<PAGE>

                                                                    EXHIBIT 10.4


                                FIRST AMENDMENT
                                   - to the -
                              EMPLOYMENT AGREEMENT



     THIS FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT ("First Amendment") is
made and entered into as of the 1st day of January, 1998 ("Effective Date") by
and between GREATE BAY HOTEL AND CASINO, INC. ("Employer") and FREDERICK H.
KRAUS ("Employee").

                              W I T N E S S E T H:
                              -------------------

     WHEREAS, Employer and Employee entered into that certain Employment
Agreement dated as of January 1, 1996 ("the Agreement") under the terms and
pursuant to the conditions set forth in the Employment Agreement, a copy of
which is attached as Exhibit "A"; and,

     WHEREAS, the Agreement is scheduled to expire by its terms on December 31,
1998; and

     WHEREAS, Employer and Employee are desirous of modifying the Agreement
subject to the terms and pursuant to the conditions set forth in this First
Amendment in order to retain the services of Employee; and,

     WHEREAS, Paragraph 15 of the Agreement requires that the Employment
Agreement "may not be amended, modified, changed or altered except by a writing
signed by both Employer and Employees";

     NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual covenants, agreements, understandings, undertakings,
representations, warranties and promises hereinafter set forth, and intending to
be legally bound thereby, Employer and Employee do hereby covenant and agree as
follows:

     1.  AMENDMENT TO PARAGRAPH 8(a) OF THE AGREEMENT.
         --------------------------------------------

     Paragraph 8(a) of the Employment Agreement is amended solely to change the
base salary stated therein to a new base salary of Two Hundred Twenty Five
Thousand Dollars ($225,000.00) per annum.
<PAGE>

     2.  AMENDMENT TO PARAGRAPH 8(B) OF THE AGREEMENT.
         --------------------------------------------
     The language of Paragraph 8(b) of the Agreement is deleted and replaced
     with the following:

     The Base Salary, shall be adjusted ("the Base Salary Adjustment") on each
     of the anniversary dates of the Effective Date of the Agreement after the
     date of this First Amendment in an amount equal to five (5) percent of the
     Base Salary for the first Base Salary Adjustment and in an amount equal to
     five (5) percent of the sum of the Base Salary plus prior Base Salary
     Adjustments for succeeding Base Salary Adjustments.

For the purpose of the this First Amendment, the parties agree that the
anniversary date shall be the anniversary date of the Effective Date of this
First Amendment.

     3.  AMENDMENT TO PARAGRAPH 6 OF THE AGREEMENT.
         -----------------------------------------
     The provisions of Paragraph 6 of the Agreement are modified solely to
extend the Term from the stated therein to the period ending on December 31,
2000.

     4.  AMENDMENT TO PARAGRAPH 4 OF THE AGREEMENT.
         -----------------------------------------
     Paragraph 4 of the Agreement is amended solely to change the title of
Employee to Executive Vice President, General Counsel, and Secretary.

     5.  SEVERANCE PAY; STAY BONUS.
         -------------------------

     Notwithstanding paragraph 3 above, and in the event Employer files a
proceeding under Chapter 11 of the United States Bankruptcy Code ("Chapter 11")
and in the event Court approval is not obtained for a stay bonus equal to 75% of
the Base Salary if Employee continues his employment for the lesser of two (2)
years or until a Chapter 11 plan is approved or the Chapter 11 case is dismissed
or in the event Court approval is not obtained for Severance Pay in a lump sum
equal to the greater of two (2) years of Base Salary or the remaining term of
the Agreement if the employment of Employee is not continued or is not continued
in the same capacity after institution of a Chapter 11 proceeding, the Employee
may elect to reduce the Term on notice to the Employer to the Term described in
Paragraph 6 of the Agreement.

     6.  RATIFICATION OF THE AGREEMENT.  Except as otherwise modified by this
         -----------------------------
First Amendment, Employer and Employee hereby ratify and affirm the terms and
conditions of the Agreement.
<PAGE>

     IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties
hereto have executed and delivered this First Amendment as of the year and date
first above written:

WITNESS:                         GREATE BAY HOTEL AND CASINO, INC.

/s/   Diane Renzetti             By:  /s/ Richard D. Knight
--------------------                ----------------------------
                                 Richard D. Knight
                                 President



WITNESS:                         EMPLOYEE

/s/   Timothy A. Ebling          /s/ Frederick H. Kraus
-------------------------        -------------------------------
                                 Frederick H. Kraus
<PAGE>

                                SECOND AMENDMENT
                                   - to the -
                              EMPLOYMENT AGREEMENT


     THIS SECOND AMENDMENT TO THE EMPLOYMENT AGREEMENT ("Second Amendment") is
made and entered into as of the 11th day of March, 1998 ("Effective Date") by
and between GREATE BAY HOTEL AND CASINO, INC. ("Employer") and FREDERICK H.
KRAUS ("Employee").

                              W I T NE S S E T H:
                              ------------------

     WHEREAS, Employer and Employee entered into that certain Employment
Agreement dated as of January 1, 1996 ("the Agreement") under the terms and
pursuant to the conditions set forth in the Employment Agreement, a copy of
which is attached as Exhibit "A", and entered into that First Amendment to
Employment Agreement as of January 1, 1998, a copy of which is attached as
Exhibit "B" (the "First Amendment" and together with the Agreement, the "Amended
Agreement"); and,

     WHEREAS, Employer and Employee are desirous of modifying the Amended
Agreement to conform to the modification of the Amended Agreement by the Order
of Judge Wizmur of the United States Bankruptcy Court for the District of New
Jersey dated March 11, 1998; and,

     WHEREAS, Paragraph 15 of the Agreement requires that the Employment
Agreement "may not be amended, modified, changed or altered except by a writing
signed by both Employer and Employee";

     NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual covenants, agreement, understandings, undertakings,
representations, warranties and promises hereinafter set forth, and intending to
be legally bound thereby, Employer and Employee do hereby covenant and agree as
follows:

     1.  AMENDMENT TO PARAGRAPH 8(b) OF THE AGREEMENT.
         --------------------------------------------
     The language of Paragraph 8(b) of the Agreement and Paragraph 1 of the
First Amendment, except for the last sentence, are deleted and replaced with the
following:
<PAGE>

     The Base Salary, shall be adjusted ("the Base Salary Adjustment") on each
     of the anniversary dates of the Effective Date of this Agreement (each "an
     Adjustment Date").  The Base Salary Adjustment shall be the product of the
     Base Salary times the difference between the CPI Comparison Period and the
     CPI Base Period.  For the purpose of this paragraph, the Base Salary shall
     include any previous Base Salary Adjustments, the CPI shall be the Consumer
     Price Index for all Urban Consumers for Phila., Pa.  All Items (1982-
     1984=100) issued by the United States Department of Labor, Bureau of Labor
     Statistics or any successor agency ("the Bureau"), the CPI Base Period
     shall be the CPI most recently published by the Bureau as of December 31,
     1997 for the first Adjustment Date and the CPI Comparison Period used for
     the preceding Adjustment date for succeeding Adjustment Dates, and the CPI
     Comparison Period shall be the most recently published CPI by the Bureau as
     of December 31, just prior to the Adjustment Date.  Nothing in this
     paragraph shall permit any increase of the Base Salary at an Adjustment
     Date to exceed five (5) percent or a decrease in Base Salary at an
     Adjustment Date except that the Board of Directors may authorize an
     increase in the Base Salary up to five percent of the Base Salary effective
     on any Adjustment Date.  In the event that the Bureau ceases to use the
     1982-1984 average of 100 as the basis of calculation of the CPI or ceases
     to publish the CPI, or a substantial change is made in the "market basket"
     of items used in determining the CPI, the Employer shall in good faith
     substitute another index or comparable statistic to measure the change in
     the cost of living in the Philadelphia metropolitan area.

     2.  AMENDMENT TO PARAGRAPH 8(d) OF THE AGREEMENT.
         --------------------------------------------

     In the case of a termination without Cause, which does not entitle Employee
to Severance Pay under the Severance Pay Policy approved by Order of Judge
Wizmur dated January 26, 1998, Paragraph 8(d) of the Agreement is modified
solely to limit the periodic payments described therein to the lesser of the
remaining Term of the Amended Agreement or two (2) years.

     3.  RATIFICATION OF THE AGREEMENT.  Except as otherwise modified by this
         -----------------------------
Second Amendment, Employer and Employee hereby ratify and affirm the terms and
conditions of the Amended Agreement.

     IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties
hereto have executed and delivered this First Amendment as of the year and date
first above written.
ATTEST:                          GREATE BAY HOTEL AND CASINO, INC.

/s/ Timothy A. Ebling            By:  /s/ Richard D. Knight
------------------------            ------------------------------
                                 Richard D. Knight
                                 President



WITNESS:                            EMPLOYEE

/s/ Phyllis Ann Le Tart             /s/ Frederick H. Kraus
------------------------            ------------------------------
                                    Frederick H. Kraus