.

        During the negotiations, the Company entered into an agreement (the
        "Advance Agreement") with Seven Arrows and the Tulalip Tribes.  The
        Advance Agreement provided for the loan by the Company and Seven Arrows
        of certain amounts to the Tulalip Tribes upon the satisfaction of
        certain conditions.  The Company contends that those conditions were
        never satisfied.  Neither the Company nor Seven Arrows advanced any
        amount under the Advance Agreement.

        In April 1996, the Tulalip Tribes brought a legal action in Tulalip
        Tribal Court - - Tulalip Tribes of Washington v. Seven Arrows, et al -
        Case No. TUL-Ci-4/96-499 - - against Seven Arrows and the Company. The
        action seeks various remedies, including (i) a declaration that a lease
        and a sublease between the Tulalip Tribes and Seven Arrows for the land
        on which the casino resort was proposed has been terminated, (ii)
        damages for breach of the lease, the sublease and the Advance Agreement,
        and (iii) a declaration that the lease, sublease and Advance Agreement
        are void.

        Because the Company is not a party to the lease or the sublease, the
        Company contends that the only claim against the Company in the tribal
        court action is for a breach of the Advance Agreement, that the Company
        did not breach the Advance Agreement, and that any damages sustained by
        the Tulalip Tribes as a result of any such breach are not material to
        the Company.

        In May 1996, Seven Arrows and the Company brought a legal action in the
        U.S. District Court in the Western District of Washington - - Seven
        Arrows, L.L.C., et al v. Tulalip Tribes of Washington  - File No.
        C96-0709Z - - against the Tulalip Tribes.  Seven Arrows seeks in that
        action certain remedies against the Tulalip Tribes, including damages,
        and the Company seeks an order rescinding the Advance Agreement.

                                     - 29 -


<PAGE>   30


                      GRAND CASINOS, INC. AND SUBSIDIARIES
                                    PART II
                         OTHER INFORMATION (CONTINUED)




        TULALIP TRIBES LITIGATION (CONTINUED)

        Seven Arrows, the Company and the Tulalip Tribes have, since June 1996,
        been engaged in disputes in both the tribal court and the federal court
        regarding which court has jurisdiction over the various claims made in
        the two legal actions.

        As of July 31, 1998, Seven Arrows, the Company and the Tulalip Tribes
        are discussing a partial settlement that, if implemented, will resolve
        the jurisdiction disputes.  During the discussions regarding that
        partial settlement, both Seven Arrows and the Tulalip Tribes have stated
        that they may pursue claims against the Company that have not yet been
        pleaded in either the tribal court action or the federal court action.

        The Company does not know the nature or the extent of any such
        additional claims and, as of July 31, 1998, has not received any amended
        pleading in either action stating any such additional claims.  Such
        claims, if made, could be in amounts material to the Company.












                                     - 30 -


<PAGE>   31

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

        (a)     The Annual Meeting of Shareholders was held on May 15, 1998.

        (b)     Matters voted upon:

                (1)     Directors elected at meeting:


                                      Affirmative    Negative
                                         Votes        Votes         Abstentions
                                         -----        -----         -----------
                Lyle Berman          35,867,228       271,154        5,896,119

                Thomas J. Brosig     35,868,884       269,498        5,896,119

                Morris Goldfarb      35,860,686       277,696        5,896,119

                Ronald Kramer        35,870,495       267,885        5,896,119

                David L. Rogers      35,872,400       265,982        5,896,119

                Neil I. Sell         35,872,803       265,579        5,896,119

                Timothy J. Cope      35,875,860       262,522        5,896,119

                Joel N. Waller       35,862,696       275,686        5,896,119





                                    - 31 -
<PAGE>   32

ITEM 5. OTHER INFORMATION

        Discretionary Proxy Voting Authority/Shareholder Proposals

                On May 21, 1998 the Securities and Exchange Commission adopted
        an amendment to Rule 14a-4, as promulgated under the Securities and
        Exchange Act of 1934.  The amendment to Rule 14a-4(c)(1) governs
        the Company's use of its discretionary proxy voting authority with
        respect to a shareholder proposal which the shareholder has not sought
        to include in the Company's proxy statement. The new amendment provides
        that if a proponent of a proposal fails to notify the company at least
        45 days prior to the month and day of mailing of the prior year's proxy
        statement, then the management proxies will be allowed to use their
        discretionary voting authority when the proposal is raised at the
        meeting, without any discussion of the matter in the proxy statement.

                With respect to the Company's 1999 Annual Meeting of
        Shareholders, if the Company is not provided notice of a shareholder
        proposal, which the shareholder has not previously sought to
        include in the Company's proxy statement, by February 10, 1999, the
        management proxies will be allowed to use their discretionary authority
        as outlined above.










                                    - 32 -
<PAGE>   33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits

        2.1     Agreement and Plan of Merger by and among Hilton Hotels
                Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
                GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
                1998. 
                
                (Pursuant to Item 601(b)(2) of Regulation S-K, certain        
                Schedules and Exhibits to this Agreement have been omitted.  
                The Registrant will furnish a copy of any omitted Schedule or
                Exhibit to the Commission upon request.)
                
        10.1    Form of Distribution Agreement by and between Grand Casinos, 
                Inc. and GCI Lakes, Inc.
                
                (Pursuant to Item 601(b)(2) of Regulation S-K, certain        
                Schedules and Exhibits to this Agreement have been omitted.  
                The Registrant will furnish a copy of any omitted Schedule or
                Exhibit to the Commission upon request.)
                
        10.2    Form of Employee Benefits and Other Employment Matters 
                Allocation Agreement By and Between Grand Casinos, Inc. 
                and GCI Lakes, Inc.
                
        10.3    Form of Intellectual Property License Agreement.
                
        10.4    Form of Tax Allocation and Indemnity Agreement.
                
        10.5    Form of Trust Agreement.
                
        10.6    Form of Pledge and Security Agreement.
                
        27      Financial Data Schedule

        (b) No reports on Form 8-K were filed during the quarterly period ended
        June 28, 1998.


                                    - 33 -
<PAGE>   34


                                   SIGNATURES




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







Dated:  August 5, 1998                GRAND CASINOS, INC.
                                      ----------------------------
                                      Registrant



                                      By/ S /THOMAS J. BROSIG
                                      ----------------------------
                                      Thomas J. Brosig
                                      President and
                                      Chief Executive Officer



                                      / S / TIMOTHY J. COPE
                                      ----------------------------
                                      Timothy J. Cope
                                      Executive Vice President and
                                      Chief Financial Officer











                                     - 34 -



<PAGE>   35
                                 Exhibit Index


Exhibit No.       Document

2.1               Agreement and Plan of Merger by and among Hilton Hotels
                  Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
                  GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
                  1998. 

                  (Pursuant to Item 601(b)(2) of Regulation S-K, certain        
                  Schedules and Exhibits to this Agreement have been omitted.  
                  The Registrant will furnish a copy of any omitted Schedule or
                  Exhibit to the Commission upon request.)

10.1              Form of Distribution Agreement by and between Grand Casinos, 
                  Inc. and GCI Lakes, Inc.

                  (Pursuant to Item 601(b)(2) of Regulation S-K, certain        
                  Schedules and Exhibits to this Agreement have been omitted.  
                  The Registrant will furnish a copy of any omitted Schedule or
                  Exhibit to the Commission upon request.)

10.2              Form of Employee Benefits and Other Employment Matters 
                  Allocation Agreement By and Between Grand Casinos, Inc. 
                  and GCI Lakes, Inc.

10.3              Form of Intellectual Property License Agreement.

10.4              Form of Tax Allocation and Indemnity Agreement.

10.5              Form of Trust Agreement.

10.6              Form of Pledge and Security Agreement.

27                Financial Data Schedule