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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549
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                                    FORM 10-K


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

                   For the fiscal year ended December 31, 1998

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACTOF 1934 For the transition period from _______________
     to______________________

                           Commission File No. 0-22436
                          Lady Luck Gaming Corporation
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             (Exact name of registrant as specified in its charter)

             Delaware                                   88-0295602       
    (State or other jurisdiction of                 (I. R. S. employer
    incorporation or organization)                 identification number)

  206 North Third Street, Las Vegas, Nevada               89101
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  (Address of principal executive offices)               (Zip code)

Registrant's telephone number, including area code:      (702) 477-3000  
                                                   -----------------------------

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

Securities registered pursuant to Section 12(g) of the Act:

         Common Stock of Lady Luck Gaming Corporation ($.006 par value)
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                                (Title of class)

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

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

      The aggregate market value of the Common Stock,  $.006 par value,  held by
non-affiliates  of the registrant,  Lady Luck Gaming  Corporation,  on March 12,
1999, based on the closing sale price as reported by the Nasdaq National Market,
was approximately  $13,999,930.  Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding  Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

      As of March 12, 1999, 4,881,003 shares of the registrant, Lady Luck Gaming
Corporation's, Common Stock, $.006 par value, were outstanding.

      The registrant,  Lady Luck Gaming  Corporation's,  proxy statement for its
1999 Annual Meeting of Stockholders  is  incorporated  by reference  herein into
Part III of this Form 10-K.
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                                     PART I

 ITEM 1.      BUSINESS.

     All statements  contained herein that are not historical  facts,  including
but not limited to, statements  regarding Lady Luck Gaming Corporation  ("LLGC")
and its subsidiaries' (collectively,  the "Company"), current business strategy,
the Company's prospective joint ventures, asset sales and expansions of existing
projects,  and the Company's plans for future  development  and operations,  are
based on current  expectations.  These statements are  forward-looking in nature
and  involve  a  number  of  risks  and  uncertainties.   Generally,  the  words
"anticipates,"  "believes,"  "estimates,"  "expects" and similar  expressions as
they  relate  to the  Company  and  its  management  are  intended  to  identify
forward-looking  statements.  Actual  results may differ  materially.  Among the
factors that could cause actual results to differ  materially are the following:
the availability of sufficient capital to finance the Company's business plan on
terms satisfactory to the Company;  competitive factors, such as legalization of
gaming in  jurisdictions  from which the Company  draws  significant  numbers of
patrons and an  increase  in the number of casinos  serving the markets in which
the  Company's  casinos are  located;  changes in labor,  equipment  and capital
costs; the ability of the Company to consummate its contemplated  joint ventures
on  terms  satisfactory  to the  Company  and  to  obtain  necessary  regulatory
approvals for them;  changes in regulations  affecting the gaming industry;  the
continued  operation of the Helena Bridge connecting Arkansas to Coahoma County,
Mississippi,  the  location  of the Lady Luck  Rhythm and  Blues/Country  Casino
complex;  the ability of the Company to comply with its  Indenture  covering the
First Mortgage Notes Due 2001 (the "2001 Notes");  the ability of the Company to
retain or obtain Nasdaq listings; future acquisitions or strategic partnerships;
general business and economic  conditions;  the Company's ability to become Year
2000 compliant in a timely manner and within its cost  estimates,  including the
risk that one or more of the  representations  provided  to the  Company  by its
suppliers may ultimately be proven false; and other factors described at various
times  in  the  Company's   reports  filed  with  the  Securities  and  Exchange
Commission. The Company wishes to caution readers not to place undue reliance on
any  forward-looking  statements,  which  statements  are made  pursuant  to the
Private  Litigation Reform Act of 1995. These  forward-looking  statements speak
only  as of the  date  they  are  made.  The  Company  expressly  disclaims  any
obligation  or  undertaking  to  disseminate  any  updates or  revisions  to any
forward-looking  statement contained in this report to reflect any change in its
expectations  with  regard to that  forward-looking  statement  or any change in
events,  conditions or circumstances on which that forward-looking  statement is
based.  See Part II, Item 7 - Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations--Certain  Risks and  Uncertainties,  for a
discussion of some of these factors.


General

     The Company operates  distinctly  themed dockside and riverboat casinos and
related  entertainment  and lodging  facilities in several  gaming  markets.  To
attract repeat  customers,  the Company's  strategy focuses on offering spacious
facilities,  ample  parking,  proximity  to  major  highways,  accessible  hotel
accommodations  and providing a value-oriented  gaming  experience.  The Company
currently owns and operates:  (1) two music-themed dockside casinos, a hotel and
an entertainment  center in Coahoma County,  Mississippi,  and a hotel less than
one mile from this complex; (2) a showboat-themed dockside casino and a hotel in
Natchez,  Mississippi;  and (3) through a 50% owned joint  venture,  a riverboat
casino and a hotel in  Bettendorf,  Iowa (the  Company  also owns and leases the
cruising vessel to this joint  venture).  The Company may develop other dockside
or riverboat casino projects, including projects at the following locations: (1)
Kimmswick,  Missouri, and (2) Vicksburg,  Mississippi.  In addition, the Company
operates  a  central  reservations  center  in  Phoenix,   Arizona  which  books
reservations for the Company's four hotels.

     Recently,  as part of the Company's strategy to dispose of under-performing
assets and focus on the markets where it has strong competitive  positions,  the
Company  disposed of: (1) Lady Luck Biloxi in Biloxi,  Mississippi  (June 1998);
(2) Lady Luck Central City in Central City,  Colorado  (February  1998); and (3)
the Company's 35% interest in Bally's Saloon, Gambling Hall and Hotel in Tunica,
Mississippi  (September 1997). These asset sales and the improved performance at
its core properties have significantly enhanced the Company's profitability.


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Operating Casinos

     Lady Luck Rhythm & Blues/Country Casino Complex (Coahoma County). Lady Luck
Rhythm & Blues opened for dockside gaming in June 1994 and the attached 173-room
hotel  opened  in  August  1994.   Coahoma   County,   Mississippi   is  located
approximately  120  miles  southeast  of  Little  Rock,  Arkansas  and 60  miles
southwest of Memphis,  Tennessee.  Approximately  two million people live within
the complex's primary target markets.

     To better accommodate its customers,  the Company opened the Country Casino
and an entertainment center, the Pavilion, in May 1996 and acquired the 120-room
Riverbluff Hotel across the Mississippi River in Helena,  Arkansas in July 1996.
Lady Luck Rhythm & Blues has a Las  Vegas-style  Rhythm & Blues  theme,  and the
Country Casino has a Las Vegas-style  country theme.  The Company  believes that
the Coahoma  County  casinos  benefit from being in an attractive  location with
easy access.  The Company is the only operator  serving the Coahoma  County area
and its casinos  are  located  next to the Helena  Bridge,  the  closest  bridge
crossing the  Mississippi  River that connects  Arkansas with  Mississippi.  The
nearest  other bridges that cross the  Mississippi  River are  approximately  50
miles to the north (near Memphis,  Tennessee) and  approximately 90 miles to the
south  (near  Greenville,  Mississippi).  The  Company  enjoys a  strong  market
position with visitors from Arkansas, as its casinos are the closest to and most
easily accessed from the Little Rock area.

     The casinos  occupy two barges  with  approximately  60,000  square feet of
combined gaming space. As of December 31, 1998, the casinos  featured 1,560 slot
machines,  49 table games and six poker tables.  Other related amenities include
the 173-room Lady Luck Rhythm & Blues Hotel, the 120-room  Riverbluff Hotel, the
Pavilion  entertainment  center,  three  restaurants and a buffet.  The Pavilion
consists of approximately  25,000 square feet of entertainment  and event space,
two movie theaters, an arcade and a logo shop.

     Management believes that the further development of the Country Casino as a
destination  property  will  enhance the  combined  operations  of the Lady Luck
Rhythm &  Blues/Country  Casino  complex.  During  1998,  the  Company  opened a
full-service restaurant to replace the food court in the Country Casino. To meet
peak demand and enhance access to the Country Casino,  the Company also modified
traffic  patterns and added  additional  paved parking areas for 360 automobiles
and 15  tractor-trailers  in 1998.  In addition,  the Company made various other
improvements,  such as  remodeling  portions of the casino and  installing a new
property-wide PBX system for more efficient  communications  and lower operating
costs. In August 1998, the Company began  construction of a 314-room hotel which
is expected to open during the second  quarter of 1999.  The new hotel will more
than  double  the  number  of rooms at the  Company's  property  and allow it to
attract  and serve  existing  and future  customers  living in distant  markets.
Approximately $6.1 million of the $17.0 million hotel  construction  project was
completed  during 1998. The balance of this project will be completed during the
first half of 1999.

     In addition,  the Company is  remodeling  the rooms at the  existing  hotel
adjacent to Lady Luck Rhythm & Blues.  The remodeling  costs are not expected to
exceed  $500,000 and the remodeling is  anticipated  to be completed  during the
second quarter of 1999.

     Lady Luck  Bettendorf.  The Lady Luck Bettendorf  opened in April 1995. The
Bettendorf  casino and related  facilities  are owned by a 50/50  joint  venture
between the Company and Bettendorf  Riverfront  Development  Company.  Lady Luck
Bettendorf  serves the Quad Cities  metropolitan area and is one of three gaming
facilities serving that market.  Since its recent expansion in August 1998, Lady
Luck  Bettendorf's  market  share has risen above 50%,  and was 48% for 1998,  a
significant  increase from its market share of 35% during its first full quarter
of  operations.  Lady  Luck  Bettendorf  benefits  from  being in an  attractive
location with easy access.  The casino is located just off  Interstate 74 on the
Mississippi River and offers easy access from the two interstate highways
serving the Quad Cities metropolitan area, Interstate 74 and Interstate 80.

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     The casino consists of approximately  30,000 square feet of gaming space on
a riverboat  gaming vessel that emphasizes  spaciousness and excitement with its
ample aisle  space,  high  ceilings and a  connecting  pavilion  and hotel.  The
overall  effect  avoids the  cramped  atmosphere  found in the nearby  competing
riverboat  casinos.  As of December 31,  1998,  the casino  featured  1,157 slot
machines,  43 table games and seven poker tables.  Customers  also enjoy related
facilities  that include a  restaurant,  gift shop and a  showroom/entertainment
area for parties and  special  events.  In August  1998,  the Company  completed
construction of a 256-room hotel with a fully enclosed  walkway to the riverboat
casino, a 500-car parking garage, approximately 16,000 square feet of convention
space and a bypass over the nearby railroad to improve access.

     During  April 1998,  the Iowa  Racing and Gaming  Commission  approved  the
addition  of up to 230 new  slot  machines  and six  table  games  at Lady  Luck
Bettendorf,  many of which were installed  before the opening of the hotel.  The
Company anticipates further development of a restaurant and offices at Lady Luck
Bettendorf's conference center.  Notwithstanding these planned expenditures, the
Company  anticipates that Lady Luck Bettendorf will begin distributing up to 45%
of its net income  beginning in 1999 to its owners in relation to their relative
ownership percentages.

     Bettendorf Riverfront  Development Company is leasing certain real property
to the Bettendorf  Joint Venture.  The Company owns and leases a cruising vessel
to Lady Luck Bettendorf. These leases are paid monthly and were determined based
on arms-length negotiations between the Company and BRDC.

     All net profits and losses from all operations of Lady Luck  Bettendorf are
allocated equally between the Company and its joint venture partner. The Company
manages Lady Luck Bettendorf pursuant to a management  agreement for a fee equal
to 2% of gross  revenues  (as  defined in the  agreement)  plus 7% of EBITDA (as
defined  in the  agreement)  not to  exceed 4% of annual  casino  gross  revenue
generated by Lady Luck  Bettendorf,  less $37,500 per month. The Company's joint
venture  partner  provides  consulting  services  to  it  concerning  licensing,
staffing  and  management  of the marine  aspects  of the gaming  vessel and any
land-based development. The Company's partner's consulting fees, which are based
on Lady  Luck  Bettendorf's  gross  revenues,  and are  not to  exceed  $325,000
annually,  are to be paid by the Company out of its  management  fee. A group of
four managers  operate the Bettendorf  joint  venture.  Both the Company and its
joint  venture  partner  have  each  appointed  two  managers.  Most  management
decisions,  including  capital  calls and  distributions,  are  determined  by a
majority of the managers.

     Lady Luck Natchez.  Lady Luck Natchez opened in February  1993.  Natchez is
one of the first  settlements  along the  Mississippi  with a rich  history that
attracts  tourists from around the nation.  To attract tourists who are drawn to
Natchez, the Company's showboat-themed casino was built to resemble the historic
J. M. White  Mississippi  riverboat,  which docked at Natchez in the late 1800s.
Lady Luck Natchez is the only gaming facility serving the Natchez area, with the
nearest casino approximately 50 miles away in Marksville, Mississippi. Lady Luck
Natchez also benefits from being in an attractive location with easy access. The
Company's  property  is located at the  intersection  of a  north-south  highway
connecting  Natchez,  Mississippi  and Memphis,  Tennessee and a major east-west
thoroughfare.

     The three-story,  dockside casino has  approximately  14,300 square feet of
gaming  space.  As of December  31,  1998,  the casino  space  featured 634 slot
machines,  16 table games and four poker  tables.  Customers may also enjoy Lady
Luck  Natchez's  nearby  recently  remodeled  147-room  River Park  Hotel  which
includes  convention  and banquet  facilities  and is located less than one mile
from our  casino,  the Bayou Lane  Buffet  restaurant  and a its nearby  gourmet
restaurant featuring chef John Martin.

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Development Stage Projects
--------------------------

     In  addition to its  operating  casinos,  the  Company has two  dockside or
riverboat casino projects that are in various stages of development. The current
status of each of these development stage projects is described below.

     Kimmswick, Missouri
     -------------------

     The first two phases of the project, as planned, include a land-based hotel
and casinos  onboard two separate  vessels.  The proposed  site is located on an
approximately  45-acre parcel of land approximately 25 miles south of St. Louis,
Missouri.  The Company has entered into an option to lease the proposed  site at
terms  management  believes  are very  favorable  to the  Company.  The  Company
believes the development project possesses many of the favorable characteristics
that it seeks in  developing  new  projects  in that the  location  enjoys  good
accessibility  to  major  transportation  corridors,  close  proximity  to major
metropolitan  areas,  and is an attractive  market with its closest  competition
more than 20 miles away.

     As of  December  31,  1998,  the Company had  invested  approximately  $8.7
million  ($140,000 of which was invested during 1998) in the Kimmswick  project,
including vessel  construction.  Development  costs have been fully reserved and
the  vessel  construction  costs  were  reduced  by a  $3.0  million  write-down
recognized  during 1997. The Company  estimates that the Kimmswick  project will
cost an additional $105.0 million to complete. The proposed project has received
the appropriate  zoning approval from the Jefferson  County Planning  Commission
and has  received a U.S.  Army Corps of  Engineers  404 permit.  However,  a new
permit  might  be  necessary  due to  changes  in the  proposed  project  design
subsequent to receiving the permit.

     The Company has continued its efforts  towards  obtaining a gaming  license
for the Kimmswick  project and has provided updated  information to the Missouri
Gaming Commission. The Missouri Gaming Commission investigates applicants at its
discretion and has not yet selected the Company to be investigated. Furthermore,
there is no guarantee  that the Company will be selected or obtain the necessary
approvals  from the Missouri  Gaming  Commission.  While the Company  intends to
continue  seeking  license  approval  by the  Missouri  Gaming  Commission,  the
eventual  development  of the Kimmswick  project may also be subject to: (1) the
selection of three new Missouri  Gaming  Commission  members,  which the Company
believes may not be familiar with the Company's application; (2) gaming revenues
in the major  metropolitan  areas of Missouri having not increased  commensurate
with recent  increases in capacity,  causing  concerns of potential  competitive
saturation;  and (3) regulatory factors, including loss limits, having generally
caused gaming  operations to underperform  relative to facilities in neighboring
jurisdictions without those restrictions.

     The Vicksburg Project
     ---------------------

     This   development   is  expected  to  include  a  riverboat   casino,   an
approximately   200-room  hotel,  an  800-car  parking  garage,  and  additional
amenities in Vicksburg,  Mississippi.  The  Vicksburg  project is expected to be
located on  approximately  23.9 acres of land owned by the  Company  immediately
south of the Interstate 20 bridge along the  Mississippi  River,  with access to
Washington  Street,  in Vicksburg.  The Company  believes the Vicksburg  project
possesses many of the favorable  characteristics that it seeks in developing new
properties in that the location enjoys access to major transportation  corridors
and is within close proximity to major metropolitan areas.

     During  1997,  the Company  entered  into a joint  venture  agreement  with
Horseshoe  Gaming,  LLC to form a joint  venture to  complete  and  operate  the
Vicksburg  project.  However,  during October 1998, the Company  terminated this
joint venture agreement under its terms.

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     A gaming license was granted on August 18, 1994 and has  subsequently  been
renewed  through July 2000.  As of December  31, 1998,  the Company has invested
approximately  $14.5 million ($100,000 of which was invested during 1998) in the
Vicksburg  project  with net property and  equipment  and deposits  remaining of
approximately  $8.4 million  after  project  development  cost  write-downs  and
reserves  for  assets  which  may not be  usable  in the  project  as  currently
contemplated.  Management's  estimate  of  net  realizable  value  is  based  on
assumptions  regarding future economic,  market and gaming regulatory conditions
including the viability of the Vicksburg  site for the  development  of a casino
project  and the ability of the Company to obtain a  replacement  joint  venture
partner and capital to develop the project.  Changes in these  assumptions could
result in changes in the estimated  net  realizable  value of the property.  The
total cost of the project is  initially  estimated  to be  approximately  $100.0
million. The Company is currently revising the development plan.

     Casino  developments on the Big Black River could  significantly  adversely
affect  operating  casinos in Vicksburg  and thus the viability of the Vicksburg
project.  The Big Black River is located about 13 miles from Vicksburg,  between
Vicksburg  and  Jackson,  Mississippi,  the major  population  base  from  which
Vicksburg  casinos draw their customers.  During the fourth quarter of 1996, the
Mississippi  Gaming  Commission  found a proposed  casino  site on the Big Black
River unsuitable. However, an affected landowner on the Big Black River sued the
Mississippi  Gaming  Commission  after the site was rejected,  and in the fourth
quarter of 1997, a circuit court found the site suitable. The Mississippi Gaming
Commission and the City of Vicksburg have appealed the circuit court decision to
the state Supreme Court.  Once the appeal has been perfected,  the state Supreme
Court  must rule on it within  270 days.  In  addition,  on July 16,  1998,  the
Mississippi Gaming Commission  adopted a regulation that prohibits  developments
such as  projects  on the Big Black  River.  While  the  Company  believes  that
adoption of this  regulation  will increase the prospects of a favorable  ruling
for the Mississippi  Gaming Commission and the City of Vicksburg with respect to
the appeal,  which is currently being held in abeyance  pending related rulings,
there is no  guarantee  that the circuit  court ruling will be  overturned.  The
Company  believes  that the state Supreme Court should rule on the appeal by the
first quarter of the year 2000.


Marketing

     The  Company  employs  systematic,  database-driven  marketing  programs to
attract  and  retain  gaming  customers.  The  Company  uses  general  marketing
approaches to attract  first time  customers to its casinos by  advertising  its
slot player club  program,  popular  entertainment  and other  promotions.  Once
customers enter the Company's  casinos,  the Company attempts to ascertain their
name and  playing  level  regardless  of their level of play.  As a result,  the
Company has  accumulated a database of more than five million names that is used
to send targeted and personalized follow-up promotions.  Management believes the
Company  benefits from utilizing the names on this database to target  potential
customers.  The Company uses this data, as well as the data collected from other
sources,  to implement  direct-mail  marketing programs designed to increase the
frequency of casino patron visits.  The Company  expects to continue  building a
detailed database by using customer tracking systems.  The Company believes that
its marketing strategy,  which focuses on promoting all levels of player,  along
with its  attractive  facilities,  creates  strong brand image  synonymous  with
quality gaming facilities, service and dining.

     Initially,  the Company focuses on targeting the local and drive-in markets
surrounding  each of its  properties.  To create a positive  image and  maintain
awareness of its properties,  the Company uses direct mail,  television,  radio,
billboard  and  newspaper  advertising.  To target local  residents,  promotions
emphasize the appetizing food,  friendly service, a high paying slot player club
program,  and the  latest  in  gaming  technology.  The  goal  of the  Company's
marketing  program is to capture the name,  level of play and preferred games of
every customer that either: (1) plays slot machines or table games; (2) responds
to an  advertisement  or redeems a coupon book; or (3) is recommended by another
customer. The Company uses this data in its direct-mail marketing programs.

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                                       7


     As the markets  surrounding the Company's  casinos continue to mature,  the
Company has expanded its focus to encompass the  surrounding  tourist markets of
each casino. The Company effectively competes for outside tourists,  as a result
of the attractive lodging facilities at each of its properties. The Company uses
and  continuously   monitors  the  effectiveness  of  direct  mail,   television
advertising,   newspapers,  billboards  and  tourist  magazines  placed  in  the
surrounding areas to increase the its casinos' visibility.

License and Other Agreements

     Effective January 1, 1996, the Company entered into several agreements with
entities  controlled by Mr. Tompkins,  Chairman of the Board and Chief Executive
Officer of the Company,  replacing other  agreements that were less favorable to
the Company.  Under a license agreement with International  Marco Polo Services,
Inc.,  (formerly known as Lady Luck Casino, Inc. and Marco Polo's  International
Marketing,  Inc.  which merged in 1996) ("Marco Polo  Services"),  a corporation
owned and  controlled by Mr.  Tompkins,  the Company pays Marco Polo Services an
annual  licensing  fee with  respect to the Lady Luck name and the mailing  list
developed  by Gemini,  Inc.  ("Gemini"),  an S  corporation  wholly owned by Mr.
Tompkins that does business as Lady Luck Casino/Hotel in Las Vegas,  Nevada. The
licensing  fee is equal to the  greater  of (a) 9% of the  Company's  EBITDA  as
defined  (calculated as EBITDA of the Company and all its subsidiaries and joint
ventures  (multiplied,  in the case of Lady Luck  Bettendorf  and the  Kimmswick
project by the Company's ownership interest), excluding, among other things, all
revenues and  expenses  arising  from any casino or  casino/hotel  for which the
Company is not the  operator and which does not utilize the mailing list or Lady
Luck  name and  excluding  revenues  from the  lease of  equipment  owned by the
Company to third parties or  unconsolidated  entities),  and (b)  $1,700,000 per
year (as adjusted based on the Consumer Price Index).  The Company has agreed to
use the Lady Luck name on all existing and future casinos that it operates.  The
license  agreement  provides that during any period of default in the payment of
principal  or interest on 2001 Notes,  the Company will not pay (but will accrue
on its  books)  any  licensing  fee due to Marco Polo  Services.  For 1998,  the
licensing  fees paid to Marco Polo  Services by the Company  were  approximately
$3.4 million.

     Under an office  lease with  Gemini,  the  Company  pays  Gemini the sum of
$300,000 per year, as adjusted based on the Consumer Price Index,  for corporate
office facilities and services.  In addition,  the Company reimburses Gemini for
the  approximate  retail  value of rooms,  food and  beverage,  and other  items
provided to the Company by Gemini.  For 1998, net rent expense and  reimbursable
items paid to Gemini were $315,000 and $104,000,  respectively. In addition, the
Company incurred  $304,000 of marketing and other expenses  reimbursed by Gemini
for 1998.

     Marco Polo  Services  provides  marketing  services to the Company  under a
reimbursement  agreement with the Company.  Mr. Uboldi, the Company's  President
and Chief Operating  Officer and director of the Company,  is the Vice President
of Marco Polo Services.  For 1998, the Company paid Marco Polo Services $870,000
for the cost of marketing services based on allocated payroll,  overhead, direct
advertising  and  other  marketing  costs.  In  addition,  Marco  Polo  Services
reimbursed the Company for $405,000 of expenses paid by the Company on behalf of
Marco Polo Services related to 1998 marketing costs.

     With respect to the Bettendorf joint venture, pursuant to an assignment and
assumption  agreement  between Marco Polo  Services and the Company,  Marco Polo
Services  assigned  to the Company  its rights to receive a  management  fee for
services performed for the Bettendorf joint venture and to assign its obligation
to pay part of that fee to its joint venture partner.

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                                       8



Employees

     As of December 31, 1998, the Company had approximately 2,500 employees,  as
follows:  approximately  1,050 employees at the Lady Luck Rhythm & Blues/Country
Casino complex;  approximately 425 employees at Lady Luck Natchez; approximately
1,000  employees  at  Lady  Luck  Bettendorf;  14  employees  at  the  Company's
reservation  facilities in Phoenix;  and 17 employees at the Company's corporate
headquarters in Las Vegas. The Company's employees are currently non-union.  The
Company has not  experienced  any work stoppages and believes its relations with
its employees are good.


Competition

     The Company  believes the gaming markets in which it currently  operates or
intends to develop projects are extremely competitive and expects them to become
even  more  competitive.  The  Company  competes  in  these  gaming  markets  by
attempting to develop  locations  within these markets which are more accessible
to potential  customers  and through its sales and marketing  efforts  described
above.

     There is a  substantial  risk  that the  supply  of  gaming  facilities  in
Mississippi  will  exceed  the demand for  gaming,  which  could have a material
adverse  effect on the  Company's  operating  results.  As of December 31, 1998,
there were a total of 28 licensed and operating  dockside  gaming  facilities in
Mississippi,  consisting  of nine in Tunica,  eight in Biloxi,  two in Gulfport,
four in Vicksburg,  one in Hancock County, one in Coahoma County, one in Natchez
and two in  Greenville  (one  additional  dockside  casino is licensed and under
construction in Biloxi). DeSoto County, the northwestern-most Mississippi County
and nearest to Memphis,  could,  under  existing  state law,  vote to  authorize
gaming activities,  which would in turn increase competition in this market. The
voters of DeSoto County have voted against  legalized gaming on three occasions,
most  recently in November  1996.  However,  local  referenda may be held during
presidential  election years,  and there is no guarantee that gaming will not be
approved in DeSoto  County in future  elections.  Additionally,  in Arkansas,  a
gaming referendum,  which, if passed,  would have legalized  particular forms of
gaming at particular  locations,  was defeated in November  1996. If gaming were
legalized  in  particular  areas of Arkansas or, to a lesser  extent,  in DeSoto
County,  it could have a material adverse effect on the Company's Coahoma County
facilities.  Furthermore,  the Mississippi Band of Choctaws negotiated a compact
with the  State  of  Mississippi  and has  opened a  land-based  casino  located
approximately 100 miles to the east of Jackson, Mississippi,  which has affected
Lady Luck Natchez and, if further developed, could affect the Vicksburg project.

     Lady Luck Bettendorf  faces  competition  from two other  riverboats in the
Quad Cities  area,  including  riverboats  in  Davenport,  Iowa and Rock Island,
Illinois.  However,  Lady Luck  Bettendorf  has  increased its share of the Quad
Cities, Iowa market from approximately 46% during 1997 to 48% during 1998.

     The Company also competes with gaming facilities  nationwide and in Canada,
including land-based casinos in Nevada, New Jersey,  South Dakota,  Colorado and
Ontario,  riverboat  or dockside  gaming in Missouri  and  Louisiana  as well as
various  gaming  operations on Native  American land in such states as New York,
California,   Connecticut,   Iowa,  Michigan,  Minnesota,  Arizona,  Washington,
Wisconsin,  Louisiana and Mississippi.  Other jurisdictions may legalize various
forms of gaming that may compete  with the Company in the future.  Although  the
Company expects that the presence of gaming in a city will result in an increase
in the  number of people  visiting  that  city,  there is no  guarantee  that an
increase  will  actually  occur.  The  failure  of those  cities to  realize  an
increase,  or a  subsequent  decrease in the number of visitors to an area where
the Company is engaged in gaming,  could have a material  adverse  effect on the
Company's operations.

     In any jurisdiction  where the Company may begin  operations,  it will face
competition  for the more  desirable  sites  and for  qualified  personnel.  The
Company will also compete with other forms of wagering, including bingo and pull
tab games,  card  clubs,  pari-mutuel  betting on horse  racing and dog  racing,
state-sponsored lotteries, video lottery terminals and video poker terminals, as
well as other forms of entertainment.

<PAGE>
                                       9


     Some of the Company's  competitors  have more gaming  industry  experience,
larger  operations or significantly  greater  financial and other resources than
the  Company  does.  Given  these  factors,  it  is  possible  that  substantial
competition could have a material adverse effect on the Company's future results
of operations.


Seasonality and Weather

     Even if the  Company  is able to expand  into other  jurisdictions,  it may
remain dependent on a relatively small number of dockside facilities. A flood or
other severe weather condition could cause the Company to lose the use of one or
more dockside facilities for an extended period. The inability to use a dockside
facility during any period could have a material adverse effect on the Company's
financial results.

     Seasonal revenue  fluctuations occur at the casinos in Mississippi and Iowa
with winter months  typically  yielding  lower  revenues due to adverse  weather
conditions.


Regulatory Matters

     The Company,  through its  subsidiaries  and affiliates,  owns and operates
gaming casinos in Mississippi and Iowa and may develop  projects in Missouri and
Mississippi. The entities owning these casinos and any of the Company's entities
owning  casinos  in the future are or will be  required  to obtain and  maintain
gaming licenses from the applicable state regulatory authorities and comply with
the  related  regulations.  Although  the  Company  believes  it is in  material
compliance with all applicable gaming regulations, non-compliance by the Company
could have a material  adverse  effect on the Company's  operations.  Generally,
regulatory authorities have broad discretion in granting,  renewing and revoking
gaming  licenses.  Lady Luck Gaming  Corporation  itself is required to be found
suitable  to own the  entities  that  directly or  indirectly  own  casinos.  In
addition,  the  Company's  directors  and  many of the  casinos'  employees  are
required  to obtain  gaming  licenses.  Where it has not  already  done so,  the
Company  intends to apply for licenses and to have its employees,  to the extent
required,  apply for  licenses.  All  directors  and  executive  officers of the
Company have  received all  necessary  approvals  with respect to the  operating
casinos and have received, applied for or will apply for all necessary approvals
with respect to the development  stage projects.  While the Company has received
gaming licenses in the states of Mississippi, Colorado and Iowa, the Company has
not received licenses in any other jurisdiction. There is no guarantee that each
casino,  officer,  director,  or the appropriate  gaming  employees will receive
(where not yet received) or maintain the necessary gaming licenses,  or that the
Company or its casinos will be able to operate  successfully or profitably under
the  terms  of any  licenses.  The  failure  of the  Company  or any of its  key
personnel to obtain or retain a license in a particular  jurisdiction could have
a material adverse effect on the Company's  ability to obtain or retain licenses
in other jurisdictions.

     Any jurisdiction in which the Company may seek to conduct gaming operations
in the  future  would  likely  require  the  Company  to  apply  for and  obtain
regulatory  approvals with respect to the  construction,  design and operational
features of whatever gaming  facilities it intends to use. There is no guarantee
that the Company will obtain the  necessary  approvals on a timely basis or with
acceptable  conditions to allow the Company to open any of the development stage
projects. In addition,  the State of Mississippi  currently requires,  and other
jurisdictions  may require,  prior approval for all entities that are conducting
gaming within their respective  jurisdictions  before conducting gaming in other
jurisdictions. The obtaining of licenses and approvals may be time consuming and
expensive  and  cannot be  guaranteed.  Any  regulations  adopted  by the gaming
commissions,  the legislatures or any governmental authority having jurisdiction
in Mississippi,  Missouri, Iowa, or other jurisdictions in which the Company has
or intends to have gaming  operations may have a material  adverse effect on the
Company's results of operations or financial condition, including its ability to
raise financing.


<PAGE>
                                       10



     Mississippi Gaming Regulations

     The ownership and operation of a gaming  business in Mississippi is subject
to extensive laws and regulations,  including the Mississippi Gaming Control Act
passed in June 1990 (the  "Mississippi  Act") and the related  regulations  (the
"Mississippi  Regulations")  issued by the  Mississippi  Gaming  Commission  and
Mississippi  Tax  Commission  which are  empowered  to oversee  and  enforce the
Mississippi Act. Gaming in Mississippi can be legally  conducted only on vessels
of a  particular  minimum  size in navigable  waters in counties  bordering  the
Mississippi River or in waters of the State of Mississippi  (so-called  dockside
gaming) which lie adjacent and to the south  (principally in the Gulf of Mexico)
of the  Counties  of Hancock,  Harrison,  and  Jackson,  and only in counties in
Mississippi  in which the  registered  voters have not voted to prohibit  gaming
activities.  The  voters in  Jackson  County,  the  southeastern-most  county of
Mississippi,  and DeSoto  County,  south of  Memphis,  Tennessee,  have voted to
prohibit gaming.  Gaming may also be legally conducted on Native-American  lands
in Mississippi as regulated in part by the Federal Indian Gaming  Regulatory Act
of 1988,  which activity is not subject to the Mississippi Act.  Presently,  the
Mississippi  Band of  Choctaws  operates a  land-based  casino at a location  in
East-Central Mississippi.

     The  Mississippi  Act requires that a person  (including any corporation or
other entity) must be licensed to conduct gaming  activities in  Mississippi.  A
license will be issued only for a specified location that has been approved as a
gaming site by the Mississippi Gaming Commission prior to issuing a license. The
Mississippi  Act  also  requires  that  each  officer  or  director  of a gaming
licensee,  or  other  person  who  is  actively  and  directly  engaged  in  the
administration  or  supervision  of  gaming,  or who has any  other  significant
involvement  with the  activities of any gaming  subsidiary,  or who exercises a
material  degree of control over the licensee,  either  directly or  indirectly,
must be found suitable by the Mississippi  Gaming Commission.  In addition,  any
employee of the licensee  who is directly  involved in gaming must obtain a work
permit from the Mississippi Gaming Commission. The Mississippi Gaming Commission
will not  issue a license  or make a  finding  of  suitability  unless  they are
satisfied,  after an extensive investigation paid for by the applicant, that the
persons  associated  with the gaming  licensee or  applicant  for a license have
proven that they are of good character,  honesty and integrity, with no relevant
or material criminal record. In addition, the Mississippi Gaming Commission will
not issue a license  unless they are  satisfied  that the licensee is adequately
financed  or has a  reasonable  plan to finance  its  proposed  operations  from
acceptable  sources,  and  that  persons  associated  with  the  applicant  have
sufficient business probity, competence and experience to engage in the proposed
gaming enterprise.  The Mississippi Gaming Commission may refuse to issue a work
permit  to a  gaming  employee  (1)  if  the  employee  has  committed  larceny,
embezzlement  or any  crime  of  moral  turpitude,  or  knowingly  violated  the
Mississippi  Act or  Mississippi  Regulations,  or (2) for any other  reasonable
cause.

     The Mississippi Gaming Commission has the power to deny, limit,  condition,
revoke and suspend any license, finding of suitability or registration,  or fine
any person,  as they deem reasonable and in the public  interest,  subject to an
opportunity  for a  hearing.  The  Mississippi  Gaming  Commission  may fine any
licensee or person who was found  suitable up to $100,000 for each  violation of
the Mississippi Act or the Mississippi  Regulations,  which is the subject of an
initial complaint, and up to $250,000 for each violation which is the subject of
any subsequent  complaint.  The  Mississippi Act provides for judicial review of
decisions of the  Mississippi  Gaming  Commission  by petition to a  Mississippi
Circuit Court, but the filing of a petition does not necessarily stay any action
taken by the  Mississippi  Gaming  Commission  pending a decision by the Circuit
Court.

     License fees and taxes,  computed in various ways  depending on the type of
gaming involved, are payable to the State of Mississippi and to the counties and
cities in which the Company's  gaming  subsidiaries'  respective  operations are
conducted. Depending on the particular fee or tax involved, these fees and taxes
are payable either monthly,  quarterly or annually and are based on a percentage
of the gross gaming revenues received by a casino operation,  the number of slot
machines  operated by the casino,  or the number of table games  operated by the
casino.  Each gaming licensee must pay a license fee to the State of Mississippi
based on "gaming receipts"  (generally defined as gross receipts less payouts to
customers as winnings).  In Coahoma and Harrison  Counties,  for  instance,  the
local governments have imposed gross revenue fees of 3.2% as well as annual fees
on slot  machines.  As of June 1, 1995,  the City of Natchez was  authorized  to
impose an equivalent tax on casino gross  revenue.  The license fee equals 4% of
gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000
and up to $134,000 per month,

<PAGE>
                                       11


and 8% of gaming  receipts  over  $134,000  per month.  These  license  fees are
allowed as a credit against the Company's Mississippi State income tax liability
for the year paid.  The  Company  may also be subject  to a local  municipal  or
county tax equal to one-tenth of the license fee due to the State of Mississippi
as set forth above.  An  additional  license  fee,  based on the number of table
games conducted or planned to be conducted on the gaming premises, is payable to
the State of  Mississippi  annually in advance.  Based on the Company's  planned
activities,  this  additional  licensee  fee will equal  approximately  $399,200
(aggregate for all the Company's dockside  casinos),  plus $100 for each game in
excess of 35 games at any one location.  Municipal and county fees have been and
may  in the  future  also  be  assessed,  and  may  vary  from  jurisdiction  to
jurisdiction.  All taxes  must be  timely  paid in order to  retain  the  gaming
license.

     The Company is also  subject to certain  audit and record  keeping laws and
regulations,  primarily  intended to ensure compliance with the Mississippi Act,
including  compliance  with the  provisions  relating  to the payment of license
fees. The Mississippi Gaming Commission, through the power to regulate licenses,
has the power to impose additional restrictions on the holders of the securities
of the Company at any time.  The Company is required to provide the  Mississippi
Gaming  Commission  with notice of any changes in  directors  or  officers.  The
Mississippi  Gaming  Commission  requires  that  any  chief  executive  officer,
president,   chief  financial  officer  or  secretary  of  the  Company  or  its
subsidiaries be found suitable.  In addition,  the Mississippi Gaming Commission
requires that any other director or officer of the Company who has a substantial
involvement with gaming or a significant  administrative supervisory role of the
gaming  operations be found  suitable.  These  suitability  findings may be made
after these  individuals  take office as  directors or  officers.  However,  the
Mississippi  Gaming Commission may require that the Company sever relations with
individuals if they are not found suitable. In addition,  during the pendency of
any  suitability  finding,  the Mississippi  Gaming  Commission may require that
these  individuals  not act as  directors or officers.  The  Mississippi  Gaming
Commission has found Messrs. Tompkins, Uboldi, Reid and Tombari suitable.

     Because the Company is licensed to conduct gaming in  Mississippi,  neither
the  Company  nor any  affiliates  may  engage in gaming  activities  outside of
Mississippi without the prior approval of the Mississippi Gaming Commission. The
Mississippi Gaming Commission has adopted  regulations related to foreign gaming
approval and the impact of any of these  regulations on the future operations of
the Company cannot be determined at this time. The Mississippi Gaming Commission
has confirmed that this requirement will not apply  retroactively.  However, the
Mississippi  Gaming  Commission will need to approve the Company's future gaming
operations  outside  of  Mississippi.  The  Mississippi  Gaming  Commission  has
approved the Company's operations in Iowa.

     The  Mississippi  Regulations  also require  prior  approval for a "plan of
recapitalization" as defined by the regulations.  In addition,  the Company must
submit detailed financial, operating and other reports to the Mississippi Gaming
Commission.  Substantially all loans,  leases,  securities and similar financing
transactions  entered into by the Company must be reported to or approved by the
Mississippi  Gaming Commission.  The Company is required  periodically to submit
detailed  financial and operating  reports to the Mississippi  Gaming Commission
and to furnish any other information that the Mississippi  Gaming Commission may
require.  The Mississippi  Act requires  annual audits by independent  certified
public  accountants of the financial  statements of casino  licensees with gross
revenue of $3 million or more.

     Any permanently moored vessel used for casino operations must meet the fire
safety standard of the Mississippi Fire Prevention Code and the Life Safety Code
and the Standards for the Construction and Fire Protection of Marine  Terminals,
Piers and Wharf's of the National Fire Protection Association. Additionally, any
establishment  to be  constructed  for  dockside  gaming must meet the  Southern
Standard  Building Code or the local building code, if a local building code has
been  implemented  at the casino's  site.  All  permanently  moored vessels must
comply with  specified  standards for  stability,  flooding and stability  after
damage. The Mississippi  Regulations require approvals by the American Bureau of
Shipping,  which is under  contract with the  Mississippi  Gaming  Commission to
perform these stability tests.


<PAGE>
                                       12


     Iowa Gaming Regulations

     In 1989, the State of Iowa legalized  riverboat  gaming on the  Mississippi
River and other  waterways  located  in Iowa.  The  legislation  authorized  the
granting  of  licenses  to  not-for-profit  corporations  which,  in  turn,  are
permitted to enter into operating  agreements  with  qualified  persons who also
actually conduct  riverboat gaming  operations.  Such operators must likewise be
approved and licensed by the Iowa Racing and Gaming Commission (the "Iowa Gaming
Commission").

     On August 11, 1994,  the Riverbend  Regional  Authority,  a  not-for-profit
corporation  organized  for the  purpose  of  facilitating  riverboat  gaming in
Bettendorf,  Iowa, entered into an operator's contract with the Bettendorf joint
venture  authorizing the Bettendorf  joint venture to operate  riverboat  gaming
operations in  Bettendorf.  The initial term of the  operator's  contract is for
three years.  The  Bettendorf  joint venture has the right to renew the contract
for succeeding  three-year periods as long as Scott County voters approve gaming
in the  jurisdiction.  The Company  renewed the  operator's  contract  effective
September 1, 1998. Under the operator's  contract,  the Bettendorf joint venture
pays the Riverbend  Regional Authority a fee equal to 4.1% of the adjusted gross
receipts.  Further,  pursuant to statute, the Bettendorf joint venture generally
must pay a fee to the City of  Bettendorf  equal  to  1.65%  of  adjusted  gross
receipts.

     In 1994, Iowa amended the enabling  legislation  removing  several previous
restrictions  including loss and wager limits and  restrictions on the amount of
space on a vessel that may be utilized  for gaming.  Current law permits  gaming
licensees to offer unlimited  stakes gaming on games approved by the Iowa Gaming
Commission on a 24-hour basis.  Dockside casino gaming is authorized by the Iowa
Gaming  Commission  although the licensed vessel is required to conduct at least
one  two-hour  excursion  cruise  each day for at  least  100  days  during  the
excursion season. The legal age for gaming is 21.

     The  enabling  legislation  gives  each  county the  opportunity  to hold a
referendum on whether to allow casino gaming within its boundaries. A referendum
was passed on April 7, 1994, with 80% voting in favor of passage and authorizing
casino gaming in Bettendorf for a period of nine years from the issuance date of
the  license.  Another  referendum  cannot be held until  2002 and if  approved,
subsequent referenda will occur at eight-year intervals.

     On March 5, 1998, the Iowa Gaming Commission  authorized the renewal of the
Bettendorf joint venture's gaming license. The license is for an additional term
of one-year  beginning  April 1, 1998, is not  transferable  and will need to be
renewed in March 1999 and at the end of each annual renewal period.

     The  ownership  and  operation of gaming  facilities in Iowa are subject to
extensive  state laws,  regulations  of the Iowa Gaming  Commission  and various
county  and  municipal  ordinances  (collectively,   the  "Iowa  Gaming  Laws"),
concerning  the  responsibility,  financial  stability  and  character of gaming
operators and persons  financially  interested or involved in gaming operations.
Iowa Gaming Laws seek to: (1) prevent unsavory or unsuitable persons from having
direct or indirect  involvement with gaming at any time or in any capacity;  (2)
establish and maintain  responsible  accounting  practices and  procedures;  (3)
maintain effective control over the financial practices of licensees  (including
the  establishment  of minimum  procedures  for  internal  fiscal  affairs,  the
safeguarding  of assets and revenues,  the provision of reliable  record keeping
and the filing of periodic reports with the Iowa Gaming Commission); (4) prevent
cheating and fraudulent  practices;  and (5) provide a source of state and local
revenues through taxation and licensing fees.  Changes in Iowa Gaming Laws could
have  a  material  adverse  effect  on the  Bettendorf  joint  venture's  gaming
operations.

     Gaming  licenses  granted to  individuals  must be renewed every year,  and
licensing  authorities  have  broad  discretion  with  regard to such  renewals.
Licenses are not transferable. The Bettendorf joint venture must submit detailed
financial and operating reports to the Iowa Gaming  Commission.  Any contract in
excess  of  $50,000  must  be  submitted  to and  approved  by the  Iowa  Gaming
Commission.

<PAGE>
                                       13

     Officers,  directors,  managers and key employees of the  Bettendorf  joint
venture are  required to be  licensed by the Iowa Gaming  Commission.  Employees
associated  with gaming must obtain work  permits  that are subject to immediate
suspension under specific circumstances.  In addition,  anyone having a material
relationship or involvement with the Bettendorf joint venture may be required to
be found  suitable  or to be  licensed,  in which  case those  persons  would be
required to pay the costs and fees of the Iowa Gaming  Commission  in connection
with the investigation. The Iowa Gaming Commission may deny an application for a
license for any cause deemed reasonable. In addition to its authority to deny an
application  for  license,  the  Iowa  Gaming  Commission  has  jurisdiction  to
disapprove  a change in position by officers or key  employees  and the power to
require the Bettendorf joint venture to suspend or dismiss  officers,  directors
or other key employees or sever  relationships  with other persons who refuse to
file  appropriate   applications  or  whom  the  Iowa  Gaming  Commission  finds
unsuitable to act in such capacities.

     The Iowa Gaming Commission may revoke a gaming license if the licensee: (1)
has been suspended from operating a gaming operation in another  jurisdiction by
a board or  commission  of that  jurisdiction;  (2) has  failed  to  demonstrate
financial  responsibility  sufficient to meet adequately the requirements of the
gaming enterprise;  (3) is not the true owner of the enterprise;  (4) has failed
to disclose  ownership of other persons in the enterprise;  (5) is a corporation
10% of the stock of which is subject to a contract  or option to purchase at any
time during the period for which the license was issued,  unless the contract or
option  was  disclosed  to the  Iowa  Gaming  Commission  and  the  Iowa  Gaming
Commission  approved the sale or transfer during the period of the license;  (6)
knowingly  makes  a false  statement  of a  material  fact  to the  Iowa  Gaming
Commission;  (7)  fails to meet a  monetary  obligation  in  connection  with an
excursion  gaming boat;  (8) pleads guilty to, or is convicted of a felony;  (9)
loans to any person, money or other thing of value for the purpose of permitting
that person to wager on any game of chance; (10) is delinquent in the payment of
property  taxes or other  taxes or fees or a payment  of any  other  contractual
obligation or debt due or owed to a city or county;  or (11) assigns,  grants or
turns over to another  person the operation of a licensed  excursion  boat (this
provision does not prohibit  assignment of a management contract approved by the
Iowa Gaming  Commission) or permits  another person to have a share of the money
received for admission to the excursion boat.

     If it were  determined  that  the  Iowa  Gaming  Laws  were  violated  by a
licensee,  the  gaming  licenses  held by a  licensee  could  be  limited,  made
conditional, suspended or revoked. In addition, the Bettendorf joint venture and
the persons  involved  could be subject to  substantial  fines for each separate
violation  of the  Iowa  Gaming  Laws  at the  discretion  of  the  Iowa  Gaming
Commission. Limitations,  conditioning or suspension of any gaming license could
(and  revocation of any gaming license would) have a material  adverse effect on
the operations of the Bettendorf joint venture.

     The Iowa  Gaming  Commission  may also  require  any  individual  who has a
material  relationship  with the Bettendorf joint venture to be investigated and
licensed  or  found  suitable.   The  Iowa  Gaming  Commission,   prior  to  the
acquisition,  must approve any person who acquires 5% or more of the  Bettendorf
joint venture's equity securities.  The applicant stockholder is required to pay
all costs of this investigation.

     Gaming taxes  approximating  20% of the  adjusted  gross  receipts  will be
payable by the Bettendorf  joint venture on its operations to the State of Iowa.
In addition,  there are costs that include a $50,000  initial  application  fee,
yearly  operations fees and all costs associated with monitoring and enforcement
by the Iowa Gaming Commission and the Iowa Department of Criminal Investigation.

     If required by any gaming authority or if the Company reasonably determines
that ownership of any of the Company's securities,  including the 2001 Notes, by
any person or entity will either materially  preclude,  interfere with, threaten
or delay the issuance of, or  jeopardize  the  maintenance  and existence of any
gaming  or  liquor  license,  or  result  in  the  imposition  of  significantly
burdensome terms or conditions on any license,  the Indenture  covering the 2001
Notes  provides  that the Company has the right to redeem them or require  their
sale.


<PAGE>
                                       14


     Non-Gaming Regulations

     The Company is subject to certain  federal,  state and local  environmental
protection,  health and safety laws,  regulations  and ordinances  that apply to
businesses  generally,  including  the Clean Air Act,  the Clean Water Act,  the
Resource   Conservation  and  Recovery  Act,  the  Comprehensive   Environmental
Response,  Compensation  and Liability Act, the  Occupational  Safety and Health
Act, and similar state statutes.

     Some of the Company's owned and leased properties were used in the past for
industrial  purposes,  which have or may have  resulted  in soil or  groundwater
contamination. For example, the Vicksburg site had been used as a bulk petroleum
storage  facility  since the early 1950's,  and contained  above-ground  storage
tanks and barge and truck loading docks  associated with that  operation.  Known
releases of petroleum products from three of the seven tanks have occurred since
1986,  along  with  other  small  releases  at various  locations  on site.  The
subsurface  assessment of the environmental  condition of the site by an outside
environmental  consultant  indicated  that  some of the  soils at the site  were
contaminated  with  petroleum   hydrocarbons  and  associated  volatile  organic
compounds, and that this contamination was present in significant concentrations
in some  locations  on  site.  Remediation  efforts  at the  Vicksburg  site are
complete.  On February 21, 1996,  the  Mississippi  Department of  Environmental
Quality  determined that the environmental  remediation  conducted by the seller
meets all federal and state standards,  and has certified that no further action
is required.  However,  there is no guarantee that the Mississippi Department of
Environmental  Quality or the Federal  Environmental  Protection Agency will not
alter  target  cleanup  levels in the future,  resulting in  additional  cleanup
requirements. This would expose the Company to additional liability as the owner
of the property, and could result in a material delay of the construction of new
facilities on-site.

     A sublessee at its Helena,  Arkansas property has informed the Company that
there may be contamination  on the property from underground  storage tanks used
by the sublessee  for gas station  operations.  The Company is awaiting  further
information  on this matter  (including  the extent of the  contamination),  but
believes that the sublessee will be responsible for any costs to investigate and
remediate the property.  However,  there is no guarantee that the sublessee will
in fact pay any of the costs.

     Other  than  those  described,  the  Company  has not  made,  and  does not
anticipate  making,  material  expenditures or incurring  delays with respect to
environmental protection,  and health and safety laws and regulations.  However,
there  is no  guarantee  that  additional  pre-existing  conditions  will not be
discovered  and that the Company  will not  encounter  material  liabilities  or
delays.

     The  Company's  riverboat  at Lady Luck  Bettendorf  must comply with U. S.
Coast Guard  requirements  as to boat design,  on-board  facilities,  equipment,
personnel and safety. This riverboat must hold Certificates of Documentation and
Inspection  issued by the U. S.  Coast  Guard and may also be  subject  to local
zoning and building codes.  Each of the Company's  permanently  moored barges in
Mississippi  must be certified  and approved by the American  Bureau of Shipping
with respect to stability and single  compartment  flooding in  accordance  with
Mississippi  regulations.  These  permanently  moored  barges must meet the fire
safety  standards of the  Mississippi  Fire Prevention Code and Life Safety Code
and the Standards for the Construction and Fire Protection of Marine  Terminals,
Piers and Wharves of the National Fire  Protection  Association  and may also be
subject to local zoning and building codes.



<PAGE>
                                       15


ITEM 2.  PROPERTIES

     The Company has various  property  leases and options to lease property and
owns  barges  on which  dockside  casinos  have  been or are  anticipated  to be
constructed. The Company (1) owns two parcels of property at the site where Lady
Luck Biloxi is located and leases  several other  properties  at that site,  (2)
owns property at the Vicksburg site, (3) leases various land in Natchez and owns
the  property  where the River Park Hotel is located,  (4) has entered  into the
Coahoma  County lease and purchased the leasehold  associated  with the property
where the  Riverbluff  Hotel is located,  (5) has entered into various leases in
Gulfport, Mississippi, and (6) has entered into an option to lease the Kimmswick
Site. All rental  payments under these leases,  other than rental payments under
the Coahoma  County  leases,  are  calculated  on a fixed base rent  adjusted in
accordance  with  increases in the Consumer Price Index up to a maximum of 3% in
any given year.  Rental payments under the Coahoma County leases are 5.5% of the
annual gross revenues  (calculated in accordance with those leases). The Company
owns eight barges,  one of which is in Natchez,  three of which are intended for
use in the  construction  of the  Vicksburg  project  and four of  which  are in
Coahoma  County.  The Company also owns a cruising  gaming vessel which is being
leased to the Bettendorf joint venture and has approximately  $6.0 million ($3.0
million net of reserves and accruals)  invested in a partially finished cruising
vessel.  The Company leases and has an obligation to acquire property in Central
City,  Colorado  (during  1998 the  Company  acquired a portion  of this  leased
property). Mortgages and other security agreements for the benefit of holders of
the 2001 Notes  encumber some of the  Company's  properties.  Additionally,  the
Company has  granted  liens on  particular  owned and leased  properties  to the
sellers or lessors of those  properties,  including  a plot of land  adjacent to
Lady Luck Biloxi and the property  where the River Park Hotel is located and has
purchased the leasehold  interest  where the  Riverbluff  Hotel is located.  The
Company leases its corporate offices in Las Vegas, Nevada.


ITEM 3.  LEGAL PROCEEDINGS.

     The Company is a party to the legal proceedings discussed below, which have
arisen in the normal course of business.  In view of the inherent  difficulty of
predicting  the outcome of litigation and other legal  proceedings,  the Company
cannot state with  certainty  what the eventual  outcome of any of these pending
proceedings will be.

     Shareholder Class Action Lawsuits
     ---------------------------------

     The Company has been named as a defendant in a purported  shareholder class
action lawsuit filed alleging violations by the Company of the Securities Act of
1933, as amended (the "Securities Act") and the Securities Exchange Act of 1934,
as amended (the "Exchange  Act"), for alleged  material  misrepresentations  and
omissions in connection  with the Company's  1993  prospectus and initial public
offering of Common Stock.  The complaint seeks,  among other things,  injunctive
relief,  rescission and  unspecified  compensatory  damages.  In addition to the
Company, the complaint also names as defendants Andrew H. Tompkins, Chairman and
Chief Executive  Officer of Lady Luck Gaming  Corporation  ("Lady Luck Gaming"),
Alain Uboldi,  Director and Chief Operating Officer of Lady Luck Gaming, Michael
Hlavsa, the former Chief Financial Officer of Lady Luck Gaming,  Bear, Stearns &
Co., Inc. and  Oppenheimer & Co., Inc., who acted as lead  underwriters  for the
initial public offering.  The Company has retained outside counsel to respond to
the  complaint.  On October 8, 1997, the Company was served with an order of the
court  dismissing  all of the  plaintiffs'  claims  under  Section  10(b) of the
Exchange Act and 11 of the plaintiffs' 16 claims under Sections 11, 12 and 15 of
the Securities Act with prejudice for failing to adequately  state a claim.  The
court also ordered the  plaintiffs to file, and the  plaintiffs  have filed,  an
amended complaint  regarding the five claims under Sections 11, 12 and 15 of the
Securities  Act which were not dismissed  with  prejudice.  While the outcome of
this matter cannot presently be determined,  the Company believes, based in part
on advice of counsel, that it has meritorious defenses.


<PAGE>
                                       16


    Greek Lawsuits
    --------------

     The Company and  particular  joint  venture  partners are  defendants  in a
lawsuit  brought by the country of Greece and its Minister of Tourism before the
Greek  Multi-Member  Court  of  First  Instance.  The  action  alleges  that the
defendants  failed to make  specified  payments  in  connection  with the gaming
license bid process for Patras,  Greece.  The payments the Company is alleged to
have been required to make aggregate  approximately  2.1 billion  drachma (which
was approximately  $7.1 million as of March 5, 1999 based on published  exchange
rates).  Although it is difficult to determine the damages being sought from the
lawsuit,  the action may seek damages up to that aggregate amount plus interest.
The cases are still in their  preliminary  stages  and their  outcome  cannot be
predicted with any degree of certainty;  however, the Company believes, based in
part on advice of counsel, that it has meritorious defenses.

     A Greek architect filed an action against the Company  alleging that he was
retained  by the  Company to provide  professional  services  with  respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's  Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately  $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's  decision.  Subsequent  to December 31, 1998,  the Company  settled this
action for $335,000 which had been reserved fully in 1997.

     Other Matters
     -------------

     On November 5, 1996,  the United States  Bankruptcy  Court for the Northern
District of  Mississippi  dismissed a lawsuit  that had been brought by Superior
Boat Works, Inc.  ("Superior")  against Lady Luck Mississippi,  Inc. on or about
September 23, 1993. Superior had previously done construction work for Lady Luck
Natchez on its barge, as well as some minor  preparatory work on one other barge
of the Company. This proceeding alleged damages of approximately $47,000,000, of
which approximately  $3,400,000 was alleged for additional  construction work on
Lady Luck Natchez and the  remaining  amount was alleged for unjust  enrichment,
for causing the bankruptcy of Superior and for future work Superior  expected to
perform for the  Company.  Superior  has  appealed  the  decision to dismiss the
action. The Company,  based in part on the advice of its counsel,  believes that
it has meritorious defenses and does not believe that the appeal of the decision
will have a material  adverse  effect on the  Company's  financial  condition or
results of operations.

     During  November  1996,  Lady  Luck  Central  City,  Inc.  entered  into  a
Memorandum  of   Understanding   with  BWCC,   Inc.,   which  does  business  as
Bullwhackers-Central  City  ("Bullwhackers").  The  Memorandum  provided  for  a
combination of the respective  companies' gaming  establishments  that currently
operate  on  adjacent  real  property  in  Central  City.  As a  result  of  the
Memorandum,  the  parties  negotiated  and  purportedly  executed  a  definitive
Operating  Agreement and Lease  Agreement in September  1997.  During the fourth
quarter of 1997, Bullwhackers refused to honor these definitive agreements,  and
accordingly,  the Company  commenced  suit against  Bullwhackers.  Subsequent to
December  31,  1998,  the  Company  and  Bullwhackers  reached an  agreement  in
principle  whereby the Company expects to receive  $300,000 as a settlement from
Bullwhackers.  The  settlement  will not be  recognized  until  the  payment  is
received.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

     No matters were submitted to a vote of security-holders of Lady Luck Gaming
during the fourth quarter of 1998.


<PAGE>
                                       17


                                     PART II

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

     Lady Luck  Gaming's  Common  Stock  (symbol  "LUCK")  trades on the  Nasdaq
National Market tier of The Nasdaq Stock Market and is quoted in The Wall Street
Journal and other  newspapers.  The following  table sets forth the high and low
sale prices of the Common Stock for each quarter during the preceding two years,
as reported by the Nasdaq National  Market.  The Company  effected a one-for-six
reverse  stock split on June 4, 1998,  and the sales prices set forth below have
been restated for periods before June 4, 1998 to reflect the decreased number of
shares of Common Stock outstanding.


                    Nasdaq National Market Daily Sales Price

                                                High                  Low
                                          ----------------     ----------------
   1998
      1st Quarter....................        $  10.500             $   5.436
      2nd Quarter....................           11.628                 6.750
      3rd Quarter....................            9.250                 4.375
      4th Quarter....................            5.500                 2.813

   1997

      1st Quarter....................        $  12.750             $  10.125
      2nd Quarter....................           11.250                 9.000
      3rd Quarter....................           12.750                 7.125
      4th Quarter....................            9.750                 4.500


     As of March 5, 1999,  Lady Luck  Gaming had  approximately  457  holders of
record of its Common Stock.

     Lady Luck Gaming did not pay any cash dividends on its Common Stock in 1998
or 1997 and has no intention of paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Indenture covering the 2001 Notes restricts
the  Company's  ability to pay  dividends on its Common Stock (See Note 5 to the
Company's Consolidated Financial Statements).


<PAGE>
                                       18

ITEM 6. SELECTED FINANCIAL DATA

Years Ended December 31,        1998      1997      1996      1995     1994
--------------------------------------------------------------------------------
                                       (thousands of dollars)
Gross revenues.............  $157,184  $172,043  $175,351  $158,411  $125,134
Promotional allowances.....   (13,105)  (13,183)  (12,527)   (8,821)   (7,979)
Net revenues...............   144,079   158,860   162,824   149,590   117,155
Casino expenses............    52,497    57,301    56,806    49,703    41,859
Food and beverage expenses.     4,941     6,644     6,928     8,582     7,215
Hotel expenses.............     1,640     2,236     1,925     1,667       652
Other operating expenses...       143       258       282       310       574
Selling, general and         
  administrative...........    45,252    52,939    53,786    49,539    51,926
Related party managemnt/
  /license fees............     3,370     2,953     3,434     5,520     2,471
Depreciation and             
  amortization.............     8,506    12,886    11,289     9,694     7,067
Pre-opening expense........         -         -       247         -     2,970
Litigation claims..........         -       700     1,100         -         -
Gain on sale of assets.....    (2,848)        -         -         -         -
Reserve for loss on            
  sale of assets...........         -     7,621         -         -         -
Project development
  costs write-downs             
  and reserves.............         -     7,784       404       509    15,635
Asset impairment               
  write-down...............         -    20,698         -         -         -
Loss on sale of investment
  in unconsolidated                
  affiliate................         -     1,912         -         -         -
Abandonment loss...........         -         -         -         -     9,344
Operating income            
  (loss)...................    30,578   (15,072)   26,623    24,066   (22,558)
Other (expense)............   (20,337)  (21,390)  (20,415)  (19,024)  (15,393)
Income (loss) before income
  tax and extraordinary            
  items....................    10,241   (36,462)    6,208     4,862   (37,951)
Net income (loss)..........    10,166   (36,511)    6,139     6,718   (35,665)
Net cash provided by
  (used in) operating        
  activities..............      9,080    10,114    13,492    17,083     8,590
--------------------------------------------------------------------------------


Years Ended December 31,        1998      1997      1996      1995     1994
--------------------------------------------------------------------------------
                                       (thousands of dollars)
Cash and cash equivalents...  $28,834   $19,552   $15,490   $22,148  $28,914
Restricted cash.............        -    15,388         -     8,858    7,847
Marketable securities.......   19,219         -         -         -        -
Current assets..............   51,194    41,930    19,523    35,219   44,679
Property and equipment,     
  net.......................  120,904   128,375   173,119   155,664  170,345
Total assets................  191,685   185,306   223,718   217,281  226,963
Current liabilities.........   18,701    22,258    19,892    23,702  216,954
Total liabilities...........  195,285   199,072   200,973   200,675  221,137
Series A mandatory
  cumulative redeemable     
  preferred.................   20,611    18,402    16,430    14,669   13,097
Stockholders' equity        
  (deficit).................  (24,211)  (32,168)    6,315     1,937   (7,271)
Working capital (deficit)...   32,493    19,672      (369)   11,517 (172,275)
--------------------------------------------------------------------------------




<PAGE>
                                       19




Years Ended December 31,        1998      1997      1996      1995     1994
--------------------------------------------------------------------------------
                                   (thousands of dollars, except per share
                                             amounts and employees)
SELECTED DATA
Basic and diluted net
  income (loss) per
  share
  Before extraordinary
  items and preferred      
  stock dividend.............. $  2.08   $ (7.48)  $  1.26   $  0.92   $ (8.72)
  Extraordinary items.........       -         -         -      0.47      0.26
  Applicable to common            
  stockholders................    1.63     (7.88)     0.90      1.07     (8.79)
Shares used in computing
  net income per share........   4,881     4,881     4,881     4,825     4,217
Shares outstanding at        
  year end....................   4,881     4,881     4,881     4,881     4,548
Cash dividends declared
  per common share............       -         -         -         -        -
Common stock - High(1)........ $ 11.63   $ 12.75   $ 27.75   $ 16.88   $ 82.50
Common stock - Low(1)......... $  2.81   $  4.50   $  9.75   $  9.00   $ 13.50
Common stock - Year end(1).... $  2.63   $  6.00   $ 11.25   $  9.75   $ 15.56
Number of employees...........   2,500     3,100     2,950     2,850     2,100
--------------------------------------------------------------------------------
 (1)  The Company  effected a  one-for-six  reverse stock split on June 4, 1998,
      and the sales prices set forth above have been restated for periods before
      June 4, 1998 to reflect  the  decreased  number of shares of Common  Stock
      outstanding.


     Reference  is made to Part I, Item 3 - Legal  Proceedings,  which  contains
information  regarding  uncertainties that may have a material adverse effect on
the Company's future financial condition and results of operations.


<PAGE>
                                       20


 ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

     All statements  contained herein that are not historical  facts,  including
but  not  limited  to,  statements  regarding  the  Company's  current  business
strategy,  the Company's prospective joint ventures,  asset sales and expansions
of  existing  projects,  and the  Company's  plans for  future  development  and
operations,   are  based  on  current   expectations.   These   statements   are
forward-looking  in nature  and  involve  a number  of risks and  uncertainties.
Generally,  the words  "anticipates,"  "believes,"  "estimates,"  "expects"  and
similar  expressions  as they  relate  to the  Company  and its  management  are
intended  to  identify  forward-looking  statements.  Actual  results may differ
materially.  Among  the  factors  that  could  cause  actual  results  to differ
materially are the following:  the availability of sufficient capital to finance
the Company's  business plan on terms  satisfactory to the Company;  competitive
factors,  such as legalization of gaming in jurisdictions from which the Company
draws  significant  numbers of patrons  and an increase in the number of casinos
serving  the markets in which the  Company's  casinos  are  located;  changes in
labor, equipment and capital costs; the ability of the Company to consummate its
contemplated  joint ventures on terms  satisfactory to the Company and to obtain
necessary  regulatory  approvals for them; changes in regulations  affecting the
gaming  industry;  the  continued  operation  of the  Helena  Bridge  connecting
Arkansas to Coahoma  County,  Mississippi,  the location of the Lady Luck Rhythm
and Blues/Country  Casino complex; the ability of the Company to comply with its
Indenture  covering the First Mortgage  Notes Due 2001 (the "2001  Notes");  the
ability of the Company to retain or obtain Nasdaq listings;  future acquisitions
or  strategic  partnerships;  general  business  and  economic  conditions;  the
Company's  ability to become Year 2000  compliant in a timely  manner and within
its cost  estimates  including the risk that one or more of the  representations
provided to the Company by its  suppliers may  ultimately  be proven false;  and
other factors described at various times in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any  forward-looking  statements,  which  statements are
made   pursuant  to  the   Private   Litigation   Reform  Act  of  1995.   These
forward-looking  statements speak only as of the date they are made. The Company
expressly  disclaims any obligation or undertaking to disseminate any updates or
revisions to any  forward-looking  statement contained in this report to reflect
any change in its expectations with regard to that forward-looking  statement or
any change in events,  conditions or circumstances on which that forward-looking
statement is based. See "--Certain Risks and Uncertainties" below for discussion
of some of these factors.


Results of Operations

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

     For the years ended December 31, 1997 and 1998, consolidated gross revenues
decreased from $172.0  million to $157.2  million,  respectively,  a decrease of
$14.8 million or 9%.

     Comparisons of the Company's  consolidated  gross revenues  between periods
may not be meaningful to the extent they reflect  several changes related to the
Company's   strategy  to   rationalize   its  asset  base  and  dispose  of  its
underperforming  investments.  In this pursuit,  since  September 30, 1997,  the
Company  has  sold:  (1)  substantially  all of  the  assets,  excluding  gaming
equipment and certain  non-contiguous  real property,  associated  with its Lady
Luck  Biloxi  casino  effective  June 11,  1998;  (2)  substantially  all of the
operating assets of Lady Luck Central City effective  February 19, 1998; (3) its
35%  partnership  interest in the Bally's joint  venture,  related to the former
Tunica  County,  Mississippi  operations,   effective  September  30,  1997.  In
addition,  effective  January 1,  1998,  the  Company  has sold  certain  gaming
equipment  which the Company had been leasing to the  Bettendorf  joint  venture
prior to that date.  The  Company's  gross  revenues from  operations  decreased
during the year ended  December 31, 1998 compared to the year ended December 31,
1997 as follows (in millions):

        Lady Luck Biloxi ...........................................   $  20.9
        Lady Luck Central City .....................................       4.6
        Equipment lease income from equipment sold .................       1.5
        Equity in net income of the Bally's joint venture ..........       1.3


<PAGE>
                                       21


     Gross  revenues  at the Lady Luck  Rhythm &  Blues/Country  Casino  complex
increased from $94.3 million to $101.1  million,  an increase of $6.8 million or
7%, during the years ended  December 31, 1997 and 1998,  respectively.  The Lady
Luck Rhythm & Blues/Country  Casino complex's gross revenues increased primarily
due to the time period  between  July 16, 1997 and August 3, 1997 when access to
the complex was  restricted  by a temporary  closure of the Helena Bridge by the
Arkansas  Department of  Transportation  due to structural  damage caused when a
barge with a large boom  attachment hit the bridge.  The bridge was repaired and
no further restrictions on access have been suffered since the repair.

     The Company's 50% equity in the net income of the Bettendorf  joint venture
increased from $3.4 million to $5.1 million, an increase of $1.7 million or 50%,
during the years ended December 31, 1997 and 1998,  respectively.  This increase
was despite a non-recurring  expense of $1.2 million (the Company's 50% share of
which is $600,000) of  pre-opening  expenses  related to the opening of the Lady
Luck  Bettendorf  Hotel on August 29, 1998.  During the years ended December 31,
1997 and 1998, the Bettendorf  joint  venture's  total gross revenues  increased
from $75.7  million  to $89.4  million,  an  increase  of $13.7  million or 18%,
despite some  disruption  of business due to  construction  and expansion at the
facility.  This increase in gross revenues was due primarily to an $11.6 million
increase in casino  revenues  driven by a $9.8 million  increase in slot machine
revenues.  Average  daily  net win per slot  machine  increased  2%  despite  an
approximately  constant win  percentage and a 15% increase in the average number
of slot machines in operation.  In addition to its new hotel and the increase in
the average number of slot machines in operation  during the year ended December
31, 1998  compared to the year ended  December 31, 1997,  the  Bettendorf  joint
venture:  (1)  furnished  additional  food  complimentaries  to its  patrons  to
stimulate  casino  revenues;  (2) provided  improved parking to patrons with the
completion in November 1997 of a 500-space parking garage; (3) provided improved
access to patrons with the opening of a bypass over the nearby  railroad  during
the third  quarter of 1998;  and (4) reduced rent expense by  purchasing  gaming
equipment from the Company effective January 1, 1998 which it had been leasing.

     Gross  revenues at Lady Luck Natchez  increased from $30.6 million to $34.7
million, an increase of $4.1 million or 13%, during the years ended December 31,
1997 and  1998,  respectively.  Lady Luck  Natchez's  gross  revenues  increased
primarily  due to a $2.7 million  increase in slot  machine  revenues and a $1.1
million increase in food and beverage revenues.  These increases were due to the
following: (1) 18 days of business interruption and continuing disruption due to
adverse weather and river conditions  experienced during the year ended December
31, 1997; (2) changes in marketing strategies including a shift from advertising
to more promotions and increased  offerings of hotel rooms, food and beverage to
patrons on a complimentary  basis;  (3) modest  improvement in the local economy
between  periods;  and  (4)  the  addition  of a  nearby  off-site  full-service
restaurant that attracted an increased number of new visitors.

     Casino operating expenses as a percentage of casino revenues increased from
41% in the year ended  December  31, 1997 to 42% in the year ended  December 31,
1998,  primarily due to the following:  (1) decreases in casino revenues at Lady
Luck  Biloxi in 1998 prior to its  closure on June 7, 1998  which  caused  fixed
costs such as gaming  device  license  fees and some labor  charges to be spread
over a lower revenue base; (2) an increase in the cost of  complimentary  rooms,
food and beverage  furnished to casino customers in relation to casino revenues;
and (3) an increase in cash  incentives for slot machine  players in relation to
slot revenues. These decreases in operating margins were offset partially by the
following:  (1) the ceasing of  operations in February 1998 of Lady Luck Central
City  and in June  1998 of  Lady  Luck  Biloxi,  which  properties  historically
operated at less favorable  margins than the Company's  average margin;  and (2)
the  negative  effects on the prior  year's  operating  results at the Lady Luck
Rhythm &  Blues/Country  Casino complex  resulting  from the  restricted  access
experienced from July 16, 1997 through August 3, 1997, as described above.

<PAGE>
                                       22


     Food and beverage costs and expenses,  prior to  reclassifying  the cost of
complimentaries,  as a percentage f related revenues  decreased from 93% for the
year ended December 31, 1997 to 87% for the year ended  December 31, 1998.  This
decrease was primarily  due to  reductions in labor and food and beverage  costs
relative to food and  beverage  revenues at Lady Luck  Natchez and the Lady Luck
Rhythm &  Blues/Country  Casino  complex  offset  partially by decreased  profit
margins at Lady Luck Biloxi before closing the  facilities.  Relative costs also
decreased due to the closing in February  1998 of Lady Luck Central City,  which
historically  operated  at less  favorable  margins  than  the  Company's  other
properties.

     Gross room  revenues for the River Park Hotel  increased  approximately  6%
during  the  year  ended  December  31,  1998  compared  with  the  prior  year.
Approximately  40% of the  hotel's  rooms were  undergoing  remodeling  during a
portion of the current year, which caused some  inconvenience to guests and were
partially  responsible  for a decrease  in average  daily room rates from $42 to
$36, a decrease of $6 or 14%. The lower number of  available  rooms,  lower room
rates and increased offerings of hotel rooms to patrons on a complimentary basis
caused  the River  Park  Hotel's  occupancy  rate to  increase  from 65% to 84%.
Combined gross room revenues at the  Riverbluff  Hotel and the 173-room hotel at
Lady Luck Rhythm &  Blues/Country  Casino  complex  were  affected by the access
restriction  from July 16,  1997  through  August 3,  1997 as  described  above;
however,  during the year ended  December 31, 1998 compared with the prior year,
combined gross room revenues decreased by approximately 3%. Between  comparative
periods,  the Riverbluff  Hotel's occupancy rate decreased from 83% to 70% while
average daily room rates increased from $24 to $27. The Lady Luck Rhythm & Blues
Hotel's occupancy rate increased from 77% to 89% between comparative periods and
average daily room rates decreased from $39 to $33. Increased offerings of hotel
rooms at  these  facilities  to  patrons  on a  complimentary  basis  positively
affected  occupancy  rates.  The Lady Luck  Rhythm & Blues  Hotel's  decrease in
average  daily  room  rate  was  primarily  due to  competitive  pressures  from
properties  which  have  added a  significant  number of rooms in nearby  Tunica
County,  Mississippi.  The Lady Luck Bettendorf  Hotel  experienced an occupancy
rate of 72% from its opening on August 29, 1998  through  December  31, 1998 and
achieved an average daily room rate of $52.

     Selling, general and administrative expenses as a percentage of total gross
revenues  decreased from 31% to 29% during the years ended December 31, 1997 and
1998,  respectively.  The decrease was primarily due to the  following:  (1) the
absence from  operations of the  relatively  underperforming  properties of Lady
Luck Biloxi and Lady Luck Central City, both of which  historically  operated at
less  favorable  margins than the Company's  average  margin;  (2) a decrease in
casino  marketing  expenses as a percentage of total gross  revenues at the Lady
Luck Rhythm &  Blues/Country  Casino complex over the prior year period,  during
which time it had suffered the effects of access restrictions as described above
and which had required  abnormally high marketing  expenditures after access was
restored to regenerate  customer patronage to previous levels; (3) reductions in
casino  marketing and  entertainment  costs and an increase in gross revenues at
Lady Luck Natchez compared to the prior year period when additional  advertising
and marketing had been necessary to recapture customers subsequent to the casino
reopening as described above; (4) a $600,000  downward  adjustment to certain of
Lady Luck Biloxi's  accruals,  including cash  incentives to slot players,  chip
liabilities,  and other  accruals  which  had  arisen  in the  normal  course of
business  based on estimates  for which actual  liabilities  were  calculated on
expiration of required redemption  periods;  and (5) reserving 1998 rent expense
related to Lady Luck Gulfport in previous years.  These decreases were partially
offset by the following:  (1) increased insurance costs associated with employee
medical claims;  and (2) an increase in development  costs related  primarily to
the Company's  pursuit of a license in  Vancouver,  Canada and  negotiating  the
ancillary development agreement.

     Operating  income was $30.6 million for the year ended December 31, 1998, a
$45.7 million  improvement  over the $15.1 million  operating  loss for the year
ended December 31, 1997. The net income  applicable to common  stockholders  was
$8.0 million or $1.63 per share for the year ended  December  31, 1998  compared
with the net loss  applicable to common  stockholders  of $38.5 million or $7.88
per share for the year ended  December  31,  1997.  In  addition  to the changes
described  above,  the  increases in operating  income and income  applicable to
common  stockholders were due to the following:  (1) a $2.8 million gain, net of
reserves for disposition  costs,  recognized on the sale of substantially all of
the assets  associated with the Lady Luck Biloxi casino in June 1998; (2) a $1.9
million  loss  on the  sale  of the  Bally's  joint  venture  to  Hilton  Hotels
Corporation  during  the  year  ended  December  31,  1997;  (3) a  decrease  in
depreciation  expense at Lady Luck Biloxi during 1998, both before and after its
sale (the  reduction  before  


<PAGE>
                                       23

the  sale  was  the  result  of a  $20.7  million  asset  impairment  write-down
recognized in 1997); (4) an absence of depreciation expense at Lady Luck Central
City,  both before and after its sale (the absence  prior to the sale was due to
recording  1998's  depreciation  expense as part of the $7.6 million reserve for
loss on sale recorded  during 1997);  (5) the $7.8 million  development  project
cost  write-downs  and  reserves  recognized  during 1997 related to current and
former  development  stage  projects;  (6) a $1.3  million  increase in interest
income due to increases in cash and marketable  securities  received as a result
of assets  sales;  and (7)  increased  management  fees  from an  unconsolidated
subsidiary  due to  improved  operations  at the  Bettendorf  joint  venture  as
described above.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     For the years ended December 31, 1997 and 1996, gross revenues decreased to
$172.0  million  from  $175.4  million,  a decrease  of $3.4  million or 2%. The
decrease  was  primarily  due to the Lady  Luck  Rhythm &  Blues/Country  Casino
complex's  revenues and operating results being materially  adversely  affected,
during  the  third  quarter  of  1997 by a  temporary  closure  by the  Arkansas
Department of Transportation of the Helena Bridge,  which provides the principle
access from the complex's primary customer market.  Other causes of the decrease
include:  (1) two closures of Lady Luck Natchez, for a total of approximately 18
days due to flooding on the Mississippi  River and adverse  weather  conditions,
which caused lingering disruptive effects for a period after each reopening; (2)
declines  in  table  games  revenues  at each  wholly  owned  subsidiary  due to
decreases in the amounts  wagered at each of these  properties  and decreases in
the percentage of wagers won by Lady Luck Natchez and Lady Luck Biloxi;  (3) the
addition of two competitive  casinos and a significant  number of hotel rooms by
competitors  of the Lady  Luck  Rhythm &  Blues/Country  Casino  complex;  (4) a
deteriorating  local economy in Natchez,  Mississippi  and  decreasing  customer
headcount  at Lady Luck  Natchez;  (5) a growing  disparity  in  relation to its
competitors  in the  amenities  which  Lady  Luck  Biloxi  is able to offer  its
customers,  such as on-site hotel rooms for table games players; (6) operational
changes and an absence of capital  improvements  at Lady Luck Central City;  and
(7) increased  competition  at Lady Luck Central City from nearby  casinos.  The
adverse effects of these items were partially  offset by: (1) an increase in the
Company's equity in net income of unconsolidated  affiliates; (2) a full year of
operation  of the  Country  Casino  adjacent to Lady Luck Rhythm & Blues in 1997
which had opened on May 21,  1996;  (3) an increase in Lady Luck  Biloxi's  slot
machine  revenues  due to an  increase  in the  amounts  wagered;  (4) Lady Luck
Natchez's  purchase  of the  River  Park  Hotel on April 15,  1996;  and (5) the
acquisition  of the  120-room  Riverbluff  Hotel in Helena,  Arkansas on July 3,
1996.

     As noted,  access to the Lady Luck Rhythm & Blues/Country  Casino complex's
two casinos,  hotel and the Pavilion was severely  restricted from July 16, 1997
through  August 3, 1997. On July 16, 1997, a barge with a large boom  attachment
hit the Helena Bridge which crosses the Mississippi  River and connects Arkansas
and Mississippi.  The bridge provides access to the complex's Arkansas customers
on which it is highly dependent.  The resulting  structural damage to the bridge
caused the  Arkansas  Department  of  Transportation  to close the bridge  until
August 4,  1997.  A 6%  increase  in gross  revenues  of the Lady Luck  Rhythm &
Blues/Country Casino complex experienced in the fourth quarter of 1997, compared
to the  fourth  quarter  of 1996,  indicates  a  successful  recovery  since the
bridge's  reopening.  In addition,  the adverse effects  experienced  during the
bridge's  closure  were  partially  offset  by a full year of  operation  of the
Country  Casino in 1997  which had  opened in May 1996.  The net effect of these
changes and the addition of competitive  facilities resulted in a $900,000 or 1%
decrease  in gross  revenues  at the Lady  Luck  Rhythm &  Blues/Country  Casino
complex to $94.3  million  during the year ended  December  31,  1997 from $95.2
million  during the year ended December 31, 1996.  The largest  decrease  during
these comparative years for the complex primarily resulted from decreases in the
amounts  wagered on table  games,  which  caused  gross table games  revenues to
decrease $1.7 million for the year ended  December 31, 1997 from the prior year.
This decrease was offset partially by an increase in food and beverage  revenues
of $900,000  primarily due to increased food and beverage furnished to customers
as complimentaries.  The increase in complimentaries was a necessary response to
additional competitor facilities added in 1996.

     Slot machine,  table games and food and beverage  revenues  decreased  $1.0
million,  $1.2 million and $500,000, or 4%, 26% and 16%,  respectively,  at Lady
Luck Natchez during the year ended December 31, 1997 compared to the prior year.
In  addition  to  the  adverse  effects  resulting  from  the  flooding  on  the
Mississippi River and other adverse weather conditions,  which twice closed Lady
Luck Natchez's  operations for a total of  approximately 18 days during 

<PAGE>
                                       24


the year ended December 31, 1997 and caused lingering  disruptive  effects for a
period after each reopening,  these decreases were due to a deteriorating  local
economy in Natchez,  Mississippi.  The decreases in gross casino revenues, while
primarily due to decreases in the amounts wagered,  were also due to declines in
the win  percentages  from  1996 to 1997.  The  amounts  wagered  may have  also
decreased  in part due to  fewer  rooms  and to less  food  and  beverage  being
furnished to customers on a complimentary basis during the comparative  periods.
This decrease in complimentary food and beverage was a significant factor in the
decline in gross food and beverage revenues.

     Lady Luck Biloxi's gross revenues  increased $400,000 during the year ended
December 31, 1997 as compared to 1996. This increase occurred  primarily between
the  three-month  periods ended March 31, 1997 and March 31, 1996,  during which
time an 8% increase in the average number of slot machines and a 20% increase in
the average  daily net win per slot machine  increased  Lady Luck  Biloxi's slot
machine  revenues by $1.2 million.  This  increase in slot machine  revenues was
primarily a result of increased  marketing  expenditures  and increased food and
beverage  furnished  as  complimentaries  to  customers  during  that time.  The
increase in slot  machine  revenues  was offset  partially by decreases in table
game revenues each quarter  during the year ended  December 31, 1997 as compared
to the respective prior year's quarters.  These declines in table games revenues
were  primarily due to decreases in total amounts  wagered,  which was caused in
part by a growing  disparity in the amenities which Lady Luck Biloxi was able to
offer its customers in relation to its  competitors,  some of which were able to
offer  on-site  hotel rooms and  entertainment.  Lady Luck Biloxi  experienced a
significant   decrease  in  gross  revenues  since  the  opening  of  additional
competitive  facilities in its market,  principally  the opening of the Imperial
Palace in December 1997. This competitive trend continued until its sale in June
1998.

     Lady Luck  Central  City's slot  machine  revenues  declined  $1.1  million
between the years ended  December  31, 1997 and 1996.  This  decrease was due to
both a decrease in the total amount  wagered on slot  machines and a decrease in
the related win percentage.  During these comparative periods, Lady Luck Central
City's total amount  wagered on slot machines  decreased  17%. Lady Luck Central
City's decreases were due in part to operational  changes, an absence of capital
improvements  at the facility and  increased  competition  from nearby  casinos.
Subsequent  to December 31, 1997 and  effective  February  19,  1998,  Lady Luck
Central City sold its real property and  substantially  all operating  assets to
the holder of its mortgage note in exchange for  forgiveness  of the note which,
as of December 31, 1997, had a $2,750,000  balance.  The sale resulted in a loss
of $7,287,000,  which was  recognized  during 1997,  including  reserves for the
remaining real property leases.

     The  Company's  equity  in net  income  of  the  Bettendorf  joint  venture
increased $300,000,  or 11%, during the year ended December 31, 1997 as compared
to the prior year.  This  increase  primarily  was due to a 13% increase in slot
machine  revenues.  The  Bettendorf  joint  venture's  increase in slot  machine
revenues  was due to an  increase  in both the  average  daily  net win per slot
machine and the average  number of slot  machines  in  operation,  as is further
detailed in the tables that follow.

     The Company's  equity in net income of the Bally's joint venture  increased
$600,000  during the nine-month  period ended  September 30, 1997 (the effective
date of the  Company's  sale of its 35%  partnership  interest to Hilton  Hotels
Corporation)  compared to the year ended  December  31, 1996.  As the  Company's
interest  was sold during 1997, a  comparison  of results  between  years is not
meaningful.  Furthermore,  the Company's equity in net income for the year ended
December 31, 1996 reflected a $1.2 million  deduction for the Company's share of
pre-opening  expenses,  while  no  such  expenses  were  recognized  during  the
nine-month period ended September 30, 1997.

<PAGE>
                                       25


     Casino operating  expenses  Company-wide as a percentage of casino revenues
increased  from 39% in the year ended December 31, 1996 to 41% in the year ended
December  31,  1997,   primarily  due  to  the  following:   (1)  severe  access
restrictions  at the  Lady  Luck  Rhythm &  Blues/Country  Casino  complex,  the
temporary  closings of Lady Luck Natchez and the  decreases  in casino  revenues
from most of the Company's other gaming  operations which caused fixed costs and
certain variable costs,  that could not immediately be eliminated,  to be spread
over a lower revenue base; (2) a 1% increase in the cost of complimentary rooms,
food and beverage  furnished to casino customers in relation to casino revenues;
(3) an increase in table games  payroll  expense at each property in relation to
table games revenue; and (4) increases in slot machine rentals,  slot department
special events and cash  incentives for slot machine players in relation to slot
revenues.

     Food and beverage costs and expenses,  prior to  reclassifying  the cost of
complimentaries,  as a percentage of related revenues increased from 90% for the
year ended December 31, 1996 to 93% for the year ended December 31, 1997, due to
an  increase in labor costs at Lady Luck  Natchez and  increases  in the cost of
sales in  relation to revenues at each  property.  These  increases  were offset
partially  by a decrease  in labor costs in relation to revenues at the Rhythm &
Blues/Country Casino complex.

     Gross  room  revenues  for the River Park  Hotel and the  Riverbluff  Hotel
increased 10% and 167%,  respectively,  and decreased 16% for the 173-room hotel
at the Lady Luck Rhythm &  Blues/Country  Casino  complex  during the year ended
December 31, 1997 compared with the prior year.  However,  these comparisons are
not for equivalent  periods  because Lady Luck Natchez  purchased the River Park
Hotel on April 15, 1996,  the Lady Luck Rhythm &  Blues/Country  Casino  complex
acquired the 120-room Riverbluff Hotel in Helena,  Arkansas on July 3, 1996, and
access to the  173-room  hotel at the Lady Luck  Rhythm &  Blues/Country  Casino
complex was temporarily  restricted  during the current year period as described
above.

     Selling, general and administrative expenses as a percentage of total gross
revenues  remained a constant  31% during the years ended  December 31, 1996 and
1997. A significant  reduction in rent paid by the Rhythm & Blues/Country Casino
complex was offset by increases in its casino marketing  expenditures  there and
at Lady Luck  Natchez and Lady Luck  Biloxi  primarily  related to direct  mail,
other  advertising  or  promotions  and group sales,  and  increases in facility
expenses at the Lady Luck Rhythm &  Blues/Country  Casino complex for utilities,
security,  insurance  and property  taxes,  primarily due to the addition of the
Country Casino. Rent paid by the Lady Luck Rhythm & Blues/Country Casino complex
decreased because  percentage rents under the lease during 1997 were reduced due
to the temporary  access  restriction  described  above.  In addition,  rent was
greater  during the  five-month  period  ended May 31,  1996 as  compared to the
corresponding  period in 1997 due to an additional  fixed monthly rental expense
of  $150,000  which was  required to be paid prior to the opening of the Country
Casino on May 26, 1996.  Subsequent to May 31, 1996, the fixed rent was replaced
with a percentage rent that has been less than the fixed rent.

     Operating (loss) income was ($15.1) million and $26.6 million for the years
ended  December  31,  1997 and 1996,  respectively.  In  addition to the changes
described above,  this $41.7 million decrease in operating income was due to the
following  occurrences,  which are further  described  below:  (1) $7.6  million
reserve in 1997 for the loss on the sale of assets; (2) project development cost
write-downs  and reserves in 1997 of $7.8  million;  (3) a $20.7  million  asset
impairment write-down in 1997; (4) a $1.9 million loss on the sale of investment
in  an  unconsolidated  affiliate  in  1997;  (5) a  $1.6  million  increase  in
depreciation  expense  during 1997 primarily  related to the  acquisition of the
River Park Hotel and the Riverbluff  Hotel and the opening of the Country Casino
and the Pavilion,  each during 1996; and (6) decreased hotel operating  margins.
The  effects  of these  items  were  partially  offset by the  following:  (1) a
$400,000   reduction  in  litigation   claims;   (2)  a  $500,000   decrease  in
related-party license fee expenses from lower operating results during 1997; (3)
a $500,000  increase in management fee revenues  related to the Bettendorf joint
venture;  and (4) the  absence of  $200,000  of  pre-opening  expense  which was
recognized during 1996 in conjunction with the opening of the Country Casino and
the Pavilion.

<PAGE>
                                       26

     Effective  February 19, 1998, Lady Luck Central City sold substantially all
of its real property and operating  assets to the holder of its mortgage note in
exchange for  forgiveness of the $2.8 million note and the assumption of some of
its liabilities.  In connection with this sale, during 1997 the Company recorded
a reserve of $7.3 million to write-down  the assets held for sale to fair market
value less closing costs,  to reserve for operating  losses in 1998 prior to the
effective  sale date and to reserve for  estimated  future  lease  payments  and
write-downs on its parking lot leases which were not assumed by the purchaser of
the assets sold.

     In addition,  the Company sold to the  Bettendorf  joint venture all of the
gaming  equipment that the venture had been leasing from the Company since April
1995  under a gaming  equipment  lease.  The gaming  equipment  was sold for its
negotiated  value of $712,000 as of December 31, 1997. The $358,000  reserve for
loss on the sale of assets represents the net book value in excess of negotiated
value as of December 31, 1997. The sale was effective January 1, 1998.

     During 1997,  the Company  wrote-down  various  project  development  costs
totaling approximately $7.8 million due to changes in regulatory,  political and
competitive environments and other factors.

     The first  write-down  was related to the Kimmswick  project.  The State of
Missouri  investigates  applicants at its  discretion  and there is no guarantee
that the Company's  application will be actively reviewed in future periods.  In
November 1997, the Missouri Supreme Court ruled that several  existing  Missouri
gaming projects were illegal due to their locations not being on the Mississippi
or Missouri rivers.  In addition,  some current  operators in Missouri have been
experiencing poor operating  results.  These  uncertainties have resulted in the
Company recording a $2.3 million project  development  write-down in 1997 of the
remaining  balance of its  pre-opening  and other  development  costs and a $3.0
million  write-down of  construction  in progress for a portion of the partially
completed cruising vessel which, if not used for the Kimmswick project, could be
sold or possibly used in a future development project. Nevertheless,  management
estimates that the fair value of this partially  completed  cruising  vessel was
approximately  50%  of its  net  book  value.  These  valuations  are  based  on
assumptions  regarding  expected future economic,  market and gaming  regulatory
conditions.  Changes in these assumptions could result in further changes in the
estimated net realizable value of the partially completed cruising vessel.

     The  second   write-down  was  related  to  the  Vicksburg   project.   The
consummation of the  transactions  contemplated  by the joint venture  agreement
with Horseshoe Gaming, LLC was subject to the fulfillment of several conditions.
Either  party,  on or after April 1, 1998,  could  terminate  the joint  venture
agreement if particular  conditions  were not met. In October 1998,  the Company
terminated the joint venture  agreement as the conditions were not satisfied.  A
determination  that particular assets may not be usable in the Vicksburg project
as currently  contemplated  resulted in a $2.3 million write-off of construction
in progress during 1997.  Management's estimate of net realizable value is based
on  assumptions   regarding  future  economic,   market  and  gaming  regulatory
conditions  including the viability of the Vicksburg site for the development of
a casino project.  Changes in these  assumptions  could result in changes in the
estimated net realizable value of the property.

     Additionally, the Company had previously planned to construct and operate a
casino in Gulfport, Mississippi.  However, in 1997 the Company suspended further
development of the Gulfport project and is not currently  engaged in negotiating
either an agreement to sell or develop these leaseholds.  The Company intends to
cancel these leases at the earliest date allowable  under the lease  agreements.
During 1997, the Company provided a project development reserve of approximately
$162,000  to fully  reserve  remaining  future  minimum  lease  payments  net of
estimated  sublease rentals for the remaining leases.  Reserves of approximately
$350,000  and  $600,000  had  previously  been  provided  during  1996 and 1995,
respectively.

     Lastly, during 1997, the Company provided reserves of approximately $50,000
related to its investment in Lady Luck New Mexico for a total reserve, including
1996 and 1995 reserves, of approximately $250,000. The Company received $200,000
cash during 1997 for its remaining investment balance.

<PAGE>
                                       27


     The Company evaluated the  recoverability of Lady Luck Biloxi's  long-lived
assets in 1996 and 1997 due to recurring  operating losses based on the criteria
established under Financial  Accounting Standards Board Statement No. 121 ("SFAS
121").  During the fourth  quarter of 1997,  pursuant  to SFAS 121,  the Company
recorded an impairment  write-down to Lady Luck  Biloxi's  long-lived  assets of
$20.7 million.  The Company considered the historical  operating results and the
significant  downturn in the  operating  results of Lady Luck  Biloxi  since the
opening of  additional  competitive  facilities in its market,  principally  the
opening of the Imperial  Palace in December  1997. In performing  its review for
recoverability,  the Company  compared the  projected  undiscounted  future cash
flows to the carrying  value of Lady Luck  Biloxi's  long-lived  assets of $31.5
million as of December 31, 1997. As the net carrying value of long-lived  assets
exceeded the estimated  undiscounted future cash flows, the Company was required
to recognize an impairment loss and write-down  long-lived  assets to their fair
market  value of $10.8  million.  Fair  value  became the new cost basis for the
impaired  assets and previously  accumulated  depreciation  was  eliminated.  As
active market quotations were not available,  the Company measured fair value by
discounting  estimated future cash flows.  Considerable  management judgment was
necessary to estimate  discounted  future cash flows.  Substantially  all of the
assets of Lady Luck Biloxi were  subsequently  sold June 11, 1998 (see Note 5 to
the Consolidated Financial Statements).

     Pursuant to an agreement effective September 30, 1997, the Company sold its
35%  minority  interest in Bally's  Saloon,  Gambling  Hall and Hotel in Tunica,
Mississippi to Hilton Hotels Corporation,  the majority owner and manager of the
property.  The sale  resulted in a loss of  $1,912,000,  which  represented  the
difference  between the sales price and the net  investment in the Bally's joint
venture and related assets.

     The net (loss)  applicable to common  stockholders  was ($38.5)  million or
($7.88) per share for the year ended  December 31, 1997 compared with net income
applicable  to common  stockholders  of $4.4  million or $0.90 per share for the
year ended December 31, 1996.  This $42.9 million or $8.78 per share decrease in
net income applicable to common stockholders was primarily due to the following:
(1) the $41.7 million  decrease in operating  income as described  above;  (2) a
$500,000  decrease in other income;  (3) a $200,000  increase in preferred stock
dividends caused by the compounding  return on dividends not paid in cash; (4) a
$200,000  increase  in net  interest  expense  due  primarily  to a decrease  in
interest  capitalized  in the  current  year;  and (5) a  $200,000  decrease  in
interest  income  resulting  from  greater  cash  invested  in 1996 prior to the
opening of the Country Casino.


Certain Risks and Uncertainties

     The Company,  through its  subsidiaries  and affiliates,  owns and operates
gaming casinos in Mississippi and Iowa and may develop  projects in Missouri and
Mississippi. The entities owning these casinos and any of the Company's entities
owning  casinos  in the future are or will be  required  to obtain and  maintain
gaming licenses from the applicable state regulatory authorities and comply with
the  related  regulations.  Although  the  Company  believes  it is in  material
compliance with all applicable gaming regulations, non-compliance by the Company
could have a material  adverse  effect on the Company's  operations.  Generally,
regulatory authorities have broad discretion in granting,  renewing and revoking
gaming  licenses.  Lady Luck  Gaming  itself  must be found  suitable to own the
entities that directly or indirectly own the Company's casinos. In addition, the
Company's  directors  and many of its  employees  are required to obtain  gaming
licenses. Where it has not already done so, the Company intends to apply for its
licenses  and to have its  employees,  to the extent  required,  apply for their
licenses.  All directors and executive officers of the Company have received all
necessary  approvals  with respect to the operating  casinos and have  received,
applied  for or will  apply for all  necessary  approvals  with  respect  to the
development  stage  projects.  While the Company has received gaming licenses in
the states of  Mississippi,  Colorado and Iowa, it has not received  licenses in
any  other  jurisdiction.  There is no  guarantee  that  each  casino,  officer,
director,  or the  appropriate  gaming  employees  will  receive  (where not yet
received) or maintain the necessary gaming licenses,  or that the Company or its
casinos will be able to operate  successfully  or profitably  under the terms of
any  licenses.  The failure of the Company or any of its key personnel to obtain
or retain a license in a particular  jurisdiction  could have a material adverse
effect  on  the  Company's  ability  to  obtain  or  retain  licenses  in  other
jurisdictions.

<PAGE>
                                       28


     There is a  substantial  risk  that the  supply  of  gaming  facilities  in
Mississippi  will  exceed  the demand for  gaming,  which  could have a material
adverse  effect  on  the  Company's   operating  results.   DeSoto  County,  the
northwestern-most  Mississippi  County and  nearest  to  Memphis,  could,  under
existing  state law, vote to authorize  gaming  activities,  which would in turn
increase  competition  in this  market.  The voters of DeSoto  County have voted
against  legalized  gaming on three  occasions,  most recently in November 1996.
However,  local referenda may be held during any presidential election year, and
there is no  guarantee  that gaming  will not be  approved  in DeSoto  County in
future elections.  Additionally,  in Arkansas,  a gaming  referendum,  which, if
passed, would have legalized particular forms of gaming at particular locations,
was defeated in November 1996. If gaming were  legalized in particular  areas of
Arkansas  or, to a lesser  extent,  in DeSoto  County,  it could have a material
adverse  effect on the Company's  Coahoma  County  facilities,  which generate a
significant portion of the Company's consolidated revenues and operating income.
Furthermore,  the  Mississippi  Band of Choctaws  negotiated  a compact with the
State of Mississippi  and has opened a land-based  casino located  approximately
100 miles to the east of  Jackson,  Mississippi,  which has  affected  Lady Luck
Natchez and, if further  developed,  could  affect the  Vicksburg  project.  The
Company also competes with gaming  facilities  nationwide  and in Canada.  It is
also possible that substantial local and nationwide  competition could cause the
supply of gaming facilities to exceed the demand for gaming. Additionally,  some
of the  Company's  competitors  have more  gaming  industry  experience,  larger
operations,  or significantly greater financial and other resources than has the
Company. Given these factors, it is possible that substantial  competition could
have a material adverse effect on the Company's future results of operations.

     The  Lady  Luck  Rhythm  &  Blues/Country  Casino  complex's  revenues  and
operating  results in 1997 were  materially  adversely  affected  by a temporary
closure by the Arkansas Department of Transportation of the Helena Bridge. These
casinos are highly dependent on patronage by residents of Arkansas.  A change in
general  economic  conditions,  a future  closure of the Helena  Bridge,  or the
extent  and nature of  regulations  enabling  casino  gaming in  Arkansas  could
adversely effect these casinos' future operating results.

     The Company is highly leveraged (see Liquidity and Capital  Resources below
for additional information).


Year 2000

     The Company's  computer  systems may not be Year 2000  compliant.  The Year
2000 issue is the result of computer  programs  being  written  using two digits
rather  than four to define  the  applicable  year,  which may result in systems
failures and  disruptions to operations on or after January 1, 2000. In order to
address this issue, the Company has retained an outside consultant to help it to
assess the computer  systems used in the  Company's  business  that are not Year
2000  compliant,  and prepare and implement  its Year 2000  computer  compliance
program.

     The Company has divided the systems  located at each of its  properties and
corporate offices into two categories: (1) systems that would have a significant
effect on operations or financial  statements (the "mission critical  systems"),
such as slot  systems  and  lodging  and gaming  systems,  and (2) low  priority
systems (for  example,  individual  personal  computers or  workstations).  Each
category  included both IT Systems (for example,  network  software and hardware
systems) and Non-IT  Systems (for  example,  devices that are  potentially  date
sensitive due to their  dependency  on a built in computer  chip or  proprietary
software  developed by a third  party).  The Company has relied  exclusively  on
representations of the suppliers of its systems to determine whether a system is
Year 2000  compliant.  As of February 28, 1999, the Company has determined  that
the total costs related to the repair and  replacement  of the mission  critical
systems that it has  evaluated  that are not yet Year 2000  compliant  would not
have a material adverse effect on the Company. In making this determination, the
Company has relied on written representations from the Company's computer system
suppliers that those suppliers will provide the Company with applicable software
upgrades  in a timely  manner.  As of  December  31,  1998,  the Company has not
expended  significant funds on Year 2000 compliance and expects expenditures not
in excess of $500,000  will be  necessary to complete  remediation.  The Company
expects to fund these costs through  operating  cash flows.  If those  suppliers
fail to provide  upgrades in a timely manner or the upgrades are not functional,
<PAGE>

 


                                       29

this  failure or  non-functionality  may have a material  adverse  effect on the
Company,  including  the loss of the  authority  to  operate  electronic  gaming
devices in one or more  jurisdictions if the electronic  monitoring systems were
to  become  non-functional  and  waivers  were  not  granted  by  the  licensing
authorities.  TheCompany has so far evaluated approximately 63% of the Company's
mission  critical  systems  and if any  remaining  systems  that  have  not been
evaluated  are not Year 2000  compliant  and cannot be Year 2000  compliant in a
cost  efficient  or timely  manner,  these  costs or  non-compliance  may have a
material  adverse  effect on the Company.  The Company has not adopted a written
contingency plan in the event of a worst-case  scenario;  however,  based on the
timing  of  completing  evaluations  of  critical  systems  and  the  successful
implementation of repairs and replacements, management will continue to evaluate
the need for a formal contingency plan.

         In addition, the Company estimates that the costs related to the repair
and replacement of the low priority systems that are not yet Year 2000 complaint
and any  costs  related  to not using  those  systems  until  they are Year 2000
compliant will not have a material adverse effect on the Company.


Operating Casinos

         Dollar amounts shown in the following  tables for gross  revenues,  net
revenues, management/license fee and operating income are in millions. Operating
margin is calculated as operating income divided by net revenues.


    Lady Luck Rhythm & Blues/Country Casino Complex (a)

<TABLE>
<CAPTION>                                                              
                                                               %Increase   %Increase
                                                               (Decrease)  (Decrease)
                                   Year Ended December 31,       1998 vs.    1997 vs.                
                             ----------  ---------- ---------- ----------- ----------
                                        (in millions)
<S>                           <C>         <C>        <C>             <C>        <C>
Gross revenue.............    $   101.1   $    94.3  $    95.2       7          (1)
Net revenues..............         92.3        86.8       88.9       6          (2)
Management/license fee....          3.5         3.0        3.1      17          (3)
Operating income..........         20.6        19.5       22.9       6         (15)
Operating margin..........          22%         22%        26%       - pts      (4) pts

Average daily net win per
  table game..............    $    629    $    602   $    820        4         (27)
Average number of tables
  in operation............          49          50         43       (2)         16
Average daily net win per
  slot machine............    $    147    $    143   $    169        3         (15)
Average number of slot
  machines in operation...       1,420       1,343      1,141        6          18
</TABLE>

(a)  County Casino and the Pavilion opened May 21, 1996; therefore,  comparisons
     may not be meaningful.


<PAGE>

                                       30

   Lady Luck Natchez

<TABLE>
<CAPTION>
                                                               %Increase   %Increase
                                                               (Decrease)  (Decrease)
                                   Year Ended December 31,       1998 vs.    1997 vs.
                                1998        1997       1996        1997        1996
                              ----------  ---------- ---------- ----------- ----------
                                         (in millions)
<S>                           <C>         <C>        <C>            <C>         <C>
Gross revenue.............    $    34.7   $    30.6  $    33.3      13          (8)
Net revenues..............         31.7        28.4       30.4      12          (7)
Management/license fee....          1.2         1.0        1.1      20          (9)
Operating income..........          4.0         2.6        4.4      54         (41)
Operating margin..........          13%          9%        14%       4 pts      (5) pts

Average daily net win per
  table game..............    $    651    $    612   $    765        6         (20)
Average number of tables
  in operation............          16          16         17        -          (6)
Average daily net win per
  slot machine............    $    110    $    103   $    109        7          (6)
Average number of slot
  machines in operation...         618         616        584        -           5
</TABLE>


   Lady Luck Bettendorf (a)

<TABLE>
<CAPTION>
                                                              %Increase   %Increase
                                                               (Decrease)  (Decrease)
                                   Year Ended December 31,       1998 vs.    1997 vs.
                                1998        1997       1996        1997       1996
                              ----------  ---------- ---------- ----------- ----------
                                         (in millions)
<S>                           <C>         <C>        <C>            <C>         <C>
Gross revenue.............    $    89.4   $    75.7  $    68.5      18          11
Net revenues..............         84.5        71.6       65.2      18          10
Management/license fee....          2.3         1.6        1.1      44          45
Operating income..........         11.4         6.8        6.4      68           6
Operating margin..........          13%          9%        10%       4 pts      (1) pt

Average daily net win per
  table game..............    $    792    $    701   $    717       13          (2)
Average number of tables
  in operation............          39          38         36        3           6
Average daily net win per
  slot machine............    $    183    $    180   $    173        2           4
Average number of slot
  machines in operation...       1,036         903        824       15          10
</TABLE>

(a)  Lady Luck Bettendorf is 50% owned by Lady Luck Quad Cities,  Inc. ("LLQC").
     The  Company  includes  50% of its net  income as  equity in net  income of
     affiliates using the equity method of accounting.



<PAGE>
                                       31


Liquidity and Capital Resources

     During the year ended December 31, 1998, the Company generated $9.1 million
in cash from operations.  The primary sources during the year ended December 31,
1998 of cash and non-cash  resources  were: (1) cash flow from  operations;  (2)
cash on hand at the  beginning  of the year;  (3) $15.1  million of the proceeds
from the sale in 1998 of  substantially  all of the assets of Lady Luck  Biloxi,
excluding gaming equipment and noncontiguous real property; (4) $15.4 million of
restricted cash at December 31, 1997 from the sale of the Company's  interest in
the Bally's joint  venture,  which became  available  for  investment in related
business and general  corporate  purposes  during 1998;  and (5) the purchase of
slot  machines  and other  assets on contracts  with their  manufacturers  to be
repaid over time.  The primary  uses of cash and non-cash  resources  during the
year ended December 31, 1998, other than operating expenditures, include:

A.    $10.4 million for property and equipment as follows:

      Related to Magnolia Lady, Inc.:
            -     Commencement    of    construction   of   a   314-room   hotel
            -     Commencement  of  remodeling  of the  Rhythm  & Blues  Hotel
            -     Modifying parking lot traffic patterns and adding 360 paved
                  parking spaces for automobiles and 15 for tractor-trailers
            -     Installation of a property wide telephone system for more
                  efficient communications and lower operating costs

      Related to Lady Luck Mississippi, Inc.:
            -    Remodeling a portion of the River Park Hotel
            -    Remodeling of the casino and buffet
            -    Addition  of a gourmet  restaurant in close proximity to the
                 casino
            -    A  deposit with its lessor for the  construction of 260
                 additional parking spaces

B.    $19.2 million for the purchase of marketable securities.

C.    $2.1 million for the payment of debt and slot contracts.

D.    $1.4  million for the  acquisition  of slot  machines  and other assets by
      certain subsidiaries for the incurrence of indebtedness.

E.    $2.8  million and $700,000  for  forgiveness  of debt of Lady Luck Central
      City and Lady  Luck  Biloxi,  respectively,  related  to the  asset  sales
      described elsewhere herein.

F.    $2.2 million for accrual of preferred stock dividends.


     Lady Luck Central City did not generate positive operating cash flow during
the year  ended  December  31,  1998 due  primarily  to lease  and debt  service
requirements.  Lady Luck  Central  City is expected to require  additional  cash
infusions  of  $200,000,  the expense  portion of which was fully  accrued as of
December 31,  1998,  in 1999 for  payments on the  remaining  parking lot leases
including the purchase of these lots as required by the  contracts.  The sellers
will finance a portion of the purchases.  During 1998, Lady Luck Gaming acquired
one of the leased  properties  with the other two to be acquired  in 1999.  Lady
Luck Central City will require additional cash infusions related to these leases
in periods beyond 1999 for debt service.

     The Bettendorf joint venture recently  constructed an expansion  project as
part of its master-plan at a cost of  approximately  $37.0 million.  The project
includes a 256-room hotel with a fully enclosed walkway to the riverboat casino,
a 500-car  parking  garage  and a bypass  over the  nearby  railroad  to improve
access.  The hotel opened August 29, 1998 with the other amenities opening prior
to that date. In addition, the project includes a marina,  construction of which
has been  delayed  due to  pending  environmental  evaluations  and flood  plain
analyses  beyond the  Company's  control.  During  April  1998,  the Iowa Gaming
Commission  approved the  addition of up to 230 new slot  machines and six table
games at Lady Luck Bettendorf, many of which were installed prior to the opening
of the hotel. 

<PAGE>
                                       32

The expansion  project  financing is  non-recourse to the Company and includes a
$17.5 million bank first mortgage note, allowing for up to a $5.0 million second
mortgage from an  affiliated  company of the  Company's  joint  venture  partner
($1.25 million was actually  used),  and including $7.5 million in tax increment
financing  from the City of  Bettendorf  to be  repaid  from  property  taxes in
exchange for deeding the overpass to the City of  Bettendorf.  During 1998,  the
Company repaid the balance of the second  mortgage to the affiliated  company of
the Company's  joint venture  partner.  As of December 31, 1998,  the Bettendorf
joint venture had  outstanding  the full amount of the bank first  mortgage note
and the tax increment  financing.  The balance of the expansion  project's costs
was paid from the Bettendorf joint venture's cash on hand and from operations.

     Under a partnership  interest  redemption  agreement,  the Company received
approximately  $15.3  million in cash on November 3, 1997 for its  investment in
the Bally's  joint  venture.  The Company  invested $5.7 million of the proceeds
from  the  sale of its  interest  in the  Bally's  joint  venture  in a  related
business.  Also, in accordance with the Indenture  governing the 2001 Notes, the
Company  offered to repurchase up to $9.6 million  principal  amount of the 2001
Notes at a price of 101% of par plus  accrued  and unpaid  interest on April 16,
1998.  None of the 2001 Notes  were  tendered  and the offer  expired on May 14,
1998.  The  remaining  proceeds  from the sale and the  interest  earned on them
became  unrestricted and available to the Company for general corporate purposes
at that time.

     During  August 1998,  the Company  entered into an agreement to construct a
new 314-room  hotel adjacent to the Country  Casino.  Commencing in August 1998,
the project is expected to be completed  during the second  quarter of 1999 at a
cost  estimated  not to exceed $17.0  million.  The Company  intends to fund the
construction  primarily with the proceeds from the sale of substantially  all of
Lady Luck  Biloxi's  operating  assets.  Subsequent  to December 31,  1998,  the
Company  entered into an  agreement  for the  purchase of  generators  that will
replace the Lady Luck Rhythm &  Blues/Country  Casino  complex's  existing power
generation  system.  The project is scheduled for  completion  during the second
quarter of 1999 at a cost not to exceed $4.1  million.  The  Company  intends to
fund the purchase and installation with a combination of bank financing and cash
on hand;  however,  if bank financing is unavailable on terms  acceptable to the
Company, cash on hand and from operations will be used.

     Lady Luck Mississippi, Inc. paid the lessor of the Natchez site $500,000 in
liquidated  damages,  as the Company did not make specified  improvements to the
site required by the related lease. In addition,  Lady Luck Natchez was required
under its lease to move its casino barge several hundred feet to another docking
facility on land  subject to the lease by  February  1998.  On August 21,  1998,
management  and the lessor amended the lease to allow the barge to remain in its
current location.  Under this amendment, the lessor agreed to allow the barge to
remain at its current location in  consideration  of the Company's  agreement to
pay  liquidated  damages of $1.2 million if it terminates  the lease at any time
during the 10-year period  following the execution of the lease amendment and to
pay $250,000 to construct additional parking spaces on the leased property.

     Various amounts of cash and non-cash  resources may be used during 1999 for
other capital improvements,  expansions or acquisitions that cannot currently be
estimated and may be  contingent  on market  conditions  and other  factors.  If
significant  cash or other  resources  become  available,  the  Company may make
additional capital expenditures. In any case, the amount of capital expenditures
will be based on cash available and market conditions at the time any commitment
is made.

     The Company may also repurchase all or a portion of the 2001 Notes in early
satisfaction of any required  repurchase  expected under the Indenture governing
the 2001 Notes or  otherwise,  the amount of which and the timing of  repurchase
cannot  currently be estimated and are  dependent on adequate cash  availability
and market conditions.  The Company  anticipates that it will not repurchase any
portion of the 2001 Notes in 1999 other than in connection with a refinancing.

     The  Company has begun to explore  various  options to  refinance  the 2001
Notes.  However,  there is no  guarantee  that the Company will  continue  these
pursuits  and,  if  pursued,  that  terms  acceptable  to  the  Company  can  be
negotiated.


<PAGE>
                                       33

     The  Company  has an  agreement  for the  construction  of a $16.0  million
cruising gaming vessel and, as of December 31, 1998,  approximately $6.0 million
had been paid under this agreement and approximately $1.9 million is included in
construction  payables.  It is anticipated that this vessel will be used for the
Kimmswick  project.  However,  construction  has  been  discontinued  and is not
anticipated  to resume until such time as the State of Missouri,  with regard to
its gaming license application, selects the Kimmswick project for investigation.
During 1998, the contractor filed for bankruptcy. The filing listed $1.5 million
as an accrued  construction  receivable  from the  Company  and did not list the
partially  completed  vessel as an asset.  The Company is  exploring  options to
either relocate the vessel from the shipyard or sell it to a third party.

     No further  significant  expenditures  for projects under  development  are
anticipated  to be made by the  Company  from  existing  cash or cash  flow from
operations.  If the Company  determines it needs additional  funds,  there is no
guarantee  that funds,  whether from equity or debt  financing or other sources,
will be  available,  or if  available,  will  be on  terms  satisfactory  to the
Company.

     The Company has been named as a defendant in a purported  shareholder class
action lawsuit filed alleging violations by the Company of the Securities Act of
1933 and the Exchange Act, for alleged material misrepresentations and omissions
in connection  with the Company's 1993 prospectus and initial public offering of
Common  Stock.  The complaint  seeks,  among other  things,  injunctive  relief,
rescission and unspecified compensatory damages. In addition to the Company, the
complaint  also  names as  defendants  Andrew H.  Tompkins,  Chairman  and Chief
Executive  Officer  of Lady  Luck  Gaming,  Alain  Uboldi,  Director  and  Chief
Operating  Officer  of Lady  Luck  Gaming,  Michael  Hlavsa,  the  former  Chief
Financial Officer of Lady Luck Gaming, Bear, Stearns & Co., Inc. and Oppenheimer
& Co., Inc., who acted as lead underwriters for the initial public offering. The
Company has retained outside counsel to respond to the complaint.  On October 8,
1997,  the Company was served with an order of the court  dismissing  all of the
plaintiffs'  claims  under  Section  10(b)  of the  Exchange  Act  and 11 of the
plaintiffs'  16 claims under  Sections 11, 12 and 15 of the  Securities Act with
prejudice  for failing to adequately  state a claim.  The court also ordered the
plaintiffs  to  file,  and the  plaintiffs  have  filed,  an  amended  complaint
regarding  the five claims under  Sections 11, 12 and 15 of the  Securities  Act
which were not dismissed with prejudice. While the outcome of this matter cannot
presently  be  determined,  the  Company  believes,  based in part on  advice of
counsel, that it has meritorious defenses.

     The Company and  particular  joint  venture  partners are  defendants  in a
lawsuit  brought by the country of Greece and its Minister of Tourism before the
Greek  Multi-Member  Court  of  First  Instance.  The  action  alleges  that the
defendants  failed to make  specified  payments  in  connection  with the gaming
license bid process for Patras,  Greece.  The payments the Company is alleged to
have been required to make aggregate  approximately  2.1 billion  drachma (which
was approximately  $7.1 million as of March 5, 1999 based on published  exchange
rates).  Although it is difficult to determine the damages being sought from the
lawsuit,  the action may seek damages up to that aggregate amount plus interest.
The cases are still in their  preliminary  stages  and their  outcome  cannot be
predicted with any degree of certainty;  however, the Company believes, based in
part on advice of counsel, that it has meritorious defenses.

     A Greek architect filed an action against the Company  alleging that he was
retained  by the  Company to provide  professional  services  with  respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's  Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately  $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's  decision.  Subsequent  to December 31, 1998,  the Company  settled this
action for $335,000 which had been reserved fully in 1997.

     On November 5, 1996,  the United States  Bankruptcy  Court for the Northern
District of  Mississippi  dismissed a lawsuit  that had been brought by Superior
Boat Works against Lady Luck  Mississippi,  Inc. on or about September 23, 1993.
Superior  had  previously  done  construction  work for Lady Luck Natchez on its
barge, as well as some minor preparatory work on one other barge of the Company.
This  proceeding  alleged  damages  of  approximately   $47,000,000,   of  which
approximately  $3,400,000 was alleged for additional  construction  work on Lady
Luck Natchez and the  remaining  amount was alleged for unjust  enrichment,  for
causing the  bankruptcy  of Superior  and for future 

<PAGE>
                                       34

work  Superior  expected to perform for the  Company.  Superior has appealed the
decision to dismiss the action. The Company,  based in part on the advice of its
counsel, believes that it has meritorious defenses and does not believe that the
appeal of the  decision  will have a material  adverse  effect on the  Company's
financial condition or results of operations.

     During  November  1996,  Lady  Luck  Central  City,  Inc.  entered  into  a
Memorandum of  Understanding  with  Bullwhackers-Central  City.  The  Memorandum
provided for a combination of the respective  companies'  gaming  establishments
that currently operate on adjacent real property in Central City. As a result of
the Memorandum,  the parties  negotiated and  purportedly  executed a definitive
Operating  Agreement and Lease  Agreement in September  1997.  During the fourth
quarter of 1997,  Bullwhackers refused to honor that definitive agreements,  and
accordingly,  the Company  commenced  suit against  Bullwhackers.  Subsequent to
December  31,  1998,  the  Company  and  Bullwhackers  reached an  agreement  in
principle  whereby the Company expects to receive  $300,000 as a settlement from
Bullwhackers.  The  settlement  will not be  recognized  until  the  payment  is
received.

     The Company is highly  leveraged.  As of December 31, 1998,  the  Company's
total  long-term   indebtedness  was   approximately   $176.6  million  and  its
stockholders'   deficit  was   approximately   $24.2  million.   This  level  of
indebtedness could have important consequences to stockholders. While management
believes the Company will have sufficient cash flow to meet its debt service and
other cash outflow  requirements  and maintain  compliance with the covenants of
the  Indenture  governing  the  2001  Notes,  if a  substantial  portion  of the
Company's  cash  flow  from  operations  remains  dedicated  to the  payment  of
principal and interest on its indebtedness,  that cash flow is not available for
other purposes such as general operations, maintenance and improvement of casino
and hotel  facilities  or  expansion  of  existing  sites or into  other  gaming
markets.  Furthermore,  the Company's ability to obtain additional  financing in
the future for working  capital,  capital  expenditures or  acquisitions  may be
limited,  and the Company's level of indebtedness could limit its flexibility in
planning for, or reacting to, changes in its industry.

     Effective June 4, 1998, the Company's  shareholders  approved a one-for-six
reverse stock split with regard to its Common Stock (the "Reverse  Split").  The
effects of the Reverse Split were to reduce the number of issued and outstanding
shares of Common  Stock from  29,285,698  to  4,881,003  and to increase the par
value of these  shares  from $0.001 to $0.006 per share.  Instead of  fractional
shares  resulting from the Reverse Split,  stockholders  received a cash payment
from the sale of the aggregate fractional shares on the open market. The Reverse
Split did not change the number of  authorized  shares of the  Company's  Common
Stock and had no effect on the Company's  Preferred Stock. All references in the
financial statements to number of shares, per share amounts and market prices of
the  Company's  Common  Stock have been  retroactively  restated  to reflect the
decreased number of shares of Common Stock outstanding.

     On October 19, 1998, the Company was informed by the Nasdaq National Market
that, based on its staff's review, the Company's Common Stock failed to maintain
market value of public float,  composed of total shares  outstanding  reduced by
those held by directors and officers as defined,  greater than or equal to $15.0
million, in accordance with Marketplace Rule 4450(b)3 under Maintenance Standard
2. The Nasdaq  National  Market  indicated  that it will  provide  the Company a
period  of  time  to  demonstrate  compliance.  If  the  Company  is  unable  to
demonstrate  compliance  during the period,  the  Company's  Common Stock may be
delisted.  If the Company is unable to achieve  compliance,  it may seek further
procedural remedies, but the Company cannot guarantee that it will be successful
in the employment of any of these remedies.  However,  the Company believes that
it would be eligible for listing on the Nasdaq  Small-Cap  Market  tier,  but no
guarantee  can be  provided  that  the  Company  would be in fact  eligible  for
Small-Cap listing.

     Andrew H. Tompkins,  Chairman and Chief  Executive  Officer of the Company,
beneficially owns  approximately 46% of the Company's  outstanding Common Stock.
As a result of his  ownership  and  control,  Mr.  Tompkins  has the  ability to
significantly  influence the Company's  affairs,  including  electing all of its
directors and (except as otherwise  provided by law)  approving or  disapproving
other  matters  submitted to a vote of the Company's  stockholders,  including a
merger, consolidation or sale of assets.

<PAGE>
                                       35


     Mr.  Tompkins also owns a  casino-hotel  in Las Vegas,  Nevada and the Lady
Luck trademark and a customer list, which the Company licenses from him. The Las
Vegas  casino-hotel has incurred  substantial  indebtedness and is in default on
that debt.  Mr.  Tompkins is personally  liable for the debt and has pledged his
assets,  including the the Lady Luck  trademark and customer list, as collateral
for the benefit of the holders of that indebtedness.  As a result of the current
default,  these lenders are entitled to the benefit of this collateral and could
foreclose on the pledge and seize the Lady Luck  trademark and customer list and
sell them to a third party. In addition,  Mr. Tompkins may be required or decide
to sell his stock, the trademark and the customer list to satisfy the debt.

     Pursuant to the Indenture,  a sale of Mr.  Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the  Company's  outstanding  2001 Notes to require  the Company to
repurchase  all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof,  plus accrued and unpaid  interest.  As of
March 24,  1999,  the closing  market  price of the 2001  Notes,  as reported by
Bloomberg Financial Services was 102.19%.


Impact of Inflation

     Absent changes in competitive and economic conditions or in specific prices
affecting the industry,  management  does not expect that  inflation will have a
significant impact on the Company's operations.  Changes in specific prices (for
example,  fuel  and  transportation  prices)  relative  to the  general  rate of
inflation may have a material  effect on the  hotel-casino  industry.  There has
been no  material  impact  from  inflation  during  the  periods  covered by the
accompanying financial statements.

Seasonality and Weather

     A flood or other severe weather  condition  could cause the Company to lose
the use of one or more dockside  facilities for an extended period.  Flooding on
the  Mississippi  River and other adverse  weather  conditions  caused Lady Luck
Natchez to close its operations  twice for a total of  approximately  18 days in
1997.  The inability to use a dockside  facility  during any period could have a
material  adverse effect on the Company's  financial  results.  Seasonal revenue
fluctuations may occur at the Company's existing casinos in Mississippi and Iowa
with winter  months  typically  yielding  lower  revenue due to adverse  weather
conditions.

<PAGE>
                                       36


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Public Accountants....................................37

Consolidated Balance Sheets as of December 31, 1998 and 1997................38

Consolidated  Statements  of  Operations  for the years  ended
      December 31, 1998, 1997 and 1996......................................40

Consolidated  Statements  of Mandatory  Cumulative  Redeemable
      Preferred Stock and Stockholders'  Deficit for the years
      ended December 31, 1998, 1997 and 1996................................42

Consolidated  Statements  of Cash  Flows for the  years  ended
      December 31, 1998, 1997 and 1996......................................43

Notes to Consolidated Financial Statements..................................45



<PAGE>
                                       37



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of Lady Luck Gaming Corporation:

We have audited the accompanying consolidated balance sheets of Lady Luck Gaming
Corporation (a Delaware  corporation)  and  subsidiaries as of December 31, 1998
and 1997,  and the related  consolidated  statements  of  operations,  mandatory
cumulative  redeemable  preferred stock and  stockholders'  equity (deficit) and
cash flows for each of the three years in the period  ended  December  31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Lady Luck Gaming Corporation
and  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.



ARTHUR ANDERSEN LLP

Las Vegas, Nevada 
February 22, 1999(except with respect to the
     matter discussed in Note 5, as to
     which the date is March 14, 1999)



<PAGE>
                                       38


                          LADY LUCK GAMING CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                        As of December 31, 1998 and 1997
               (in thousands, except share and per share amounts)

                                       ASSETS

                                                           1998          1997
                                                       -----------  ------------
Current assets:
  Cash and cash equivalents..........................   $  28,834     $  19,552
  Restricted cash....................................           -        15,388
  Marketable securities..............................      19,219             -
  Accounts receivable................................         862           786
  Inventories........................................         946           957
  Assets held for sale...............................           -         2,791
  Prepaid expenses...................................       1,333         2,456
                                                        ---------     ---------
    Total current assets.............................      51,194        41,930
                                                        ---------     ---------

Property and equipment:
  Land and land improvements.........................      16,235        17,974
  Building and improvements..........................      89,912        95,472
  Furniture, fixtures and equipment..................      34,680        36,279
                                                        ---------     ---------
                                                          140,827       149,725
  Less accumulated depreciation......................     (31,352)      (26,525)
                                                        ---------     ---------
                                                          109,475       123,200
  Construction in progress...........................      11,429         5,175
                                                        ---------     ---------
    Total property and equipment, net................     120,904       128,375
                                                        ---------     ---------

Other assets:
  Deferred financing fees and costs, net of
    accumulated amortization of $4,212 and $3,347 as
    of December 31, 1998 and 1997, respectively......       1,875         2,740
  Investment in unconsolidated affiliates, net......       14,412         9,313
  Other.............................................        3,300         2,948
                                                        ---------     ---------
                                                           19,587        15,001

TOTAL ASSETS........................................    $ 191,685     $ 185,306
                                                        =========     =========

 


The accompanying notes are an integral part of these consolidated statements

<PAGE>
                                       39


                          LADY LUCK GAMING CORPORATION
                     CONSOLIDATED BALANCE SHEETS (continued)
                        As of December 31, 1998 and 1997
               (in thousands, except share and per share amounts)


                      LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                          1998          1997
                                                       -----------  ------------
Current liabilities:
  Current portion of long-term debt...............     $     595     $   4,481
  Accrued interest................................         1,834         1,846
  Accounts payable................................         1,915         4,776
  Construction payables...........................         3,951         1,957
  Accrued property taxes..........................         1,300         1,375
  Other accrued liabilities.......................         9,106         7,823
                                                       ---------     ---------
    Total current liabilities.....................        18,701        22,258
                                                       ---------     ---------

Long-term debt:
  Mortgage notes payable..........................       173,500       173,500
  Other long-term debt............................         3,084         3,314
                                                       ---------     ---------
    Total long-term debt..........................       176,584       176,814
                                                       ---------     ---------
      Total liabilities...........................       195,285       199,072
                                                       ---------     ---------

Commitments and contingencies (Notes 14, 15, 16 
   and 17)

Series A mandatory cumulative redeemable preferred
  stock, $47.53 and $42.44, respectively per share
  liquidation value, 1,800,000 shares authorized,       
  433,638 shares issued and outstanding...........       20,611        18,402
                                                       ---------     ---------
Stockholders' deficit:
  Common stock, $.006 par value, 75,000,000 shares
    authorized, 4,881,003 shares issued and
    outstanding as of December 31, 1998 and 1997..            29            29
  Additional paid-in capital .....................        31,382        31,382
  Accumulated deficit.............................       (55,622)      (63,579)
                                                       ---------     ---------
    Total stockholders' deficit...................       (24,211)      (32,168)
                                                       ---------      --------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT.......     $ 191,685     $ 185,306
                                                       =========     =========



The accompanying notes are an integral part of these consolidated statements


<PAGE>
                                       40


                          LADY LUCK GAMING CORPORATION
               CONSOLIDATED STATEMENTS OF OPERATIONS For the Years
                     Ended December 31, 1998, 1997 and 1996
               (in thousands, except share and per share amounts)



                                          1998          1997          1996
                                       ------------  ------------  ------------
Revenues:
  Casino...............................$ 126,314     $ 138,860     $ 143,886
  Food and beverage....................   15,535        17,152        16,928
  Hotel................................    4,229         4,216         3,948
  Equity in net income of                  5,099         4,724         3,815
      unconsolidated affiliates........
  Management fees from unconsolidated      2,292         1,569         1,117
      affiliate........................
  Other................................    3,715         5,522         5,657
                                       ---------     ---------     ---------
    Gross revenues.....................  157,184       172,043       175,351
    Less: Promotional allowances.......  (13,105)      (13,183)      (12,527)
                                       ---------     ---------     ---------
    Net revenues.......................  144,079       158,860       162,824
                                       ---------     ---------     ---------

Costs and expenses:
  Casino...............................   52,497        57,301        56,806
  Food and beverage....................    4,941         6,644         6,928
  Hotel................................    1,640         2,236         1,925
  Other................................      143           258           282
  Selling, general and administrative..   45,252        52,939        53,786
  Related party license fees...........    3,370         2,953         3,434
  Depreciation and amortization........    8,506        12,886        11,289
  Pre-opening expenses.................        -             -           247
  Litigation claims....................        -           700         1,100
  Gain on sale of assets...............   (2,848)            -             -
  Reserve for loss on sales of assets..        -         7,621             -
  Project development cost write-downs
    and reserves.......................        -         7,784           404
  Asset impairment write-down..........        -        20,698             -
  Loss on sale of investment in
    unconsolidated affiliate...........        -         1,912             -
                                       ---------     ---------     ---------
    Total costs and expenses...........  113,501       173,932       136,201
                                       ---------     ---------     ---------

Operating income (loss)................   30,578       (15,072)       26,623
                                       ---------     ---------     ---------

Other income (expense):
  Interest income......................    2,160           878         1,073
  Interest expense, net................  (21,960)      (22,407)      (22,170)
  Other................................     (537)          139           682
                                       ---------     ---------     ---------
                                         (20,337)      (21,390)      (20,415)
                                       ---------     ---------     ---------
Income (loss) before income tax        
  (provision) .........................$  10,241       (36,462)        6,208


The accompanying notes are an integral part of these consolidated statements


<PAGE>
                                       41


                          LADY LUCK GAMING CORPORATION
              CONSOLIDATED STATEMENTS OF OPERATIONS (continued) For
                the Years Ended December 31, 1998, 1997 and 1996
               (in thousands, except share and per share amounts)


                                           1998          1997          1996
                                        ------------  ------------  ------------

Income (loss) before income tax         $  10,241       (36,462)        6,208
  (provision)..........................
Income tax (provision).................       (75)          (49)          (69)
                                        ---------     ---------     ---------

NET INCOME (LOSS)......................    10,166       (36,511)        6,139

Preferred stock dividends..............    (2,209)       (1,972)       (1,761)
                                        ---------     ---------     ---------
Income (loss) applicable to common      
 stockholders.........................  $   7,957     $ (38,483)    $   4,378
                                        =========     =========     =========
BASIC AND DILUTED NET INCOME (LOSS) PER
  SHARE

Applicable to common stockholders...... $     1.63    $    (7.88)   $     0.90
                                        ==========    ==========    ==========

Weighted-average number of common
  shares outstanding...................  4,881,003     4,881,003     4,881,003
                                        ==========    ==========    ==========












The accompanying notes are an integral part of these consolidated statements



<PAGE>
                                       42


                          LADY LUCK GAMING CORPORATION
                 CONSOLIDATED STATEMENTS OF MANDATORY CUMULATIVE
                           REDEEMABLE PREFERRED STOCK
                           AND STOCKHOLDERS' (DEFICIT)
              For the Years Ended December 31, 1998, 1997 and 1996
                                 (in thousands)

<TABLE>

<CAPTION>
                       Mandatory                        
                       Cumulative    Common Stock                                   Total
                       Redeemable  --------------------  Additional              Stockholders'
                       Preferred   Number of              Paid-in   (Accumulated   Equity
                         Stock      Shares     Amount     Capital      Deficit)   (Deficit)
                       ---------- ----------- ---------- ----------  ----------  ----------
<S>                    <C>            <C>     <C>        <C>         <C>         <C>   
Balance at December    
 31, 1995............  $  14,669      4,881   $      29  $  31,382   $ (29,474)  $   1,937

Accrued preferred
  stock dividends....      1,761          -           -          -      (1,761)     (1,761)

Net income...........          -          -           -          -       6,139       6,139
                       ---------  ---------   ---------  ---------   ---------   ---------

Balance at December       16,430      4,881          29     31,382     (25,096)      6,315
 
  31, 1996...........
                       ---------  ---------   ---------  ---------   ---------   ---------
Accrued preferred
  stock dividends....      1,972          -           -          -      (1,972)     (1,972)

Net loss.............          -          -           -          -     (36,511)    (36,511)
                       ---------  ---------   ---------  ---------   ---------   ---------

Balance at December      
  31, 1997...........     18,402      4,881          29     31,382     (63,579)    (32,168)
                       ---------  ---------   ---------  ---------   ---------   ---------
Accrued preferred
  stock dividends....      2,209          -           -          -      (2,209)     (2,209)

Net income...........          -          -           -          -      10,166      10,166
                        --------  ---------   ---------  ---------   ---------   ---------

Balance at December  
   31, 1998...........  $ 20,611      4,881   $      29  $  31,382   $ (55,622)  $ (24,211)
                        ========  =========   =========  =========   =========   ========= 
</TABLE>







The accompanying notes are an integral part of these consolidated statements


<PAGE>
                                       43


                          LADY LUCK GAMING CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 1998, 1997 and 1996
                                 (in thousands)


                                             1998          1997          1996
                                          ---------    -----------    ----------
Cash flows from operating activities:
  Net income (loss)....................   $  10,166     $ (36,511)    $   6,139
  Adjustments to reconcile net income
    (loss) to net cash provided by
    (used in) operating activities:
    Depreciation and amortization.......      8,506        12,886        11,289
    Amortization of bond offering fees         
      and costs.........................        865           865           865
    Equity in net (income) of
      unconsolidated affiliates.........     (5,099)       (4,724)       (3,815)
    (Gain) on sale of assets............     (2,848)            -          (404)
    Reserve for loss on sale of assets..          -         7,621             -
    Project development cost
      write-downs and reserves..........          -         7,784           404
    Asset impairment write-down.........          -        20,698             -
    Loss on sale of investment in
      unconsolidated affiliate..........          -         1,912             -
    Pre-opening expenses................          -             -           247
  (Increase) decrease in assets:
    Accounts receivable.................        (78)          490          (275)
    Inventories.........................         11           202          (313)
    Prepaid expenses....................      1,313          (992)          111
  Increase (decrease) in liabilities:
    Accrued interest....................         40            21          (501)
    Accounts payable....................     (3,263)        1,300           808
    Other accrued liabilities...........       (533)       (1,438)       (1,063)
                                           --------     ---------     ---------
Net cash (used in) provided by             
   operating activities..............         9,080        10,114        13,492
                                           --------     ---------     ---------
      
Cash flows from investing activities:
  Purchase of property and equipment....    (10,366)       (3,622)      (21,524)
  Proceeds from sale of operating assets.    15,127             -             -
  Construction payables.................      1,994             -        (1,169)
  Restricted cash.......................     15,388       (15,388)        8,858
  Purchases of marketable securities....    (19,219)            -             -
  Investment in unconsolidated                    -        15,250           (15)
      affiliates........................
  Pre-opening costs.....................         -             -           (500)
  Other assets..........................       (663)        1,621          (449)
                                           --------     ---------     ---------
Net cash (used in) provided by
      investment activities.............      2,261        (2,139)      (14,799)
                                           --------     ---------     ---------
     

The accompanying notes are an integral part of these consolidated statements



<PAGE>
                                       44

                          LADY LUCK GAMING CORPORATION
              CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
              For the Years Ended December 31, 1998, 1997 and 1996
                                 (in thousands)


                                            1998          1997          1996
                                         ------------  ------------  -----------
Cash flows from financing activities:
  Net proceeds from borrowings.........          -             -            40
  Payments on debt and slot contracts..     (2,059)       (3,913)       (5,391)
                                         ---------     ---------     ---------
Net cash (used in) provided by        
    financing activities................    (2,059)       (3,913)       (5,351)
                                         ---------     ---------     ---------
  
Net (decrease) increase in cash and
  cash equivalents......................     9,282         4,062        (6,658)
Cash and cash equivalents, beginning        19,552        15,490        22,148
                                         ---------     ---------     ---------
  of  year..............................
Cash and cash equivalents, end of year.. $  28,834     $  19,552     $  15,490
                                         =========     =========     =========

Supplemental disclosures of cash flow
   information:
  Cash paid during the year for:
    Interest (net of amount
      capitalized of $102, $289, and
      $514 in 1998, 1997 and 1996,     
     respectively)....................   $  21,107     $  21,521     $  21,806
                                         =========     =========     =========
   
    Income taxes paid .................  $       -     $      80     $     225
                                         =========     =========     =========


Supplemental Schedule of Non-Cash Investing and Financing Activities:

     The  liquidation  value of the  Series A  mandatory  cumulative  redeemable
preferred stock increased by approximately $2,209,000, $1,972,000 and $1,761,000
in unpaid  accrued  dividends  for the years ended  December 31, 1998,  1997 and
1996, respectively.

     The Company  entered  into several  contracts  with  manufacturers  for the
purchase  of  slot  machines  and  other  assets  which  totaled   approximately
$1,407,000,  $743,000 and $3,780,000 for the years ended December 31, 1998, 1997
and 1996, respectively.

     Effective June 11, 1998, in conjunction with the sale of substantially  all
of Lady  Luck  Biloxi,  Inc.'s  operating  assets to the  holder  of a  $714,000
mortgage note, the holder forgave the outstanding principal and accrued interest
in addition to making a $15.1 million cash payment.

     Effective   February  19,  1998,   Lady  Luck  Central   City,   Inc.  sold
substantially  all of its real property and operating  assets to the holder of a
$2,750,000  mortgage note in exchange for  forgiveness  of the mortgage note and
the assumption of certain liabilities.

     On July 3, 1996,  Magnolia Lady,  Inc.  acquired the  Riverbluff  Hotel for
approximately   $1,000,000,   including   approximately   $600,000  cash  and  a
non-recourse mortgage note for the balance.

     On April 15, 1996, Lady Luck Mississippi  acquired the River Park Hotel for
approximately   $4,000,000,   including  approximately  $1,000,000  cash  and  a
non-recourse mortgage note for the balance.

The accompanying notes are an integral part of these consolidated statements



<PAGE>
                                       45


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     1.     The Company and Basis of Presentation

     The  consolidated  financial  statements  of Lady Luck  Gaming  Corporation
("LLGC"),  a  Delaware  corporation,  include  the  accounts  of  LLGC  and  its
subsidiaries  (collectively  the  "Company").  For the periods  presented in the
financial statements,  the Company's operations primarily include those of LLGC,
Lady Luck Gaming Finance Corporation ("LLGFC"), a Delaware corporation; Magnolia
Lady, Inc. ("MLI"), Lady Luck Mississippi,  Inc. ("LLM"), Lady Luck Biloxi, Inc.
("LLB") and Lady Luck  Tunica,  Inc.  ("LLT"),  each a  Mississippi  corporation
(collectively  the  "Mississippi  Companies");  Lady  Luck  Central  City,  Inc.
formerly Gold Coin,  Inc.  ("LLCC"),  a Delaware  corporation,  and L.L.  Gaming
Reservations,  Inc. ("LLGR"), a Nevada corporation.  The Company also owns a 50%
interest in a joint  venture  with  Bettendorf  Riverfront  Development  Company
("BRDC")  which is and has been  accounted  for under  the  equity  method.  The
Company formerly owned an interest in a joint venture with Bally's Entertainment
Corp. ("Bally's") which was accounted for under the equity method. The Company's
financial   statements  also  include  the  development  efforts  of  Lady  Luck
Kimmswick,  Inc.  ("LLK"),  a 93%  owned  Missouri  corporation;  and Lady  Luck
Vicksburg,  Inc.  ("LLV") and Lady Luck Gulfport,  Inc. ("LLG") both Mississippi
corporations.  LLGC and its  subsidiaries  were organized to develop and operate
gaming and hotel properties in emerging jurisdictions.

     LLGC and LLGFC were  formed in February  1993.  LLM began  dockside  casino
operations  on February 26, 1993 in Natchez,  Mississippi  and acquired and took
over operation of the 147-room River Park Hotel in Natchez, Mississippi on April
15, 1996;  LLCC opened on May 28, 1993 and sold its real  property and operating
assets and ceased operations effective February 19, 1998 (see Note 9); LLB began
dockside casino operations on December 13, 1993 in Biloxi,  Mississippi and sold
its real property and operating assets and ceased  operations  effective June 7,
1998  (see Note 11);  MLI,  which  does  business  as Lady Luck  Rhythm & Blues,
commenced  dockside  gaming  operations  on June  27,  1994 in  Coahoma  County,
Mississippi,  commenced  operation  of a  173-room  hotel on  August  16,  1994,
commenced  gaming  operations of Country Casino and the Pavilion on May 21, 1996
and acquired and took over operation of the 120-room Riverbluff Hotel in Helena,
Arkansas on July 3, 1996;  LLT which  currently  leases a gaming  vessel to Lady
Luck Bettendorf,  LC, an Iowa limited liability company (see below);  LLGR began
operating a central reservations center for the Company's hotels on September 3,
1996;  Lady  Luck  Quad  Cities,  Inc.  ("LLQC"),  a  Delaware  corporation  and
subsidiary  of the Company,  LLQC formed a joint  venture  with BRDC,  Lady Luck
Bettendorf,  LC,  (the  "Bettendorf  Joint  Venture")  to  operate  a casino  in
Bettendorf,  Iowa which  commenced  operations  on April 21, 1995 and  commenced
operation  of a 256-room  hotel on August 29, 1998 (see Note 4); and,  Old River
Development,  Inc.,  a  subsidiary  of the  Company,  commenced  operation  of a
240-room  hotel on August 24, 1994,  contributed it to the Bally's Joint Venture
in March 1995 and sold its equity investment to Bally's effective  September 30,
1997 (see Note 4). LLV and LLK are in various stages of development  and have no
operating history.


     2. Certain Risks and Uncertainties

     The  Company's  operations  in  Mississippi  and Iowa are  dependent on the
continued  licensability or  qualifications  of the Company and its subsidiaries
that  hold the  gaming  licenses  in these  jurisdictions.  Such  licensing  and
qualifications  are reviewed  periodically  by the gaming  authorities  in these
states.

<PAGE>
                                       46


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     A significant portion of the Company's  consolidated revenues and operating
income  are  generated  by the  Company's  Coahoma  County,  Mississippi  casino
operations.  These  casinos are highly  dependent  on  patronage by residents in
Arkansas. A change in general economic conditions,  closure of the Helena Bridge
or a change in the extent and nature of  regulations  enabling  casino gaming in
Arkansas could adversely affect these casinos' future operating results.


     3. Summary of Significant Accounting Policies

     (a) Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries.  Significant  intercompany  accounts and transactions have
been eliminated.

     (b) Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual  results could differ from these  estimates.  Among the estimates made by
management is the evaluation of the recoverability of the carrying values of the
land held for development,  a partially  completed gaming vessel and the reserve
for disposition costs related to the sale of Lady Luck Biloxi's operating assets
as more fully described below.

     (c) Cash and Cash Equivalents

     The Company  considers  all highly  liquid  investments  purchased  with an
original maturity of three months or less as cash equivalents.

     (d) Restricted Cash

     Restricted  cash  consists of amounts held in escrow and cash  specifically
restricted to be used in accordance  with the terms of the Indenture  related to
the 2001 Notes (See Note 5).

     (e) Marketable Securities

     The  Company's  marketable  securities,  which are  recorded at fair market
value, are comprised of federal agency and corporate obligations, all classified
as trading  securities  as of December  31, 1998,  under  Statement of Financial
Accounting  Standards No. 115,  "Accounting for Certain  Investments in Debt and
Equity  Securities."  Accordingly,  net unrealized  holding gains and losses for
trading  securities  were included in net income for the year ended December 31,
1998.  Unrealized  holding  gains and losses are  determined  as the  difference
between cost and fair value based on quoted market  prices or valuation  methods
from services  believed to be reliable.  The fair market value of the marketable
securities  approximated  their  original  cost at  December  31,  1998,  as the
unrealized holding gains were immaterial.

     (f) Inventories

     Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market value.

<PAGE>
                                       47


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     (g) Assets Held for Sale

     Assets  held for sale  include  the  current  book  value of  assets  to be
disposed of, net of the  estimated  loss on sale of these  assets.  These assets
relate to LLCC (See Note 9).

     (h) Property and Equipment

     Property and equipment are stated at cost. The Company capitalizes interest
on funds dispersed during the active  construction and development phases of its
projects.  Depreciation and amortization  are computed using  predominantly  the
straight-line  method for financial  reporting purposes and accelerated  methods
for income tax purposes. Estimated useful lives for financial reporting purposes
are as follows:

         Land improvements..................................15-25 years
         Buildings and improvements.........................15-30 years
         Furniture, fixtures and equipment....................5-7 years

     When  equipment  has been  fully  depreciated,  its  cost  and the  related
accumulated  depreciation are eliminated from the respective accounts.  Gains or
losses arising from dispositions are reported as other income or expense.  Costs
of major  improvements  are  capitalized,  while  costs of  normal  repairs  and
maintenance are charged to expense as incurred.

     Substantially  all property  and  equipment  is pledged as  collateral  for
long-term debt. (See Note 5).

     (i) Investment in Unconsolidated Affiliates

     The Company accounts for its investment in 50% or less owned joint ventures
using  the  equity  method of  accounting.  Under the  equity  method,  original
investments  are  recorded  at cost  and  adjusted  by the  Company's  share  of
earnings,   losses  and   distributions   of  these  joint  ventures.   No  cash
distributions have been made since inception.

     (j) Pre-Opening Costs

     During April 1998, the American  Institute of Certified Public  Accountants
issued   Statement  of  Position  98-5  "Reporting  of  the  Costs  of  Start-up
Activities"  effective for fiscal years  beginning  after December 15, 1998. The
new standard requires that all companies expense costs of "start-up"  activities
as  the  costs  are  incurred.   The  term  "start-up"   includes   pre-opening,
pre-operating  and  organization   activities.   Previously,   the  Company  had
capitalized these items until the property opened at which time these cumulative
costs were expensed. Although the Company has no capitalized "start-up" costs as
of  December  31,  1998,  any  "start-up"  costs  related  to  projects  in  the
development stage will be required to be expensed as incurred  beginning January
1, 1999.

     (k) Development Costs

     Development  costs represent those costs such as legal and consulting fees,
gaming license applications and options for land acquisitions or leases incurred
for  prospective  gaming  projects.  The  Company  defers  such  costs for those
projects in  jurisdictions in which gaming is legalized and in which the Company
believes that it has a probable chance of obtaining a license and completing the
project;  otherwise,  the costs are  expensed  as incurred  and are  included in
selling, general and administrative expense.


<PAGE>
                                       48


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     (l) Deferred Financing Fees and Costs

     Deferred  financing fees and costs incurred relating to the issuance of the
2001 Notes were  capitalized and are being  amortized to interest  expense using
the effective interest method over the term of the 2001 Notes.

     (m) Revenue Recognition

     Casino revenues represent the net win from gaming activities,  which is the
difference between gaming wins and losses.

     (n) Advertising

     Advertising costs are expensed the first time such  advertisement  appears.
Total  advertising  costs (including  direct mail marketing) were  approximately
$3,917,000, $5,794,000 and $4,153,000 for 1998, 1997, and 1996, respectively.

     (o) Income Taxes

     The Company  follows the  provisions  of Statement of Financial  Accounting
Standards  ("SFAS") No. 109 "Accounting for Income Taxes." SFAS No. 109 requires
the recognition of deferred tax assets and  liabilities for the  consequences of
temporary  differences  between  amounts  reported for  financial  reporting and
income tax purposes.  SFAS No. 109 requires  recognition of a future tax benefit
of net operating loss  carryforwards and certain other temporary  differences to
the extent that realization of such benefit is more likely than not;  otherwise,
a valuation  allowance is applied.  Included in the calculation of the Company's
deferred tax assets and  liabilities  and the  provision for income taxes is the
equity in net income of the  Bettendorf  Joint  Venture  and the  Bally's  Joint
Venture at their respective ownership interests.

     (p) Net Income (Loss) Per Share

     The Company  follows the  provisions  of SFAS No. 128 "Earnings Per Share."
SFAS No. 128 requires  basic income per share of common stock be computed  based
on the number of weighted-average  shares of common stock outstanding during the
period.  Diluted income per share of common stock would be anti-dilutive;  thus,
there is no  difference  between  the  basic  and  diluted  earnings  per  share
disclosure.  Pursuant to SFAS No. 128, all prior period  presentations have been
restated. There was no material effect on the earnings per share calculations as
a result of these restatements.

     (q) Fair Value of Financial Instruments

     The fair value of the Company's  financial  instruments  approximates their
recorded values at December 31, 1998 and 1997, except for the Company's mortgage
notes payable,  the fair market values of which,  based on quoted market prices,
were  approximately  $176.1 million and $177.0 million,  respectively.  The fair
values are not  necessarily  indicative of the amounts the Company could realize
in a current market exchange.


<PAGE>
                                       49


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     (r) Long-lived Assets

     Long-lived assets,  which are not to be disposed of, including property and
equipment,   are  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of the  asset  may  not be
recoverable. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely  independent of the
cash flows of other groups of assets.  The Company deems an asset to be impaired
if a projection of undiscounted  future operating cash flows directly related to
the asset, including disposal value if any, is less than its carrying amount. If
an asset is  determined  to be  impaired,  the loss is measured as the amount by
which the  carrying  amount of the  asset  exceeds  fair  value.  Fair  value is
measured  based on quoted market  prices in active  markets,  if  available.  If
quoted  market  prices are not  available,  the Company  measures  fair value by
discounting estimated cash flows.  Considerable management judgment is necessary
to estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. During the fourth quarter of 1997, management
determined that the carrying value of LLB's long-lived  assets had been impaired
(See Note 11).

     (s) Reclassifications

     The Company made certain financial statement reclassifications,  which have
no impact on net income,  for the years  ended  December  31, 1997 and 1996,  in
order to classify  amounts in a manner  consistent  with the year ended December
31, 1998.


     4. Investment in Unconsolidated Affiliates

     The  Company's  investments  in joint  ventures  with BRDC and  Bally's are
accounted  for under the equity  method and the  Company's  portion of income or
loss  from  the  joint   ventures  is  included  in  Equity  in  Net  Income  of
Unconsolidated   Affiliates  in  the  accompanying  Consolidated  Statements  of
Operations for the years ended December 31, 1998, 1997 and 1996.

     Bettendorf Joint Venture
     ------------------------

     In December  1994, the Company  entered into the  Bettendorf  Joint Venture
with BRDC to  develop  and  operate a casino in  Bettendorf,  Iowa  ("Lady  Luck
Bettendorf").  The joint  venture  agreement  required that the Company and BRDC
each contribute  cash to the Bettendorf  Joint Venture of $3.0 million in return
for a 50% ownership interest. In addition, BRDC is leasing certain real property
to the Bettendorf Joint Venture at a lease rate equal to $150,000 per month. The
Company is leasing a gaming  vessel  with a cost of  $21,635,000  and a carrying
value net of accumulated  depreciation as of December 31, 1998 of $19,387,000 to
the Bettendorf Joint Venture for approximately  $189,000 per month, which amount
was determined based on arms-length  negotiations  between the Company and BRDC.
This  lease is for an  initial  term of 5 years,  expiring  in May 2000,  with a
10-year  renewal  option.  In addition,  from inception of the Bettendorf  Joint
Venture  through  December 31, 1997, the Company had been leasing certain gaming
equipment  to  the  Bettendorf  Joint  Venture  with a cost  of  $3,705,000  for
approximately $122,000 per month, its fair market rental value. Pursuant to such
equipment  lease,  effective  January 1, 1998, the Company sold the equipment to
the  Bettendorf  Joint  Venture for a negotiated  amount of $712,000  cash.  The
Company's  rental  income  relating to the gaming  vessel lease was  $2,266,000,
$2,266,000 and $2,187,000 for the years ended December 31, 1998,  1997 and 1996,
respectively. The Company's rental income relating to the gaming equipment lease
was  $1,465,000  and  $1,649,000 for the years ended December 31, 1997 and 1996,
respectively.

<PAGE>
                                       50


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     Lady  Luck  Bettendorf  commenced  operations  on April 21,  1995.  All net
profits and losses from all  operations  of Lady Luck  Bettendorf  are allocated
equally  between  the  Company  and  BRDC.  Effective  January  1, 1996 with the
replacement of the Old Management  Agreements by the Marketing  Agreements  (see
Note 15),  the  Company  has also  been  granted  the right to manage  Lady Luck
Bettendorf  with  substantially  the  same  terms  and  fees  as  the  Company's
wholly-owned  casinos,  less  $37,500  abated  per  month,  with up to  $325,000
annually of the fees received by the Company paid to BRDC as consultants.

     Lady Luck  Bettendorf  incurred  management  fees, net of $37,500  monthly
abatement,  for the years ended December 31, 1998,  1997 and 1996 as follows (in
thousands):

                                                December 31,
                                   -----------------------------------------
                                      1998           1997          1996
                                   ------------   ------------  ------------
Lady Luck Bettendorf
  management fees...........        $   2,292      $   1,569     $   1,117
                                    =========      =========     =========

      Summarized  balance sheet  information for the Bettendorf Joint Venture as
of December 31, 1998 and 1997 is as follows (in thousands):

                                                       December 31,
                                                 --------------------------
                                                    1998          1997
                                                 ------------  ------------
   Current assets........................        $   6,870     $   4,758
   Other.................................              750           732
   Property and equipment, net...........           52,727        25,459
                                                 ---------     ---------
     Total assets........................        $  60,347     $  30,949
                                                 =========     =========

   Current liabilities...................        $   8,154     $  12,276
   Long-term liabilities.................           23,370            48
   Members' equity.......................           28,823        18,625
                                                 ---------     ---------
     Total   liabilities   and   members'        $  60,347     $  30,949
      equity.............................        =========     =========
 
      Summarized  results of operations for the Bettendorf Joint Venture for the
years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):

                                  1998           1997          1996
                               ------------   ------------  ------------
Net revenues................   $  84,508      $  71,612     $  65,202
Costs and expenses..........      74,310         64,758        59,020
                               ---------      ---------     ---------
  Net income ...............   $  10,198      $   6,854     $   6,182
                               =========      =========     =========



<PAGE>
                                       51


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     A summary of changes in the Company's  investment in the  Bettendorf  Joint
Venture for the years ended December 31, 1998,  1997 and 1996 and are as follows
(in thousands):

                                  1998           1997          1996
                               ------------   ------------  ------------
Investment, beginning of       $   9,313      $   5,886     $   2,795
  period....................
Equity in net income of
  unconsolidated affiliate..       5,099          3,427         3,091
                               ---------      ---------     ---------
Investment, end of period...   $  14,412      $   9,313     $   5,886
                               =========      =========     =========

         Included  in  the  Company's  accumulated  deficit  is  $11,412,000  of
undistributed  retained  earnings of the Bettendorf Joint Venture as of December
31, 1998.

         Bally's joint venture
         ---------------------

         Pursuant to an agreement effective September 30, 1997, the Company sold
its 35% minority interest in Bally's Saloon,  Gambling Hall and Hotel in Tunica,
Mississippi to Hilton Hotels Corporation,  the majority owner and manager of the
property (the "Partnership Interest Redemption Agreement"). The sale resulted in
a loss of $1,912,000,  which represented the difference  between the sales price
and the net investment in the Bally's Joint Venture and related assets.

         Summarized  results of operations for the Bally's Joint Venture for the
nine months  ended  September  30, 1997 (the  effective  date of the sale of the
Company's 35% interest in the Bally's Joint Venture) and the year ended December
31, 1996 are as follows (in thousands):

                                      1997                 1996
                                 ----------------     ----------------
Net revenues................     $       48,836       $       70,093
Costs and expenses..........             45,129               67,976
                                 --------------       --------------
   Net income...............     $        3,707       $        2,117
                                 ==============       ==============

         Net income of the Bally's Joint Venture for the year ended December 31,
1996 includes pre-opening expenses of $3.3 million.

         A summary of changes in the  Company's  investment in the Bally's Joint
Venture for the nine months ended  September 30, 1997 (the effective date of the
sale of the Company's  35% interest in the Bally's  Joint  Venture) and the year
ended December 31, 1996 are as follows (in thousands):

                                              1997          1996
                                           ------------  ------------
Beginning investment..................      $  15,563     $  14,824
Equity in net income of
  unconsolidated affiliate............          1,297           724
Loss on sale of equity              
  investment..........................         (1,912)            -
Other.................................            302            15
Proceeds from sale of               
  investment..........................        (15,250)            -
                                            ---------     ---------
  Ending investment...................      $       -     $  15,563
                                            =========     =========


<PAGE>
                                       52


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


      5.    Long-term Debt

     At December 31, 1998 and 1997,  long-term  debt  consisted of the following
(in thousands):

                                                     1998            1997
                                                 ------------    ------------
   $185,000   11  7/8%   First   Mortgage
     Notes;    quarterly    Payments   of
     interest   only;   due  March  2001;
     collateralized  by substantially all    
     assets    of   the    Company    and
     guaranteed   by  LLGC   (the   "2001
     Notes")...................................     $ 173,500     $ 173,500

   Note   payable   to   an   individual;
     monthly  payments of  principal  and
     interest  at 8.5%;  due  March 2018;        
     collateralized by a deed of trust.........           344             -

   Note   payable  to  a  bank;   monthly
     payments of  principal  and interest
     of   8%;    due    November    2008;         
     collateralized by deed of trust...........           198             -

   Note   payable   to   a   corporation;
     monthly  payments of  interest  only
     at 10%;  principal  due  July  2001,           
     collateralized  by a deed  of  trust
     (See Note 9)..............................             -         2,750

   Note payable to a  corporation;  annual  
     payments of  principal  of $119 plus
     accrued interest at 8%; due June
     2003;  collateralized by a land deed           
     of trust..................................            -            714

   Notes    payable   to    corporations;
     monthly  payments of  principal  and
     interest  at rates  up to 12.5%  due
     through  December  2002  secured  by          
     the equipment.............................           494         1,122

   Mortgage    note    payable    to    a
     corporation;  quarterly  payments of
     principal   and  interest  at  prime
     plus  11/2%   based  on  a  20  year        
     amortization;    due   April   2006;
     collateralized by a deed of trust.........         2,623         2,773

   Note   payable   to   a   corporation;
     quarterly  payments of principal and
     accrued  interest  at 9%;  due  July            
     1998,  collateralized  by a deed  of
     trust.....................................             -           110

   Other.......................................            20           326
                                                    ---------     ---------
                                                      177,179       181,295
   Less: current portion.......................          (595)       (4,481)
                                                    ---------     ---------

     Total long-term debt......................     $ 176,584     $ 176,814
                                                    =========     =========


<PAGE>
                                       53


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     The Indenture, as amended and supplemented (the "Indenture"),  covering the
Company's 11 7/8% First Mortgage Notes due 2001 (the "2001 Notes") provides for,
among  other  things,   restrictions   on  the  Company's  and  certain  of  its
subsidiaries'  abilities  (a) to pay  dividends  or other  distributions  on its
capital stock,  (b) to incur additional  indebtedness,  (c) to make asset sales,
(d) to  engage  in other  lines  of  business,  and (e) to  maintain  a  minimum
consolidated net worth, as defined in the Indenture.  The Company believes it is
in compliance with the Indenture,  as amended and  supplemented,  as of December
31, 1998.

     The 2001 Notes bear interest at the rate of 11 7/8% per annum effective
October 15,  1995 (prior to that time they bore  interest at the rate of 10 1/2%
per  annum).  Interest on the 2001 Notes held by each  holder who  consented  to
certain amendments to and waivers of continuing  defaults under the Indenture in
1996 (the  "Amendments and Waivers") will be payable  quarterly on each March 1,
June 1,  September 1 and  December 1, so long as the 2001 Notes are  outstanding
(interest on the notes held by each holder who did not consent to the Amendments
and Waivers will  continue to be payable  semiannually  on March 1 and September
1). In addition,  the Company is obligated within 180 days after the end of each
year,  commencing with the year ended December 31, 1996, to purchase on the open
market, or to make an offer to purchase from the holders at par, 2001 Notes with
a principal  amount equal to Excess Cash Flow (as defined in the  Indenture) for
such year. However, the Company will be able to credit toward the amount of 2001
Notes  required  to be  purchased  in any year any  amount of 2001  Notes it has
purchased  since January 1, 1996 which it has not previously used as a credit in
any prior year.  There was no Excess Cash Flow for the years ended  December 31,
1998 and 1997. The Company may also  repurchase a portion of the 2001 Notes from
time to time in early satisfaction of any required  repurchase expected pursuant
to the Indenture or otherwise,  the amount of which and the timing of repurchase
cannot currently be estimated and is dependent on adequate cash availability and
market conditions.

     Andrew H. Tompkins,  Chairman and Chief  Executive  Officer of the Company,
beneficially owns  approximately 46% of the Company's  outstanding Common Stock.
Mr.  Tompkins also owns a  casino-hotel  in Las Vegas,  Nevada and the Lady Luck
trademark  and a customer  list,  which the Company  licenses  from him. The Las
Vegas  casino-hotel has incurred  substantial  indebtedness and is in default on
that debt.  Mr.  Tompkins is personally  liable for the debt and has pledged his
assets,  including the the Lady Luck  trademark and customer list, as collateral
for the benefit of the holders of that indebtedness.  As a result of the current
default,  these lenders are entitled to the benefit of this collateral and could
foreclose on the pledge and seize the Lady Luck  trademark and customer list and
sell them to a third party. In addition,  Mr. Tompkins may be required or decide
to sell his stock, the trademark and the customer list to satisfy the debt.

     Pursuant to the Indenture,  a sale of Mr.  Tompkins' Common Stock resulting
in another person beneficially owning more than 35% of the Company's outstanding
common stock would trigger a Change in Control event, which would in turn permit
any holder of the  Company's  outstanding  2001 Notes to require  the Company to
repurchase  all or any part of such holder's 2001 Notes at a cash price equal to
101% of the principal amount thereof,  plus accrued and unpaid  interest.  As of
March 24,  1999,  the closing  market  price of the 2001  Notes,  as reported by
Bloomberg Financial Services was 102.19%.

     Sale of Biloxi Operating Assets
     -------------------------------

     Pursuant to an Asset  Purchase  Agreement  dated June 2, 1998,  on June 11,
1998,  the Company  received  approximately  $15.1 million from Grand Casinos of
Mississippi, Inc. and Grand Casinos, Inc. (collectively "Grand Casinos") for the
sale of substantially all of the assets,  excluding gaming equipment and certain
noncontiguous  real property,  associated with its Lady Luck Biloxi casino which
ceased  operations  June 7,  1998.  The sale  resulted  in a $2.8  million  gain
recognized  during the year ended  December 31,  1998.  In  accordance  with the
Indenture,  the 


<PAGE>
                                       54


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

Company had 180 days after  receiving the $15.1 million (until December 8, 1998)
to invest the money and any earnings  thereon in a Related  Business (as defined
in the Indenture).  The Company  invested the funds in a Related Business before
such time.

     Sale of Interest in Bally's Joint Venture
     -----------------------------------------

     Pursuant to a Partnership  Interest  Redemption  Agreement,  on November 3,
1997, the Company received  approximately  $15.3 million cash for its investment
in the Bally's Joint Venture.  The Company invested $5.7 million of the proceeds
from the sale of its interest in the Bally's Joint Venture in a Related Business
(as  defined in the  Indenture).  Also in  accordance  with the  Indenture,  the
Company,  on April 16, 1998,  offered to repurchase up to $9.6 million principal
amount of the 2001  Notes  (the  "Tender  Offer") at a price of 101% of par plus
accrued and unpaid  interest  thereon.  The Tender Offer expired on May 14, 1998
and none of the 2001 Notes were tendered.  The remaining  proceeds from the sale
and interest earned thereon became unrestricted and available to the Company for
general purposes at that time.

     Scheduled  maturities of long-term  debt for each of the years ending as of
December 31, are as follows (in thousands):

           1999..........................         $          595
           2000..........................                    259
           2001..........................                173,684
           2002..........................                    216
           2003..........................                    180
           Thereafter....................                  2,245
                                                  --------------
           Total......................            $      177,179
                                                  ==============


     6. Mandatory Cumulative Redeemable Preferred Stock

     LLGC has  authorized  1,800,000  shares  of Series A  Mandatory  Cumulative
Redeemable  Preferred  Stock.  Holders of Series A are  entitled to a compounded
cumulative  preference  dividend each quarter.  The current dividend is 11.5% of
the liquidation  preference per share per annum, payable or accrued in quarterly
installments.  Dividends of approximately $2,209,000,  $1,972,000 and $1,761,000
were accrued on the Series A preferred stock during the years ended December 31,
1998,  1997  and  1996,  respectively.  The  Series  A also  requires  mandatory
redemption  on or  before  December  31,  2013.  Cumulative  dividends  on these
preferred shares as of December 31, 1998 are $9,770,000.


     7. Reverse Stock Split, NASDAQ Market Listing and Net Income Per Share

     Effective June 4, 1998, the Company's  shareholders  approved a one-for-six
reverse stock split with regard to its Common Stock (the "Reverse  Split").  The
effects of the Reverse Split were to reduce the number of issued and outstanding
shares of Common  Stock from  29,285,698  to  4,881,003  and to increase the par
value of these  shares  from $0.001 to $0.006 per share.  Instead of  fractional
shares  resulting from the Reverse Split,  stockholders  received a cash payment
from the sale of the aggregate fractional shares on the open market. The Reverse
Split did not change the number of  authorized  shares of the  Company's  Common
Stock and had no effect on the Company's  Preferred Stock. 

<PAGE>
                                       55

                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

All  references  in the  financial  statements  to number of  shares,  per share
amounts and market prices of the Company's Common Stock have been  retroactively
restated to reflect the decreased number of shares of Common Stock outstanding.

     On October 19, 1998, the Company was informed by the Nasdaq National Market
that, based on its staff's review, the Company's Common Stock failed to maintain
market value of public float,  composed of total shares  outstanding  reduced by
those held by directors and officers as defined,  greater than or equal to $15.0
million, in accordance with Marketplace Rule 4450(b)3 under Maintenance Standard
2. The Nasdaq  National  Market  indicated  that it will  provide  the Company a
period  of  time  to  demonstrate  compliance.  If  the  Company  is  unable  to
demonstrate  compliance  during the period,  the  Company's  Common Stock may be
delisted.  If the Company is unable to achieve  compliance,  it may seek further
procedural remedies, but the Company cannot guarantee that it will be successful
in the employment of any of these remedies.  However,  the Company believes that
it would be eligible for listing on the Nasdaq  Small-Cap  Market  tier,  but no
guarantee  can be  provided  that  the  Company  would be in fact  eligible  for
Small-Cap listing.

     As of December 31, 1998,  options to purchase  68,000 and 43,000  shares of
Common  Stock at exercise  prices  ranging  from $15.00 to $18.72 per share were
outstanding and exercisable, respectively, and could potentially dilute earnings
per share in future periods.  The related  weighted  average number of shares of
Common Stock were not included in the computations of earnings per share because
the options'  exercise  prices were greater  than the average  market  prices of
Common  Stock during the years ended  December  31, 1998,  1997 and 1996 and any
effect would be antidilutive.


     8. Promotional Allowances

     The retail value of food,  beverage and rooms  provided on a  complimentary
basis to  customers  without  charge are  included  in gross  revenues  and then
deducted as  promotional  allowances.  The  estimated  costs of providing  these
promotional  allowances  are  included in casino  departmental  expenses for the
years ended December 31, 1998, 1997, and 1996, as follows (in thousands):


                                      1998            1997           1996
                                  ------------    ------------   ------------
Food and beverage...............  $      8,640    $      9,347    $     8,370
Hotel and other.................         1,072             906            800
                                  ------------    ------------    -----------
   Total........................  $      9,712    $     10,253    $     9,170
                                  ============    ============    ===========


     9. Reserve for Loss on Sale of Lady Luck Central City Assets

     Effective  February  19,  1998,  LLCC  sold  substantially  all of its real
property and operating assets to the holder of its mortgage note in exchange for
forgiveness of the $2.8 million note and the assumption of certain  liabilities.
During 1997,  the Company  recorded a reserve of $7.3 million to write-down  the
assets  held for sale to fair  market  value less  closing  costs,  reserve  for
operating  losses in 1998 prior to the  effective  sale date and to reserve  for
estimated  future lease payments and write-downs on its parking lot leases which
were not  assumed by the  purchaser  of the assets  sold.  Accordingly,  the net
assets of LLCC were classified as Assets Held for Sale as of December 31, 1997.


  
<PAGE>
                                       56

                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

   10. Project Development Cost Write-Downs

     During 1997,  the Company  wrote down  various  project  development  costs
totaling approximately $7.8 million due to changes in regulatory,  political and
competitive environments and other factors.

     The first write-down related to the Missouri Project. The State of Missouri
investigates applicants at its discretion and there can be no assurance that the
Company's  application will be actively reviewed in future periods.  In November
1997, the Missouri  Supreme Court ruled that several  existing  Missouri  gaming
projects  are illegal due to their  locations  not being on the  Mississippi  or
Missouri rivers.  In addition,  certain current  operators in Missouri have been
experiencing poor operating results. These uncertainties resulted in the Company
recording a $2.3 million project development write-down in 1997 of the remaining
balance  of its  pre-opening  and other  development  costs  and a $3.0  million
write-down of construction in progress for a portion of the partially  completed
cruising  vessel which, if not used for the Missouri  Project,  could be sold or
possibly  used  in  a  future  development  project.  Nevertheless,   management
estimates that the fair value of this partially  completed  cruising  vessel was
approximately 50% of its net book value.

     These  valuations  are  based  on  assumptions  regarding  expected  future
economic, market and gaming regulatory conditions.  Changes in these assumptions
could result in further  changes in the  estimated net  realizable  value of the
partially completed cruising vessel.

     The  second   write-down  was  related  to  the  Vicksburg   Project.   The
consummation  of the  transactions  contemplated  by the Horseshoe Joint Venture
Agreement  was  subject  to  the   fulfillment   of  several   conditions   (the
"Conditions").  Either LLV or Horseshoe  could  terminate  the  Horseshoe  Joint
Venture Agreement on or after April 1, 1998, if certain conditions were not met.
In October 1998, the Horseshoe Joint Venture  Agreement was terminated by LLV as
the Conditions were not satisfied.  A determination  that certain assets may not
be usable in the Vicksburg Project as currently  contemplated resulted in a $2.3
million write-off of construction in progress during 1997. Management's estimate
of net  realizable  value is based on  assumptions  regarding  future  economic,
market and gaming regulatory conditions including the viability of the Vicksburg
Site for the development of a casino project. Changes in these assumptions could
result in changes in the estimated net realizable value of the property.

     Additionally, the Company had previously planned to construct and operate a
casino in Gulfport,  Mississippi (the "Gulfport Project").  However, in 1997 the
Company  suspended  further  development  of  the  Gulfport  Project  and is not
currently  engaged in  negotiating  either an agreement to sell or develop these
leaseholds.  The Company  intends to cancel these  leases at the  earliest  date
allowable pursuant to the lease agreements.  During 1997, the Company provided a
project development reserve of approximately $162,000 to fully reserve remaining
future  minimum  lease  payments  net of  estimated  sublease  rentals  for  the
remaining  LLG leases.  Reserves of  approximately  $350,000  and  $600,000  had
previously been provided during 1996 and 1995, respectively.

     Lastly, during 1997, the Company provided reserves of approximately $50,000
related to its  investment in Lady Luck New Mexico  ("LLNM") for a total reserve
related to LLNM,  including 1996 and 1995 reserves,  of approximately  $250,000.
The Company  received  $200,000  cash during 1997 for its  remaining  investment
balance.


     11. Asset Impairment Write-Down

     The Company evaluated the recoverability of LLB's long-lived assets in 1996
and 1997 due to recurring  operating  losses  based on the criteria  established
under  Financial  Accounting  Standards  Board  Statement  No. 121 ("SFAS 121").
During the fourth quarter of 1997, pursuant to SFAS 121, the Company recorded an
impairment  write-down to LLB's long-lived assets of $20.7 million.  The Company
considered the historical  operating results and the 



<PAGE>
                                       57


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

significant  downturn  in the  operating  results  of LLB since the  opening  of
additional  competitive  facilities  in its market,  principally  the opening of
Imperial  Palace in December 1997. In performing its review for  recoverability,
the  Company  compared  the  projected  undiscounted  future  cash  flows to the
carrying  value of LLB's  long-lived  assets of $31.5 million as of December 31,
1997.  As the net carrying  value of  long-lived  assets  exceeded the estimated
undiscounted  future cash  flows,  the Company  was  required  to  recognize  an
impairment loss and write-down  long-lived  assets to their fair market value of
$10.8 million.  Fair value became the new cost basis for the impaired assets and
previously accumulated depreciation was eliminated.  As active market quotations
were not available,  the Company  measured fair value by  discounting  estimated
future cash flows.  Considerable  management  judgment was necessary to estimate
discounted  future  cash  flows.  Substantially  all of the  assets  of LLB were
subsequently sold on June 11, 1998 (see Note 5).


     12. Income Taxes

     The net  deferred tax asset  (liability)  as of December 31, 1998 and 1997,
are as follows (in thousands):

                                                          1998         1997
                                                       ----------    ---------
     Deferred tax asset
        Net operating loss carry-forward............   $   27,017    $  20,798
        Excess  of tax  over  book  basis of  
           assets  due to write down of assets......        7,283       14,778
        Deposits....................................          525          525
        Other.......................................        2,369        1,691
                                                       ----------    ---------
                                                           37,194       37,792

        Less: valuation allowance...................      (15,674)     (19,167)
                                                       ----------    ---------

        Net deferred tax asset......................       21,520       18,625
                                                       ----------    ---------

     Deferred tax liability
        Excess of tax depreciation over book........      (18,283)     (15,896)
        Unconsolidated affiliates...................         (680)        (417)
        Other.......................................       (2,557)      (2,312)
                                                       ----------     --------

        Net deferred tax liability..................      (21,520)     (18,625)
                                                       ----------    ---------

         Net........................................   $        -    $       -
                                                       ==========    =========

     SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not, otherwise, a
valuation  allowance  is  applied.  At December  31, 1998 and 1997,  the Company
determined that $15,674,000 and $19,167,000,  respectively,  of tax benefits did
not meet the realization  criteria because of the Company's history of operating
results.   Accordingly,  a  valuation  allowance  was  applied  to  reserve  the
applicable deferred tax assets.


<PAGE>
                                       58


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     The following  summarizes the components of the income tax  (provision) for
the years ended December 31, 1998, 1997 and 1996 (in thousands):

                                     1998           1997        1996
                                  ------------   -----------  ----------
Current.......................    $       (75)   $      (49)  $      (69)
Deferred......................              -             -            -
                                  -----------    ----------   ----------
   Income tax (provision).....    $       (75)   $      (49)  $      (69)
                                  ===========    ==========   ==========

     Mississippi State income taxes were offset by a tax credit for state gaming
taxes that are based on gross gaming  revenues.  The credit is the lesser of the
annual  total  gaming taxes paid or the  Mississippi  State  income tax.  Credit
carry-forwards  are not  permitted  and may  not be used on a  combined  company
basis.

     A reconciliation of the "expected" income tax (provision)  benefit assuming
a 35% federal  statutory  rate to the income tax  provision  for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):


                                           1998          1997          1996
                                        ----------    ----------    ----------
"Expected" income tax (provision)
    benefit............................ $   (3,583)   $   12,761    $   (2,173)
Nondeductible items....................       (254)         (329)          (59)
Net operating loss carryforward........      3,762             -         2,163
Net operating loss--no benefit 
    recorded...........................          -       (12,481)            -
                                        ----------    ----------    ----------
   Income tax (provision).............. $      (75)   $      (49)   $      (69)
                                        ==========    ==========    ==========

     At  December  31,  1998  and  1997,  the  Company  had net  operating  loss
carryforwards available for income tax purposes of approximately $77,000,000 and
$59,000,000, respectively, which expire from 2009 to 2018.


     13. Stock Option Plan

     Under the 1993 stock option plan (the "Stock Option Plan"),  options may be
granted to purchase up to an aggregate of 166,667 shares of LLGC's common stock.
All full-time officers and other key executives, as well as outside directors of
LLGC,  are eligible to receive  options.  Options may be granted that either are
intended to be incentive stock options or non-qualified stock options for income
tax purposes.  Each option  granted will be  exercisable  in full at any time or
from time to time as determined by the Compensation Committee,  provided that no
option may have a term exceeding ten years.

     During 1998 and 1997, no stock options were granted.  During the year ended
December 31, 1996,  29,499 stock options were granted at exercise prices ranging
from $15.00 to $18.00 per share.  During 1998, 1997 and 1996, no options expired
or were exercised;  667, 13,334, and 1,667 options were canceled,  respectively.
The effect of these  options on diluted EPS has been omitted as their  inclusion
would be antidilutive.



<PAGE>
                                       59


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

     The Company  accounts  for the Stock  Option  Plan under APB No. 25,  under
which no compensation  cost has been recognized.  Had compensation cost for this
plan been determined consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based  Compensation" (SFAS No. 123) the Company's
net income and earnings per share would have been reduced to the  following  pro
forma amounts:

                                                    Years Ended December 31,
                                                 ----------------------------
                                                   1998      1997       1996
                                                 -------   --------   -------
                                                     (thousands of dollars)
     Net income (loss) applicable to
        common stockholders as reported.......   $ 7,957   $(38,483)  $ 4,378
     Pro forma................................   $ 7,790   $(38,544)  $ 4,054

     Basic and diluted net income (loss) per
        share as reported.....................   $  1.63   $  (7.88)  $  0.90
     Pro forma................................   $  1.60   $  (7.90)  $  0.83

     Because the  Statement  123 method of  accounting  has not been  applied to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be representative of that to be expected in future years.

     The options granted to date to various employees and outside directors vest
ratably  over 5 years,  with an  expiration  10 years from the date of issuance.
Option  prices  were  equal  to or  greater  than  market  value  on the date of
issuance,  and at December 31,  1998,  the  weighted-average  issue price of the
options was $15.86. The fair value of each option grant is estimated on the date
of grant  using  the  Black-Scholes  option  pricing  model  with the  following
weighted average  assumptions;  risk-free interest rates of 5.4%, 5.4%, and 6.5%
for 1998, 1997 and 1996, respectively;  expected lives of 5 years for 1998, 1997
and 1996 and expected volatility of 240, 213, and 185 percent for 1998, 1997 and
1996,  respectively.  There are no expected  dividend  yields in 1998,  1997 and
1996.


<PAGE>
                                       60


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

     A summary  of the  status of the stock  option  plan and  weighted  average
exercise  prices ("WAEP") at December 31, 1998, 1997 and 1996 and changes during
the years then ended is presented in the table below:


                                          Years Ended December 31,
                         -------------------------------------------------------
                                1998              1997                1996
                         -----------------  ----------------- ------------------
                           Number             Number            Number
                         OF Shares  WAEP    of Shares  WAEP   of Shares   WAEP
                         --------- -------  --------- ------- --------- --------
 Outstanding at
   beginning of year...        69  $ 17.28        82  $ 17.44        54  $ 18.72
 Granted...............         -       -          -        -        30    15.18
 Forfeited/canceled....        (1)   17.79       (13)   18.26        (2)   18.72
                         --------            -------             ------

 Outstanding at end        
   of year.............        68    17.28        69    17.28        82    17.44
                         ========           ========            =======
  
 Exercisable at             
   year end...........         43    17.80        29    18.60        20    18.72

 Weighted average
   fair value of          
   options.............            $     -            $     -            $ 12.12

 Weighted average
   remaining
   contractual life      
   of options..........      6.02 years           7.03 years         7.19 years


     14.  Employment Agreements

     On October 24, 1994,  LLGC entered Letter  Agreements with Alain J. Uboldi,
LLGC's President, Chief Operating Officer and Director, and Rory J. Reid, LLGC's
Senior   Vice-President,   General   Counsel,   Secretary   and  Director   (the
"Agreements").  The Agreements  were for an initial term of three years,  and on
each October 24,  beginning  October 24, 1997, the Agreements are  automatically
extended for an additional year,  unless  terminated by the Company on or before
July 24 of that year.  The  Agreements  provide that in the event of a change of
control,  as defined in the  Agreements,  and the subsequent  termination of the
employment of either Mr. Uboldi or Mr. Reid, under certain  circumstances,  LLGC
would be required to pay to Mr. Uboldi and Mr. Reid a lump sum severance payment
equal to 2.99 times the sum of their  respective  annual  base  salary  plus the
amount of any bonus paid in the year preceding such termination. In the event of
such  termination,  Mr. Uboldi and Mr. Reid would also receive in cash an amount
equal to the  difference  between the exercise  price of each option held by Mr.
Uboldi or Mr. Reid (whether or not fully  exercisable)  and the current price of
LLGC's common stock. Further, in connection with the Agreements,  Mr. Uboldi and
Mr. Reid would receive life, disability,  accident and health insurance benefits
substantially  similar to those they are  receiving  immediately  prior to their
termination for a 36-month period after such termination.

     15. Related Party Transactions

     Effective January 1, 1996, the Company entered into several agreements with
entities  controlled by Mr. Tompkins,  Chairman of the Board and Chief Executive
Officer of the Company,  replacing other  agreements that were less favorable to
the  Company.   Under  a  license  agreement  (the  "License   Agreement")  with
International  Marco Polo 

  
<PAGE>
                                       61


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

Services,  Inc.,  (formerly  known as Lady Luck  Casino,  Inc.  and Marco Polo's
International  Marketing,  Inc. which merged in 1996) ("Marco Polo Services"), a
corporation  owned and controlled by Mr.  Tompkins,  the Company pays Marco Polo
Services  an annual  licensing  fee with  respect  to the Lady Luck name and the
mailing list developed by Gemini, Inc. ("Gemini"), an S corporation wholly owned
by Mr.  Tompkins  that does  business  as Lady Luck  Casino/Hotel  in Las Vegas,
Nevada.  The  licensing  fee is equal to the greater of (a) 9% of the  Company's
EBITDA as defined  (calculated as EBITDA of the Company and all its subsidiaries
and joint ventures  (multiplied,  in the case  Bettendorf  Joint Venture and the
Missouri Project by the Company's ownership  interest),  excluding,  among other
things,  all revenues and expenses  arising from any casino or casino/hotel  for
which the  Company is not the  operator  and which does not  utilize the mailing
list or Lady Luck name and excluding  revenues from the lease of equipment owned
by the Company to third parties or unconsolidated  entities), and (b) $1,700,000
per year (as  adjusted  based on the U.S.  Consumer  Price  Index  Urban  Annual
Percent Change as published by the U.S.  Department of Labor Bureau of Labor and
Statistics  from year to year (the  "Consumer  Price  Index")).  The Company has
agreed to use the Lady Luck name on all  existing  and  future  casinos  that it
operates.  The License  Agreement  provides that during any period of default in
the payment of principal or interest on the 2001 Notes, the Company will not pay
(but will accrue on its books) any licensing fee due to Marco Polo Services. For
1998,  1997 and 1996,  the licensing  fees payable to Marco Polo Services by the
Company were approximately $3,370,000, $2,953,000 and $3,434,000, respectively.

     Under an office  lease with  Gemini,  the  Company  pays  Gemini the sum of
$300,000 per year, as adjusted based on the Consumer Price Index,  for corporate
office facilities and services.  In addition,  the Company reimburses Gemini for
the  approximate  retail  value of rooms,  food and  beverage,  and other  items
provided to the Company by Gemini.  During 1998, 1997 and 1996, net rent expense
of $315,000,  $310,000 and $300,000,  respectively,  and  reimbursable  items of
$104,000,  $147,000,  and  $129,000,  respectively,  were  paid  to  Gemini.  In
addition,  the Company incurred  $304,000,  $49,000,  and $7,000 of expenses for
1998,  1997 and 1996,  respectively,  that were related to  marketing  and other
expenses, and were reimbursed by Gemini

     Marco Polo  Services  provides  marketing  services to the Company under an
agreement  with the Company.  Mr.  Uboldi,  the  Company's  President  and Chief
Operating  Officer and director of the Company,  is the Vice  President of Marco
Polo Services.  Net marketing  services  received by the Company from Marco Polo
Services during 1998,  1997 and 1996, for allocated  payroll,  overhead,  direct
advertising   and  marketing   costs  were  $870,000,   $788,000  and  $659,000,
respectively.  The Company  incurred  $405,000,  $40,000 and $14,000 of expenses
related to  marketing  and other  costs that were  reimbursed  by Marco Polo for
1998, 1997 and 1996, respectively.

     16. Litigation

     Shareholder Class Action Lawsuits
     ---------------------------------

     The Company has been named as a defendant in a purported  shareholder class
action lawsuit alleging violations by the Company of the Securities Act of 1933,
as amended (the  "Securities  Act") and the Securities  Exchange Act of 1934, as
amended  (the  "Exchange  Act"),  for alleged  material  misrepresentations  and
omissions in connection  with the Company's  1993  prospectus and initial public
offering of Common Stock.  The complaint seeks,  among other things,  injunctive
relief,  rescission and  unspecified  compensatory  damages.  In addition to the
Company, the complaint also names as defendants Andrew H. Tompkins, Chairman and
Chief  Executive  Officer of LLGC,  Alain Uboldi,  Director and Chief  Operating
Officer of LLGC,  Michael Hlavsa,  the former Chief  Financial  Officer of LLGC,
Bear,  Stearns  & Co.,  Inc.  and  Oppenheimer  & Co.,  Inc.,  who acted as lead
underwriters for the initial public  offering.  The Company has retained outside
counsel to respond to the complaint.  On October 8, 1997, the Company was served
with an  order of the  court  dismissing  all of the  Plaintiffs'  claims  under
Section  10(b) of the  Exchange  Act and 11 of the  Plaintiffs'  16 claims under
Sections  11, 12 and 15 of the  Securities  Act with  prejudice  for  failing to
adequately state a claim. The 
<PAGE>
                                       62


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


court also ordered the  Plaintiffs to file, and the  Plaintiffs  have filed,  an
amended complaint  regarding the five claims under Sections 11, 12 and 15 of the
Securities  Act which were not dismissed  with  prejudice.  While the outcome of
this matter cannot presently be determined,  the Company believes, based in part
on advice of counsel, that it has meritorious defenses.

     Greek Lawsuits
     --------------

     The Company and particular  joint venture partners (the  "Defendants")  are
defendants  in a lawsuit  brought by the  country of Greece and its  Minister of
Tourism  before  the Greek  Multi-Member  Court of First  Instance.  The  action
alleges that the Defendants failed to make specified payments in connection with
the gaming license bid process for Patras,  Greece.  The payments the Company is
alleged  to have been  required  to make  aggregate  approximately  2.1  billion
drachma  (which  was  approximately  $7.1  million  as of March 5, 1999 based on
published  exchange  rates).  Although it is difficult to determine  the damages
being sought from the lawsuit,  the action may seek damages up to that aggregate
amount plus interest.  The cases are still in their preliminary stages and their
outcome cannot be predicted with any degree of certainty;  however,  the Company
believes, based in part on advice of counsel, that it has meritorious defenses.

     A Greek architect filed an action against the Company  alleging that he was
retained  by the  Company to provide  professional  services  with  respect to a
casino in Loutraki, Greece. On July 29, 1996, the Athens Court of First Instance
in this matter served the Company's  Greek counsel with its decision and entered
judgment against the Company in the amount of approximately 87.1 million drachma
plus accrued interest (which was approximately  $294,000, plus accrued interest,
as of March 5, 1999 based on published exchange rates). The Company appealed the
Court's  decision.  Subsequent  to December 31, 1998,  the Company  settled this
action for $335,000 which had been reserved fully in 1997.

     Other Matters
     -------------

     On November 5, 1996,  the United States  Bankruptcy  Court for the Northern
District of  Mississippi  dismissed a lawsuit  that had been brought by Superior
Boat Works,  Inc.  ("Superior")  against  LLM on or about  September  23,  1993.
Superior had  previously  done  construction  work for LLM on its Natchez  barge
("Lady Luck Natchez"), as well as some minor preparatory work on one other barge
of the Company. This proceeding alleged damages of approximately $47,000,000, of
which approximately  $3,400,000 was alleged for additional  construction work on
Lady Luck Natchez and the  remaining  amount was alleged for unjust  enrichment,
for causing the bankruptcy of Superior and for future work Superior  expected to
perform for the  Company.  Superior  has  appealed  the  decision to dismiss the
action. The Company,  based in part on the advice of its counsel,  believes that
it has meritorious defenses and does not believe that the appeal of the decision
will have a material  adverse  effect on the  Company's  financial  condition or
results of operations.

     During November 1996, LLCC entered into a Memorandum of Understanding  (the
"Memorandum") with BWCC, Inc., which does business as Bullwhackers-Central  City
("Bullwhackers").  The  Memorandum  provided for a combination of the respective
companies'  gaming  establishments  that  currently  operate  on  adjacent  real
property in Central City. As a result of the Memorandum,  the parties negotiated
and purportedly executed a definitive Operating Agreement and Lease Agreement in
September 1997. During the fourth quarter of 1997, Bullwhackers refused to honor
these definitive agreements, and accordingly, the Company commenced suit against
Bullwhackers.  Subsequent  to December  31, 1998,  the Company and  Bullwhackers
reached  an  agreement  in  principle  whereby  the  Company  expects to receive
$300,000  as  a  settlement  from  Bullwhackers.  The  settlement  will  not  be
recognized until the payment is received.


<PAGE>
                                       63


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


     17. Commitments and Contingencies

     Lease Commitments
     -----------------

     LLGC, on its own or through its operating subsidiaries,  has entered into a
series of leases and options to lease in various locations where it is operating
or intends to develop and operate dockside casinos. The leases are primarily for
a term of 40 years from the date of execution  and are  cancelable at the option
of LLGC with a  minimum  period of  notice  of 60 days,  with the  exception  of
certain  leases  entered into by LLB and LLG that are  cancelable  on six-months
notice on the fifth  anniversary of the commencement  date of such leases and on
six-months notice on any fifth anniversary date thereafter.  In addition,  LLGC,
on its own or through  its  operating  subsidiaries,  has entered  into  certain
options to either lease or purchase additional property in other states. Most of
the leases are  contingent  on  regulatory  approval of the lease and all leases
contain certain periodic rent adjustments. Rent expense incurred under operating
leases was approximately  $6,890,000,  $7,885,000,  and $8,934,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.

     Future minimum lease commitments under  non-cancelable  long-term operating
leases for the years ending December 31, are as follows (in thousands):

       1999...................................   $        1,735
       2000...................................            1,669
       2001...................................            1,389
       2002...................................            1,389
       2003...................................            1,389
       Thereafter.............................           35,888
                                                 --------------
          Total...............................   $       43,459
                                                 ==============

Construction Commitments
------------------------

     Bettendorf Joint Venture
     ------------------------

     The Bettendorf  Joint Venture  recently  constructed  an expansion  project
pursuant  to its  master-plan  at a cost of  approximately  $37.0  million.  The
project includes a 256-room hotel with a fully enclosed walkway to the riverboat
casino,  a 500-car  parking  garage  and a bypass  over the nearby  railroad  to
improve  access.  The hotel  opened  August  29,  1998 with the other  amenities
opening  prior to that  date.  In  addition,  the  project  includes  a  marina,
construction  of which has been  delayed  beyond the  Company's  control  due to
pending environmental evaluations. During April 1998, the Iowa Racing and Gaming
Commission  approved the  addition of up to 230 new slot  machines and six table
games at Lady Luck Bettendorf, many of which were installed prior to the opening
of the hotel. The expansion project financing is non-recourse to the Company and
includes a $17.5  million bank first  mortgage  note, a second  mortgage from an
affiliated  company of BRDC for up to $5.0 million  ($1.25  million was actually
drawn),  and includes $7.5 million in tax increment  financing  from the City of
Bettendorf to be repaid from property taxes in exchange for deeding the overpass
to the City of  Bettendorf.  During October 1998, the Company repaid the balance
of the second  mortgage to the  affiliated  company of BRDC.  As of December 31,
1998, the Bettendorf  Joint Venture had  outstanding the full amount of the bank
first  mortgage  note  and the  tax  increment  financing.  The  balance  of the
expansion  project's costs was paid from the Bettendorf  Joint Venture's cash on
hand and from operations.

 
<PAGE>
                                       64

                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

    Service Marine Vessel
     ---------------------

     The Company has entered into an agreement for the construction of a
cruising  gaming  vessel in the amount of $16.0  million and as of December  31,
1998, approximately $6.0 million ($3.0 million net of reserves and accruals) has
been expended under this contract and approximately  $1.9 million is included in
construction payables. Construction has been discontinued and is not anticipated
to resume until such time as a suitable  development  project  proceeds.  During
1998, the contractor filed for bankruptcy.  The filing listed $1.5 million as an
accrued  construction payable and did not list the partially completed vessel as
an asset.  The Company is exploring  options to either  relocate the vessel from
the shipyard or sell it to a third party.

     Natchez Site
     ------------

     Pursuant to its lease,  LLM paid the lessor of the Natchez site $500,000 in
liquidated damages as the Company did not make certain  improvements to the site
required by the lease.  In addition,  Lady Luck  Natchez was required  under its
lease to move its casino barge several hundred feet to another docking  facility
on land subject to the lease by February  1998.  On August 21, 1998,  management
and the  lessor  amended  the lease to allow the barge to remain in its  current
location.  Pursuant to such  agreement,  the lessor agreed to allow the barge to
remain at its current location in  consideration  of the Company's  agreement to
pay  liquidated  damages of $1.2 million if it terminates  the lease at any time
during the 10 year period following the execution of the lease amendment and the
Company's  payment of $250,000 to  construct  additional  parking  spaces on the
leased property.

     Country Hotel
     -------------

     During August 1998, MLI entered into an agreement for and began the
construction of a new 314-room hotel adjacent to its Country Casino. The project
is expected to be complete during the second quarter of 1999 at a cost estimated
not to exceed  $17.0  million.  The  Company  intends  to fund the  construction
primarily  with  the  proceeds  from  the  sale of  substantially  all of  LLB's
operating  assets.  The  remaining  obligation  under the  general  construction
contract at December 31, 1998 was $8.2 million.


     Development Stage Projects
     --------------------------

     In addition to its operating casinos, the Company has riverboat or dockside
casino  projects in various  stages of  development  in Kimmswick,  Missouri and
Vicksburg, Mississippi; and has discontinued a planned development in Vancouver,
British Columbia during 1998 (the  "Development  Stage  Projects").  The current
status of each of these Development Stage Projects is described below.

     Kimmswick, Missouri
     -------------------

     The first two phases of the project, as planned, include a land-based hotel
and casinos onboard two separate vessels (the "Missouri Project").  The proposed
site is located on an approximately  45-acre parcel of land in Jefferson County,
Missouri,  approximately 25 miles south of St. Louis (the "Kimmswick Site"). LLK
has entered into an option to lease the Kimmswick Site.

     As of  December  31,  1998,  the Company has  invested  approximately  $8.7
million  ($140,000 of which was invested  during 1998) in the Missouri  Project,
including the vessel construction noted above. Development costs have been fully
reserved and the vessel  construction  costs have been reduced by a $3.0 million
write-down  recognized during 1997. The Missouri Project is estimated to cost an
additional  $105.0  million to complete.  The proposed  project has 
<PAGE>
                                       65


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

received the  appropriate  zoning  approval from the Jefferson  County  Planning
Commission and has received a U.S. Army Corps of Engineers 404 permit.  However,
a new permit might be necessary  due to changes in the proposed  project  design
subsequent to receiving the permit.

     The Company has continued its efforts  towards  obtaining a gaming  license
for the Missouri Project and provided updated information to the Missouri Gaming
Commission.  The  Missouri  Gaming  Commission  investigates  applicants  at its
discretion and has not yet selected the Company to be investigated. Furthermore,
there can be no  assurance  that the  Company  will be  selected  or obtain such
approvals  from the Missouri  Gaming  Commission.  While the Company  intends to
continue  seeking  license  approval  by the  Missouri  Gaming  Commission,  the
eventual  development  of the  Missouri  Project may also be subject to: (i) the
selection of three new Missouri  Gaming  Commission  members,  which the Company
believes  may not be  familiar  with  the  Company's  application;  (ii)  gaming
revenues  in the  major  metropolitan  areas  of  Missouri  have  not  increased
commensurate  with recent  increases in capacity,  causing concerns of potential
competitive  saturation;  and (iii) regulatory  factors,  including loss limits,
have generally caused gaming  operations to underperform  relative to facilities
in neighboring jurisdictions without such restrictions.

     The Vicksburg Project
     ---------------------

     The   development   as  planned  will  include  a  riverboat   casino,   an
approximately   200-room  hotel,  an  800-car  parking  garage,  and  additional
amenities (the  "Vicksburg  Project").  The Vicksburg  Project is expected to be
located on  approximately  23.9 acres of land owned by the  Company  immediately
south of the I-20 bridge along the Mississippi  River, with access to Washington
Street, in Vicksburg, Mississippi.

     During 1997, the Company  entered into an agreement (the  "Horseshoe  Joint
Venture  Agreement") with Horseshoe  Gaming,  LLC  ("Horseshoe") to form a joint
venture to complete and operate the Vicksburg Project.  During October 1998, the
Company terminated the Horseshoe Joint Venture Agreement pursuant to a provision
therein.

     A gaming license was granted to LLV on August 18, 1994 and has subsequently
been  renewed  through  July 2000.  As of  December  31,  1998,  the Company has
invested  approximately  $14.5  million  ($100,000 of which was invested  during
1998) in the  Vicksburg  Project,  with net property and  equipment and deposits
remaining  of  approximately   $8.4  million  after  project   development  cost
write-downs  and  reserves  for assets which may not be usable in the project as
currently  contemplated.  Management's estimate of net realizable value is based
on  assumptions   regarding  future  economic,   market  and  gaming  regulatory
conditions  including the viability of the Vicksburg Site for the development of
a casino  project and the ability of the Company to obtain a  replacement  joint
venture partner and capital to develop the project. Changes in these assumptions
could result in changes in the estimated net  realizable  value of the property.
The total cost of the project is initially estimated to be approximately  $100.0
million. The Company is currently revising the development plan.

     Casino  developments on the Big Black River could  significantly  adversely
affect operating casinos in Vicksburg, as well as the viability of the Vicksburg
Project.  The Big Black River is located about 13 miles from Vicksburg,  between
Vicksburg and Jackson,  the major  population base from which Vicksburg  casinos
draw their customers.  During the fourth quarter of 1996, the Mississippi Gaming
Commission  found a  proposed  casino  site on the Big Black  River  unsuitable.
However,  an  affected  landowner  on the Big Black  River sued the  Mississippi
Gaming Commission after it rejected the site, and in the fourth quarter of 1997,
a circuit court found the site suitable.  The Mississippi  Gaming Commission and
City of Vicksburg  have appealed the circuit court decision to the State Supreme
Court.  Once the appeal has been  perfected,  the Supreme  Court must rule on it
within  270  days.  In  addition,  on July  16,  1998,  the  Mississippi  Gaming
Commission adopted a regulation that prohibits  developments such as projects on
the Big Black River. While the Company believes that adoption of this regulation
will increase the  prospects of a 

<PAGE>
                                       66


                          LADY LUCK GAMING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

favorable ruling for the Mississippi Gaming Commission and the City of Vicksburg
with respect to the appeal,  which is currently  being held in abeyance  pending
related  rulings,  there can be no assurances that the circuit court ruling will
be  overturned.  The Company  believes that the Supreme Court should rule on the
appeal by the first quarter of the year 2000.

     Lady Luck Vancouver
     -------------------

     The Province of British  Columbia (the  "Province"),  through its Lotteries
Advisory  Committee  invited  interested  parties to  respond  to a Request  for
Proposal ("RFP") relating to a planned expansion of gaming in the Province.

     The Company  responded to the RFP during the fourth quarter of 1997, with a
proposed  project to be developed on Tsawwassen  First Nation Band Reserve lands
(the "Vancouver  Project"),  located about 20 miles south of downtown Vancouver.
During the fourth  quarter of 1998,  the  Company was  informed  that it did not
receive approval to proceed on the Project.

     Environmental Matters
     ---------------------

     The Company is subject to certain  federal,  state and local  environmental
protection,  health and safety laws,  regulations  and ordinances  that apply to
businesses  generally,  including  the Clean Air Act,  the Clean Water Act,  the
Resource   Conservation  and  Recovery  Act,  the  Comprehensive   Environmental
Response,  Compensation  and Liability Act, the  Occupational  Safety and Health
Act, and similar state statutes.

     Some of the Company's owned and leased properties were used in the past for
industrial  purposes,  which have or may have  resulted  in soil or  groundwater
contamination. For example, the Vicksburg site had been used as a bulk petroleum
storage  facility  since the early 1950's,  and contained  above-ground  storage
tanks and barge and truck loading docks  associated with that  operation.  Known
releases of petroleum products from three of the seven tanks have occurred since
1986,  along  with  other  small  releases  at various  locations  on site.  The
subsurface  assessment of the environmental  condition of the site by an outside
environmental  consultant  indicated  that  some of the  soils at the site  were
contaminated  with  petroleum   hydrocarbons  and  associated  volatile  organic
compounds, and that this contamination was present in significant concentrations
in some  locations  on  site.  Remediation  efforts  at the  Vicksburg  site are
complete.  On February 21, 1996,  the  Mississippi  Department of  Environmental
Quality  determined that the environmental  remediation  conducted by the seller
meets all federal and state standards,  and has certified that no further action
is required.  However,  there is no guarantee that the Mississippi Department of
Environmental  Quality or the Federal  Environmental  Protection Agency will not
alter  target  cleanup  levels in the future,  resulting in  additional  cleanup
requirements. This would expose the Company to additional liability as the owner
of the property, and could result in a material delay of the construction of new
facilities on-site.

     A sublessee at its Helena,  Arkansas property has informed the Company that
there may be contamination on this property from underground  storage tanks used
by the sublessee  for gas station  operations.  The Company is awaiting  further
information  on this matter  (including  the extent of the  contamination),  but
believes that the sublessee will be responsible for any costs to investigate and
remediate the property.  However,  there is no guarantee that the sublessee will
in fact pay any of the costs.

     Other  than  those  described,  the  Company  has not  made,  and  does not
anticipate  making,  material  expenditures or incurring  delays with respect to
environmental protection,  and health and safety laws and regulations.  However,
there  is no  guarantee  that  additional  pre-existing  conditions  will not be
discovered  and that the Company  will not  encounter  material  liabilities  or
delays.


<PAGE>
                                       67


    Leverage
    --------

     The Company is highly  leveraged.  As of December 31, 1998,  the  Company's
total  long-term   indebtedness  was   approximately   $176.6  million  and  its
stockholders'   deficit  was   approximately   $24.2  million.   This  level  of
indebtedness could have important consequences to stockholders. While management
believes the Company will have sufficient cash flow to meet its debt service and
other cash outflow  requirements  and maintain  compliance with the covenants of
the Indenture as supplemented,  to the extent that a substantial  portion of the
Company's  cash  flow  from  operations  remains  dedicated  to the  payment  of
principal and interest on its indebtedness,  such cash flow is not available for
other purposes such as general operations, maintenance and improvement of casino
and hotel  facilities  or  expansion  of  existing  sites or into  other  gaming
markets.  Furthermore,  the Company's ability to obtain additional  financing in
the future for working  capital,  capital  expenditures or  acquisitions  may be
limited and the Company's level of  indebtedness  could limit its flexibility in
planning for, or reacting to, changes in its industry.



<PAGE>
                                       68


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

     Not applicable


                                    PART III

     The Board of Directors of LLGC has established April 27, 1999 as the annual
meeting date of stockholders.


 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required  by this Item will be set forth in LLGC's  Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.


 ITEM 11. EXECUTIVE COMPENSATION

     The  information  required  by this Item will be set forth in LLGC's  Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.


 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required  by this Item will be set forth in LLGC's  Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.


 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  required  by this Item will be set forth in LLGC's  Proxy
Statement for the 1999 Annual Meeting of Stockholders of LLGC, which information
is incorporated by reference herein.

 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements.

            Included in Part II of this Report:

            Report of Independent Accountants
            Consolidated  Balance  Sheets  as of  December  31,  1998  and  1997
            Consolidated Statements of Operations -- for the years ended
                  December 31, 1998, 1997 and 1996
            Consolidated Statements of Mandatory Cumulative Redeemable Preferred
                  Stock and Stockholders' Deficit - for the years ended December
                  31, 1998, 1997 and 1996
            Consolidated Statements of Cash Flows - for the years ended December
                  31, 1998, 1997 and 1996
            Notes to Consolidated Financial Statements

<PAGE>
                                       69


  (a)(2)    Financial Statement Schedules.

            Included  in Part III of this  Report  --  Unconsolidated  financial
            statements Lady Luck Bettendorf, L.C., an unconsolidated 50% or less
            owned  investee  accounted for under the equity  method  included in
            Item 14(d):

            Report of Independent Accountants
            Consolidated  Balance  Sheets  as of  December  31,  1998  and  1997
            Consolidated Statements of Operations -- for the years ended
                  December 31, 1998, 1997 and 1996
            Consolidated  Statements  of Members'  Equity -- for the years ended
                  December 31, 1998, 1997 and 1996
            Consolidated  Statements  of  Cash  Flows  -- for  the  years  ended
                  December 31, 1998, 1997 and 1996
            Notes to Consolidated Financial Statements


   (a)(3)   Exhibits.

Exhibit
Number   Description of Exhibits
-------  -----------------------

3.1      Certificate  of  Incorporation  of Lady  Luck  Gaming  Corporation,  as
         amended.  Incorporated  by  reference  to  Exhibit  3.1 to the Form S-1
         Registration  Statement filed by Lady Luck Gaming Corporation under the
         Securities Act (No. 33-63930) (the "Form S-1").

3.2      By-laws of Lady Luck Gaming Corporation,  as amended.  Incorporated by
         reference to Exhibit 3.2 to the Form S- 1.

4.1      Indenture  dated as of February  17, 1994 by and among Lady Luck Gaming
         Finance  Corporation,  the  Guarantors  named  therein  and First Trust
         National  Association (the  "Indenture").  Incorporated by reference to
         Exhibit 4.1 to the Annual Report on Form 10-K for the fiscal year ended
         December 31, 1993 by Lady Luck Gaming Corporation (the "Form 10-K").

4.2      Registration  Rights  Agreement  dated as of  February  17, 1994 by and
         among  Lady Luck  Gaming  Finance  Corporation,  the  Guarantors  named
         therein and the Purchasers who were signatories  thereto.  Incorporated
         by reference to Exhibit 4.2 to the Form 10-K.

4.3      Pledge  Agreement  dated as of February  17, 1994 from Lady Luck Gaming
         Finance Corporation, as Pledgor to First Trust National Association, as
         Trustee. Incorporated by reference to Exhibit 4.4 to the Form 10-K.

4.4      Pledge  Agreement  dated as of February  17, 1994 from Lady Luck Gaming
         Finance Corporation, as Pledgor to First Trust National Association, as
         Trustee. Incorporated by reference to Exhibit 4.4 to the Form 10-K.

4.5      Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February 17, 1994 by and among Lady Luck Gulfport, Inc., as
         Trustor,   Jim  B.  Tohill  as  Trustee,   and  First  Trust   National
         Association,  as  Beneficiary.  Incorporated  by  reference to National
         Exhibit 4.5 to the Form 10-K.

4.6      Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February 17, 1994 by and among Lady Luck Mississippi,  Inc.
         as  Trustor,  Jim B.  Tohill,  as  Trustee,  and First  Trust  National
         Association,  as Beneficiary.  Incorporated by reference to Exhibit 4.6
         to the Form 10-K.

4.7      Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February 17, 1994 by and among Lady Luck Tunica,  Inc.,  as
         Trustor,   Jim  B.  Tohill,  as  Trustee,   and  First  Trust  National
         Association,  as Beneficiary.  Incorporated by reference to Exhibit 4.7
         to the Form 10-K.


<PAGE>
                                       70

4.8      Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February 17, 1994 by and among Lady Luck Biloxi,  Inc.,  as
         Trustor,   Jim  B.  Tohill,  as  Trustee,   and  First  Trust  National
         Association,  as Beneficiary.  Incorporated by reference to Exhibit 4.8
         to the Form 10-K.

4.9      Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February  17, 1994 by and among  Magnolia  Lady,  Inc.,  as
         Trustor,   Jim  B.  Tohill,  as  Trustee,   and  First  Trust  National
         Association,  as Beneficiary.  Incorporated by reference to Exhibit 4.9
         to the Form 10-K.

4.10     Leasehold  Deed of Trust,  Assignment  of Rents and Security  Agreement
         dated as of February 17, 1994 by and among Gold Coin  Incorporated,  as
         Trustor,   Jim  B.  Tohill,  as  Trustee,   and  First  Trust  National
         Association, as Beneficiary.  Incorporated by reference to Exhibit 4.10
         to the Form 10-K.

4.11     First  Preferred  Vessel Mortgage on the Whole of the Lady Luck I dated
         as of February  17, 1994 from Lady Luck  Mississippi,  Inc. in favor of
         First Trust National Association.  Incorporated by reference to Exhibit
         4.11 to the Form 10-K.

4.12     First  Preferred  Fleet Mortgage on the Whole of the Lady Luck Tunica I
         and Lady Luck  Tunica II dated as of  February  17, 1994 from Lady Luck
         Tunica, Inc. in favor of First Trust National Association. Incorporated
         by reference to Exhibit 4.12 to the Form 10-K.

4.13     First Preferred  Vessel Mortgage on the Whole of the Lady Luck Biloxi,
         Inc.  dated as of  February  17, 1994 from Lady Luck  Biloxi,  Inc. in
         favor of First Trust National  Association.  Incorporated by reference
         to Exhibit 4.13 to the Form 10-K.

4.14     Security  Agreement  dated as of February 17, 1994 by and between Lady
         Luck   Kimmswick,   Inc.   and  First  Trust   National   Association.
         Incorporated by reference to Exhibit 4.14 to the Form 10-K.

4.15     Security  Agreement  dated as of February 17, 1994 by and between Lady
         Luck   Vicksburg,   Inc.   and  First  Trust   National   Association.
         Incorporated by reference to Exhibit 4.15 to the Form 10-K.

4.16     Deed of Trust,  Assignment of Rents and Security  Agreement dated as of
         February  17,  1994 by and among  Gold Coin  Incorporated,  the  Public
         Trustee of the  County of Gilpin,  State of  Colorado  and First  Trust
         National Association.  Incorporated by reference to Exhibit 4.16 to the
         Form 10-K.

4.17     Deed of Trust,  Assignment of Rents and Security  Agreement dated as of
         February  17, 1994 by and among Lady Luck Biloxi,  Inc.,  Jim B. Tohill
         and First Trust  National  Association.  Incorporated  by  reference to
         Exhibit 4.17 to the Form 10-K.

4.18     Deed of Trust,  Assignment of Rents and Security  agreement dated as of
         February  17,  1994 by and among Lady Luck  Mississippi,  Inc.,  Jim B.
         Tohill and First Trust National Association.  Incorporated by reference
         to Exhibit 4.18 to the Form 10-K.

4.19     Assignment  of  Option  dated  as of  February  17,  1994 by Lady  Luck
         Gulfport,   Inc.  in  favor  of  First  Trust   National   Association.
         Incorporated by reference to Exhibit 4.19 to the Form 10-K.

4.20     Assignment  of  Option  dated  as of  February  17,  1994 by Lady  Luck
         Kimmswick,   Inc.  in  favor  of  First  Trust  National   Association.
         Incorporated by reference to Exhibit 4.20 to the Form 10-K.

4.21     Assignment  of  Option  dated  as of  February  17,  1994 by Lady  Luck
         Vicksburg,   Inc.  in  favor  of  First  Trust  National   Association.
         Incorporated by reference to Exhibit 4.21 to the Form 10-K.

4.22     Stockholders  Agreement dated as of April 1, 1993 by and among the Lady
         Luck  Gaming   Corporation,   Andrew  H.   Tompkins   and  all  current
         stockholders  and  warrant  holders  of Lady Luck  Gaming  Corporation.
         Incorporated by reference to Exhibit 4.14 to the Form S-1.

4.23     Cash  Collateral  and  Disbursement  Agreement  dated February 17, 1994
         among First Trust National Association.  the Company and the Guarantors
         named  therein.  Incorporated  by reference to Exhibit 4.18 to the Form
         10-K.

<PAGE>
                                       71

4.24     First Amendment to Stockholders  Agreement dated as of June 9, 1993, by
         and among  Andrew  H.  Tompkins  and the  Stockholders  named  therein.
         Incorporated by reference to Exhibit 4.24 to the Registration Statement
         on  Form  S-4   Registration   Statement  filed  by  Lady  Luck  Gaming
         Corporation under the Securities Act (No. 33- 91616)(the "Form S-4, No.
         91616").

4.25     Second  Supplemental  Indenture dated as of March 17, 1995 by and among
         Lady Luck Gaming Finance Corporation,  the Guarantors named therein and
         First Trust National Association.  Incorporated by reference to Exhibit
         4.25 to the  Quarterly  Report  on Form 10-Q for the  quarterly  period
         ended March 31, 1995 by Lady Luck Gaming Corporation.

4.26     Third  Supplemental  Indenture  by and among Lady Luck  Gaming  Finance
         Corporation,  Lady Luck Quad  Cities,  Inc.  and First  Trust  National
         Association.  Incorporated  by  reference to Exhibit 4.26 to the Annual
         Report on Form 10-K for the fiscal year ended December 31, 1995 by Lady
         Luck Gaming Corporation the ("1995 Form 10-K.")

4.27     Fourth  Supplemental  Indenture by and among Lady Luck Gaming  Finance
         Corporation,  the  Guarantors  named therein and First Trust  National
         Association.  Incorporated  by  reference  to Exhibit 4.27 to the 1995
         Form 10-K.

4.28     Specimen  Common Stock  Certificate.  Incorporated  by reference to
         Exhibit 4.15 to the Form S-1.

4.29     Security  Agreement  (Lady  Luck  Gaming  Finance  Corporation)  by and
         between Lady Luck Gaming Finance  Corporation  and First Trust National
         Association. Incorporated by reference to Exhibit 4.29 to the 1995 Form
         10-K

4.30     Security Agreement (Lady Luck Gaming  Corporation) by and between Lady
         Luck  Gaming   Corporation  and  First  Trust  National   Association.
         Incorporated by reference to Exhibit 4.30 to the 1995 Form 10-K

4.31     Pledge Agreement  between Lady Luck Quad Cities,  Inc. and First Trust
         National Association.  Incorporated by reference to Exhibit 4.31 to the
         1995 Form 10-K

10.1.    Lease for parking lot in Biloxi,  Mississippi dated May 28, 1993 by and
         between John M.  Mladnick and Lady Luck Biloxi,  Inc.  Incorporated  by
         reference to Exhibit 10.18 to the Form S-1.

10.2     Lease Agreement dated January 12, 1994 by and among Tyrone J. Gollott,
         Gary F.  Gollott,  Thomas  H.  Gollott  and  Lady  Luck  Biloxi,  Inc.
         Incorporated by reference to Exhibit 10.10 to the Form 10-K.

10.5     Lease for casino  site in Tunica,  Mississippi,  dated  March 18,  1993
         between Lady Luck Tunica,  Inc. and D.C. Parker and Richard B. Flowers.
         Incorporated by reference to Exhibit 10.5 to the Form S-1.

10.6     Lease for casino site in Gulfport,  Mississippi  dated  October 5, 1992
         between  Lady Luck  Gulfport,  Inc. and  Mississippi  Coast Marine Inc.
         Incorporated by reference to Exhibit 10.6 to the Form S-1.

10.7     Lease in Gulfport, Mississippi dated October 1, 1993 by and between
         Coast Materials  Company and Lady Luck Gulfport,  Inc.  Incorporated by
         reference to Exhibit 10.15 to the Form 10-K.

10.8     Agreement to Lease in Gulfport,  Mississippi  dated September 23, 1993
         by and among Robert C.  Fielding,  Lady Luck  Gulfport,  Inc. and Lady
         Luck Gaming Corporation. Incorporated by reference to Exhibit 10.16 to
         the Form 10-K.

10.9     Leases of part of casino site in Natchez, Mississippi dated October 29,
         1991  between  Lady  Luck  Mississippi,  Inc.  and  Silver  Land,  Inc.
         Incorporated by reference to Exhibit 10.7 to the Form S-1.

10.10    Silver Land,  Inc.  Amended and Restated Lease  Agreement  dated 
         December 31, 1992 Incorporated by reference to Exhibit 10.8 to the 
         Form S-1.


<PAGE>
                                       72

10.11    Lease for part of casino  site in Natchez,  Mississippi  dated June 30,
         1992 by and between Lady Luck Mississippi, Inc. and the City of Natchez
         and amendment thereto dated October 27, 1992. Incorporated by reference
         to Exhibit 10.9 to the Form S-1.

10.12    Lease for part of casino  site in Natchez,  Mississippi  dated June 30,
         1992 by and between Lady Luck Mississippi, Inc. and the City of Natchez
         and amendment thereto dated October 27, 1992. Incorporated by reference
         to Exhibit 10.10 to the Form S-1.

10.13    Sublease Contract dated August 13, 1993 by and between Callon Petroleum
         Company and Lady Luck  Mississippi,  Inc.  Incorporated by reference to
         Exhibit 10.22 to the Form 10-K.

10.14    Lease for parking lot in Central City,  Colorado  dated June 1, 1993 by
         and among Gold Coin  Incorporated  and J. Scott  Bradley and Phyllis M.
         Brown (Lots 1-12).  Incorporated  by reference to Exhibit  10.21 to the
         Form S-4 Registration  Statement filed by Lady Luck Gaming  Corporation
         under the Securities Act (No. 33-65232) (the "Form S-4, No. 65232").

10.15    Lease for parking lot in Central City,  Colorado  dated June 1, 1993 by
         and  among J.  Scott  Bradley  and  Phyllis  M.  Brown  and  Gold  Coin
         Incorporated  (Lots 13-21).  Incorporated by reference to Exhibit 10.22
         to the Form S-4, No. 65232.

10.17    Option to purchase  site in Jefferson  County,  Missouri  dated July 8,
         1993 by and between  Lady Luck  Kimmswick,  Inc.  and Donald J. Branch.
         Incorporated by reference to Exhibit 10.17 to the Form S-1.

10.18    Lease in Coahoma,  Mississippi  dated  November  30, 1993 (sic) by and
         among Roger Allen  Johnson,  Jr.,  Charles Bryant Johnson and Magnolia
         Lady,  Inc.  Incorporated  by reference  to Exhibit  10.28 to the Form
         10-K.

10.20    Lady Luck Gaming Corporation  Employee Stock Option Plan.  Incorporated
         by reference to Exhibit 10.31 to the Form 10-K.

10.31    Agreement  dated July 18, 1994 by and among Green  Bridge  Company,  an
         Iowa corporation,  Bettendorf Riverfront  Development Company, L.C., an
         Iowa  limited  liability  company,  Lady Luck  Casino,  Inc.,  a Nevada
         corporation,   and  Lady  Luck  Gaming  Corporation.   Incorporated  by
         reference to Exhibit 10.40 to the June 30, 1994 Form 10-Q.

10.33    Letter Agreement dated October 24, 1994 by and between Alain Uboldi and
         Lady Luck Gaming  Corporation.  Incorporated  by  reference  to Exhibit
         10.41 to the  Annual  Report on Form  10-K for the  fiscal  year  ended
         December  31,  1994 by Lady Luck  Gaming  Corporation  (the  "1994 Form
         10-K").

10.34    Letter Agreement dated October 24, 1994 by and between Rory J. Reid and
         Lady Luck Gaming  Corporation.  Incorporated  by  reference  to Exhibit
         10.42 to the 1994 Form 10-K.

10.38    Real  Estate  Lease dated  January  12,  1995 by and among  Greenbridge
         Company,  an  Iowa  corporation,   Bettendorf  Riverfront   Development
         Company, L.C., an Iowa limited liability company, Lady Luck Bettendorf,
         L.C.,  an Iowa  limited  liability  company and Lady Luck Quad  Cities,
         Inc.,  a Delaware  corporation.  Incorporated  by  reference to Exhibit
         10.46 to the 1994 Form 10-K.

10.39    Operating  Agreement  dated  December 2, 1994 by and between  Lady Luck
         Quad Cities,  Inc., a Delaware  corporation  and Bettendorf  Riverfront
         Development   Company,   L.C.,  an  Iowa  limited  liability   company.
         Incorporated by reference to Exhibit 10.47 to the 1994 Form 10-K.

10.40    Charter  Agreement dated December 9, 1994 by and among Lady Luck Gaming
         Corporation,  Lady Luck Kimmswick, Inc. and Lady Luck Bettendorf, L.C.,
         an Iowa limited liability company. Incorporated by reference to Exhibit
         10.48 to the 1994 Form 10-K.

10.45    License  Agreement  dated as of January 1, 1996 among Lady Luck Casino,
         Inc., Lady Luck Gaming  Corporation and the other parties listed on the
         signature pages thereto.  Incorporated by reference to Exhibit 10.45 to
         the 1995 Form 10-K.

<PAGE>
                                       73

10.46    Services  Agreement  dated as of January 1, 1996 among Lady Luck Gaming
         Corporation and Marco Polo International  Marketing,  Inc. Incorporated
         by reference to Exhibit 10.46 to the 1995 Form 10-K.

10.47    Office  Lease  dated as of  January  1, 1996  among  Lady  Luck  Gaming
         Corporation and Gemini, Inc. Incorporated by reference to Exhibit 10.47
         to the 1995 Form 10-K.

10.48    Assignment and Assumption  Agreement  dated as of January 1, 1996 among
         Lady Luck Gaming Corporation and Lady Luck Casinos,  Inc.  Incorporated
         by reference to Exhibit 10.48 to the 1995 Form 10-K.

10.49    Contract for the Purchase and Sale of Real Estate and Personal Property
         dated as of April 12, 1996 by and between River Park Hotel Group,  Inc.
         and Lady Luck  Mississippi,  Inc.  Incorporated by reference to Exhibit
         10.49 to the Quarterly  Report on Form 10-Q for the quarter ended March
         31, 1996 of Lady Luck Gaming Corporation.

10.51    Partnership  Interest  Redemption  Agreement  dated  September 30, 1997
         between  Bally's  Olympia  Limited  Partnership,   a  Delaware  limited
         partnership,   and  Old  River   Development,   Inc.,   a   Mississippi
         corporation.

10.52    Commercial  Contract to Buy and Sell Real Estate  dated  February 6,
         1998 between Gold Coin, Inc., a Delaware corporation and J. D.
         Carelli.

10.53    Agreement  for Purchase and Sale of Business  Assets dated  February 6,
         1998 between Gold Coin,  Inc.,  a Delaware  corporation  and Stage Stop
         Gaming Hall, Inc.

21       Subsidiaries of Lady Luck Gaming Corporation.

27       Financial Data Schedule.

        (b)   Reports on Form 8-K.

              None.

        (c)   Financial Statement Schedules
              Lady Luck Bettendorf, L.C.
  


<PAGE>
                                       74

                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13  or  15(d)  of  the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the  undersigned,  thereunto  duly  authorized on the
30th day of March 1999.

                                    LADY LUCK GAMING CORPORATION


                                    By:   /s/ Andrew H. Tompkins              
                                          Andrew H. Tompkins
                                          (Chairman of the Board and Chief 
                                           Executive Officer)

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

/s/ Andrew H. Tompkins                                            March 30, 1999
   Andrew H. Tompkins
   (Chairman of the Board, Principal Executive Officer
     and Director)

/s/ Alain Uboldi                                                  March 30, 1999
   Alain Uboldi
   (President, Chief Operating Officer and Director)

/s/Lawrence P. Tombari                                            March 30, 1999
   Lawrence P. Tombari
   (Senior Vice President,  Chief Financial Officer and
   Principal Financial Officer)

/s/James D. Bowen                                                 March 30, 1999
   James D. Bowen
   (Vice President Finance and Principal Accounting Officer)

/s/Rory J. Reid                                                   March 30, 1999
   Rory J. Reid
   (Senior Vice President,  General Counsel, 
    Secretary and Director)

/s/Minxin Pei                                                     March 30, 1999
   Minxin Pei, Director

/s/Anthony J. Drexel Biddle III                                   March 30, 1999
   Anthony J. Drexel Biddle III, Director

/s/James A. Bilbray                                               March 30, 1999
   James A. Bilbray, Director

/s/Charles Brewer                                                 March 30, 1999
   Charles Brewer, Director