<PAGE>   1
                                                                      EXHIBIT 13
 
THE SANDS REGENT
SELECTED FINANCIAL DATA
 ................................................................................
 
FOR THE YEARS ENDED JUNE 30,
 
<TABLE>
<CAPTION>
                                               1998      1997      1996       1995        1994
                                              -------   -------   -------   --------     -------
                                                (Dollars in thousands, except per share data)
<S>                                           <C>       <C>       <C>       <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Operating revenues(1).....................  $59,211   $57,527   $59,072   $ 60,497     $51,446
  Income (loss) from operations.............      233       245     4,192    (11,748)(2)   8,178
  Net income (loss).........................   (1,219)     (762)    2,042    (11,428)(2)   7,730
  Net income (loss) per share:
       Basic................................  $  (.27)  $  (.17)  $   .45   $  (2.54)(2) $  1.76
       Diluted..............................  $  (.27)  $  (.17)  $   .45   $  (2.54)(2) $  1.73
  Cash dividends per share..................    --        --      $   .15   $    .20     $   .20
 
OPERATING DATA:
  Casino square footage(3)..................   51,000    51,000    51,000     51,000      51,000
  Number of slot machines(3)................    1,459     1,409     1,407      1,459       1,483
  Number of hotel rooms(3)..................      938       938       938        938         938
  Average hotel occupancy rate..............     83.3%     84.3%     82.9%      87.1%       89.7%
 
BALANCE SHEET DATA:
  Cash, cash equivalents and short-term
     investments(3).........................  $ 9,453   $ 7,894   $11,557   $ 12,214     $ 9,804
          Total assets(3)...................   58,901    61,053    64,311     66,253      82,268
  Long-term debt(3).........................   14,643     4,658    14,816     17,808      27,559
          Total stockholders' equity(3).....   31,235    32,454    33,216     31,849      44,138
</TABLE>
 
---------------
(1) Revenues are net of complimentaries.
 
(2) Includes a write-off attributable to an impairment in long-lived assets of
    GCP and GCI. The negative impact of such write-off on income (loss) from
    operations, net income (loss) and net income (loss) per share was
    approximately $17.4 million, $13.9 million and $3.08, respectively.
 
(3) Information presented as of the end of the period.
 
                                        5
<PAGE>   2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 ................................................................................
 
RESULTS OF OPERATIONS
COMPARISON OF 1998 TO 1997
 
     For the year ended June 30, 1998, revenues increased to $59.2 million from
$57.5 million in the prior year and income from operations decreased slightly
from $245,000 to $233,000. The increase in revenue is attributable to the Sands
Regency where revenue increased from $32.2 million in fiscal 1997 to $34.8
million in fiscal 1998, over an 8% increase. Such increase at the Sands Regency
was partially offset by a decrease in revenue at the Copa Casino of $1.0 million
to $24.4 million in fiscal 1998. The slight decrease in income from operations
consists of an increase in income from operations from the Sands Regency of $2.2
million to $304,000 which was offset by a decline in income from operations from
the Copa Casino of approximately $2.2 million to a loss from operations of
$71,000.
 
     For the same comparable fiscal years, the Company had a net loss of $1.2
million, or loss per share of $.27, in fiscal 1998 compared to a net loss of
$762,000, or loss per share of $.17, in fiscal 1997. The Sands Regency had a net
loss of approximately $688,000 in fiscal 1998 which compared favorably to a net
loss in fiscal 1997 of $1.5 million. Such improvement from the Sands Regency was
offset by a decline at the Copa Casino. For the year ended June 30 1998, the
Copa Casino incurred a net loss of approximately $532,000 as compared to net
income in the prior year of approximately $741,000.
 
     The increases at the Sands Regency are due to an increase in gaming,
lodging and food and beverage revenue per occupied room. The declines in
revenues, income (loss) from operations and net income (loss) at the Copa Casino
are due to a decline in customer counts and an increase in costs and expenses.
The decline in customers is due, in part, to the construction on Highway 90
which significantly impaired access to the Copa Casino for most of fiscal 1998.
 
     The increase in lodging revenue of $416,000 in the year ended June 30,
1998, compared to the year ended June 30, 1997, is primarily due to an increase
in the average daily rate from approximately $29 in fiscal 1997 to $31 in fiscal
1998. For the same comparable periods, hotel occupancy declined slightly from
84.3% to 83.3%.
 
     The increase in gaming revenue of $487,000 includes a 9% increase in gaming
revenue from the Sands Regency of $1.6 million. Such increase was offset by a
decline in gaming revenue from the Copa Casino of approximately $1.1 million.
The increase in gaming revenue in Reno is primarily due to an increase in gaming
revenue from hotel guests and an increase in local patrons. Gaming revenue per
occupied room increased from approximately $62 in the year ended June 30, 1997
to $69 in the year ended June 30, 1998. The decline in gaming revenue at the
Copa Casino is due to a reduction in the number of customers which the Company
attributes, in part, to the curtailment of access to the Copa because of
construction on Highway 90. Not until July 1998 had construction progressed to
the point where access to the Copa Casino had finally improved to any
significance.
 
     The increase in food and beverage revenue of $638,000, in fiscal 1998
compared to fiscal 1997, includes an increase in restaurant revenue at the Sands
Regency of approximately $472,000 and an increase at the Copa Casino of
$174,000. At the Sands Regency, food revenue per occupied room increased from
approximately $17 in the fiscal 1997 to $19 in fiscal 1998. This increase is
partially
 
                                        6
<PAGE>   3
 
 ................................................................................
 
attributable to improvements and upgrades to the Sands Regency's restaurant
facilities. The increase in restaurant revenue at the Copa Casino, partially
offset by a decrease in Copa Casino beverage revenue, is due to the Copa's
operation of a buffet restaurant in fiscal 1998. Previously operated by a third
party through May 1997, the buffet restaurant was subsequently eliminated in
July 1998 due to low customer counts and high operating costs.
 
     The increase in other revenue of $142,000 is in ancillary revenue from the
Sands Regency.
 
     The increase in gaming costs and expense of $247,000, in the year ended
June 30, 1998 compared to the year ended June 30, 1997, is comprised of an
increase from the Copa Casino of approximately $387,000 and a decrease from the
Sands Regency of approximately $140,000. The increase in Copa Casino costs and
expenses is primarily attributable to added costs and expenses associated with
the slot player's club, which was commenced in April 1997, of $555,000. This
increase was partially offset by a reduction in gaming taxes due to reduced
gaming revenue. The decrease at the Sands Regency is composed of increases in
gaming player's club costs and gaming taxes and licenses related to the
increased revenue, respectively, of $154,000 and $140,000 which were more than
offset by decreases in various other gaming cost and expense items due,
partially, to improved efficiency.
 
     The increase in food and beverage costs and expense of $987,000 in the
fiscal 1998, compared to fiscal 1997, consists of increases at the Copa Casino
and Sands Regency, respectively, of $735,000 and $252,000. The increase at the
Copa Casino includes $404,000 in added food costs associated with the buffet
restaurant and increased other food operating costs and expenses in the Copa's
other food operation due to changes in products being offered to the public. The
Copa's buffet restaurant was operated by the Copa from May 1997 to July 1998
when it was closed due to low customer counts and high operating costs. The
increase at the Sands Regency consists primarily of promotional discounts
offered on certain restaurant food products of approximately $308,000 and a
decrease in various other food and beverage costs and expenses.
 
     The increase in maintenance and utilities costs and expenses of $249,000 is
primarily attributable to the Copa Casino. It includes an increase in hurricane
evacuation expenses of $202,000 as a result of preparedness actions necessary
during Hurricane Danny in July 1997 and increases in other maintenance and
repair costs aggregating approximately $103,000. Such increases have been offset
by a decrease in costs and expenses associated with maintenance dredging
performed under and around the ship during the fourth quarter of fiscal 1997.
 
     The increase in general and administrative costs and expenses of $77,000,
in the year ended June 30, 1998 compared to the year ended June 30, 1997,
consists principally of a decrease from the Copa Casino of approximately
$189,000 and an increase from the Sands Regency of approximately $266,000. The
decrease from the Copa Casino is attributable to a decrease in advertising and
promotional costs of approximately $412,000. This decrease was partially offset
by an increase in legal and professional costs of $183,000. The decrease in
direct advertising and promotional costs is due, in part, to the implementation
of the slot player's club which includes various promotional costs that
supercede some prior promotional programs. The increase in legal and
professional costs is related to
 
                                        7
<PAGE>   4
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
 ................................................................................
 
the legal actions with the State Port of Mississippi at Gulfport which,
culminated in a trial in October 1997 (See Notes 8 and 9 to the Company's
consolidated financial statements).
 
     The increase in general and administrative costs and expenses at the Sands
Regency includes an increase in performance based compensation for the facility
of approximately $287,000, increases due to the implementation of a casino
marketing department in mid-fiscal 1998 of approximately $153,000 and increases
in various other general and administrative costs and expenses aggregating
approximately $103,000. Such increases were offset by a decrease in various
promotional costs and expenses due to the refinement of promotional programs in
the gaming player's club included in gaming costs and expenses.
 
     The increase in depreciation and amortization expense of $247,000 is
primarily due to additional depreciation taken on assets placed in service in
fiscal 1998 and 1997 at the Copa Casino. During such years, significant property
and equipment additions and replacements were undertaken including the
acquisition of a new slot player tracking/monitoring and accounting system.
 
     The decrease in interest and other income of approximately $75,000, in
fiscal 1998 compared to fiscal 1997, includes a decrease from the Sands Regency
of approximately $365,000 and an increase from the Copa Casino of approximately
$290,000. The decrease from the Sands Regency is primarily due to the
non-recurrence of a gain on the sale of a non-casino property in Reno in fiscal
1997. The increase from the Copa Casino is due to the non-recurrence of a prior
year loss from the write-off of the undepreciated cost of the slot
monitoring/accounting system replaced in the fourth quarter of fiscal 1997 and
the write-off of certain capitalized costs for projects no longer deemed viable.
 
     The increase in interest expense of $507,000 is primarily attributable to
the Sands Regency. It includes the write-off of unamortized loan fees of
approximately $138,000, due to the amendment of the Sands Regency's bank debt
effective January 31, 1998, and the non-recurrence of approximately $77,000 in
interest expense capitalized into property and equipment for projects undertaken
in fiscal 1997. It also includes an increase in interest expense due to an
increase in the interest rate to a default rate of interest of prime plus three
percent in the six months preceding the January 1998 amendment. The amended
loan agreement presently specifies an interest rate of prime plus one and
one-half percent.
 
     As is true for other hotel/casinos in the Reno area, demand for the
Company's facilities declines in the winter. Due to lower room rates and a lower
level of gaming play per occupied room, operating margins and, to a lesser
extent, revenues are lower during the second and third fiscal quarters . The
Sands Regency has not historically been affected as severely as many other
hotel/casinos in the Reno area because the Company attracts high levels of group
business during that period. This group business and the Company's flexible
pricing strategy have historically enabled the Company to maintain relatively
high levels of hotel occupancy. Management anticipates that the trend of
experiencing lower operating margins in the second and third quarters of each
fiscal year will continue.
 
     It appears that such seasonal trends are also applicable to gaming on the
Mississippi Gulfcoast. Specifically, revenues are lower in the December quarter
than during other times of the year. Such trends appear to also be applicable to
the Copa Casino. However, because of the limited amount of time that the
 
                                        8
<PAGE>   5
 
 ................................................................................
 
Copa has been in operation and impact of other factors on the Copa's operations,
the nature, impact and extent of seasonal fluctuations on the Copa, if any, are
subject to change.
 
COMPARISON OF 1997 TO 1996
 
     For the year ended June 30, 1997, revenues decreased to $57.5 million
compared to $59.1 million for the year ended June 30, 1996 and income from
operations decreased from $4.2 million to $245,000. For the same comparable
periods, net income decreased from $2 million, or $.45 per share, in fiscal
1996, to a net loss of $762,000, or a $.17 loss per share, in fiscal 1997. The
decrease in revenues is composed of an increase in revenues from the Copa Casino
of approximately $1.2 million which was offset by a decrease in revenues from
the Sands Regency of approximately $2.7 million. The decrease in income from
operations is composed of a decrease from the Copa Casino of approximately
$700,000 and a decrease from the Sands Regency of $3.2 million. The decrease in
Copa Casino income from operations is due to increased costs and expenses.
Whereas, the decrease in income from operations from the Sands Regency is due
primarily to a decrease in revenue.
 
     The decreases in net income and net income per share, are also attributable
to both the Sands Regency and the Copa Casino operations. The Copa Casino
contributed approximately $741,000 to the consolidated net income in fiscal 1997
compared to $1.3 million in fiscal 1996. For the same comparable periods, the
Sands Regency incurred a net loss of approximately $1.5 million in fiscal 1997
compared to net income in fiscal 1996 of $705,000.
 
     Such declines in revenues, income from operations, net income (loss) and
net income (loss) per share at the Sands Regency are primarily due to increased
competition from new and expanded Reno area hotel/casinos and from new Las Vegas
mega-resorts. Unusually poor weather conditions in Northern Nevada, Northern
California and the Pacific Northwest during the third quarter of fiscal 1997
also contributed to the decline in Sands Regency Revenues. The increase in Copa
Casino revenues is due to an increase in customer counts while the decrease in
profitability is due to increased costs and expenses.
 
     The decrease in lodging revenue of $671,000 in the year ended June 30,
1997, compared to the prior year, is due to a decrease in the average daily room
rate at the Sands Regency. The average daily rate decreased from $32 in fiscal
1996 to approximately $29 in fiscal 1997. For the same periods, hotel occupancy
increased from 82.9% for the year ended June 30, 1996 to 84.3% in the year ended
June 30, 1997.
 
     The decrease in gaming revenue of $656,000 is a result of a decrease in
gaming revenue from the Sands Regency of approximately $1.7 million. This
decrease was offset by an increase in gaming revenue from the Copa Casino of
$1.0 million. The decrease in gaming revenue in Reno consists of a decrease in
the Sands Regency casino gaming revenue of $2.2 million. This decrease was
offset by increased gaming revenue from the Company's slot route operation of
$477,000. The decrease in the Sands Regency gaming revenue primarily consists of
a decrease in slot revenue and is due to a decline in gaming revenue per
occupied room. Gaming revenue per occupied room decreased from $71 in the year
ended June 30, 1996 to approximately $62 in the year ended June 30, 1997. The
increase in slot route revenue is due to
 
                                        9
<PAGE>   6
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
 ................................................................................
 
the Company's acquisition of a slot route business in June 1996 which operates
slot machines at various non-casino businesses (convenience stores and cocktail
lounges) in the Reno area.
 
     The slight increase in food and beverage revenue of $28,000 in fiscal 1997,
compared to fiscal 1996, consists of an increase from the Copa Casino of
approximately $101,000 and a decrease from the Sands Regency of $73,000. The
increase at the Copa Casino is in beverage revenue. The decrease at the Sands
Regency is in restaurant revenue, resulting from a slight decrease per occupied
room.
 
     The decrease in other revenue of $148,000 includes decreases from the Copa
Casino of approximately $51,000 and from the Sands Regency of approximately
$97,000 and consist of various ancillary revenue items.
 
     The increase in complimentary lodging, food and beverage, deducted from
revenue, of $98,000 consists of an increase from the Sands Regency of $203,000
This increase was offset by a decrease from the Copa Casino of $105,000.The
increase at the Sands Regency is composed of an increase in complimentary hotel
accomodations of approximately $74,000 and an increase in complimentary food and
beverages of $129,000. The increase in complimentary lodging is partially a
result of changes in the Company's lodging programs and packages offered to
attract and retain guests.
 
     The increase in gaming costs and expense of $1.3 million in the year ended
June 30, 1997, compared to the year ended June 30, 1996, is comprised of
increases from the Copa Casino of $647,000 and from the Sands Regency of
$614,000. The increase in Copa Casino costs and expenses is primarily
attributable to the increase in associated gaming revenue. The increase in Sands
Regency gaming costs and expenses include: increases in the cost of
complimentary goods and services provided of $297,000, costs and expenses
associated with the new slot route operation of $425,000, and costs of
approximately $338,000 associated with the preferred players club which was
implemented in December 1996. These increases at the Sands Regency have been
offset by a decrease in gaming taxes and licenses of $192,000 and a decrease in
various other costs and expenses of approximately $254,000. The decrease in
taxes and licenses is due to the decrease in associated gaming revenue.
 
     The decrease in lodging costs and expenses of $240,000 includes an increase
in the allocation of costs and expenses to gaming relative to the provision of
complimentary lodging of $65,000 and a decrease in various other lodging costs
and expenses.
 
     The slight increase in food and beverage costs and expenses of $68,000, in
fiscal 1997 compared to fiscal 1996, consists of a decrease from the Sands
Regency of approximately $222,000 and an increase from the Copa Casino of
$290,000. The increase from the Copa Casino is due to a decrease in the
allocation of costs and expenses to gaming relative to the provision of
complimentary food and beverage of $80,000 and an increase in the cost of
beverages provided. The decrease from the Sands Regency consists primarily of an
increase in the allocation of costs and expenses to gaming relative to the
provision of complimentary food and beverage.
 
     The increase in maintenance and utilities costs and expenses of $195,000
includes an increase from the Copa Casino of $145,000 and an increase from the
Sands Regency of approximately $50,000. The increase from the Copa Casino is due
to maintenance dredging performed under and around the ship
 
                                       10
<PAGE>   7
 
 ................................................................................
 
totaling approximately $316,000 through June 30, 1997. These costs were greater
than the prior year hurricane preparedness costs and expenses associated with
Hurricane Opal. The increase from the Sands Regency primarily consists of
painting costs of $162,000 which was offset by a decrease in other costs of
approximately $112,000. The increase in painting costs is due to the painting of
the exterior of the Company's Reno facilities and the interior of the five story
parking structure.
 
     The increase in general and administrative costs and expenses of $934,000
consists principally of an increase from the Copa Casino of $628,000 and an
increase from the Sands Regency of $299,000. The increase from the Copa Casino
is attributable to increases in legal costs of $570,000 and in wages and
benefits of $238,000, which were offset by a decrease in advertising and
promotional costs of approximately $176,000. The increase in legal costs is
significantly related to the disputes and legal actions associated with the
State Port of Mississippi at Gulfport as further discussed in Notes 8 and 9 to
the Company's Consolidated Financial Statements.
 
     The increase in general and administrative costs and expenses for the Sands
Regency consists primarily of an increase in advertising and promotional costs
of approximately $389,000 reduced by a decrease in property taxes of $185,000.
 
     The increase in depreciation and amortization expense of $170,000 is
primarily attributable to the Sands Regency and is due to additional
depreciation taken on assets placed in service in fiscal 1997 and 1996. During
such years, significant property and equipment additions and replacements were
undertaken.
 
     The decrease in interest and other income of approximately $654,000
consists primarily of a decrease from the Sands Regency of approximately
$307,000 and a decrease from the Copa Casino of $327,000. The decrease at the
Copa Casino is due to the write-off of the undepreciated cost of a slot
monitoring/accounting system which was replaced in fiscal 1997 and the write-off
of certain capitalized costs for projects no longer deemed viable. The decrease
at the Sands Regency is due to a reduction in gains recognized from the sale of
non-casino properties of approximately $178,000 and a reduction in interest
income. Interest income decreased as a result of a reduction in excess cash held
in investments.
 
     The decrease in interest and other expense of $468,000, in fiscal 1997
compared to fiscal 1996, is primarily due to a principal reduction in an
interest bearing long-term debt obligation of the Sands Regency in October 1996.
 
     As further indicated in the Company's Notes to the Consolidated Financial
Statements, the effective income tax rate differs from the statutory rate, in
the current fiscal year, as a result of one-time differences including tax-free
interest income and deductible tax credits.
 
CAPITAL RESOURCES AND LIQUIDITY
 
     The Company's working capital improved from a deficit of $12.6 million at
June 30, 1997 to a deficit of $337,000 at June 30, 1998. The improvement is
primarily due to the reclassification of the Company's
 
                                       11
<PAGE>   8
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
 ................................................................................
 
long-term debt, due to its bank, which was $10.6 million at June 30, 1998. This
debt was previously classified as current while it was in default and being
restructured. The remaining increase in working capital is significantly due to
cash generated from operating activities.
 
     Cash, cash equivalents and short-term investments increased from $7.9
million at June 30, 1997 to $9.5 million at June 30, 1998. Cash and cash
equivalents provided from operating activities for the years ended June 30,
1998, 1997 and 1996 was $3.0 million, $3.3 million and $5.1 million,
respectively. Although the Company's operations and capital expenditures are
financed primarily from funds generated from operations and borrowings, cash of
approximately $1.2 million was received in fiscal 1998 as a result of the early
repayment of a note receivable which was not otherwise due to be paid until
fiscal 1999. In fiscal 1997, cash was also generated through the issuance of
long-term debt of $498,000 and from the sale of non-hotel/casino properties
located in Reno, Nevada of $475,000. In fiscal 1996, cash was also generated
from the sale of non-hotel/casino properties located in Reno, Nevada of $735,000
and from the net disposal of short-term investments of $1.7 million. The
Company's short-term investments, which generally mature in one year or less,
represent temporarily invested cash funds which are generally readily
convertible to cash.
 
     Uses of cash included the Company's payments of long-term debt of $731,000,
$4.9 million and $3.1 million in fiscal 1998, 1997 and 1996, respectively, and
the payment of dividends in the amount of $675,000 in fiscal 1996. Cash was also
utilized for the acquisition of property and equipment in the amounts of $2.0
million, $3.1 million and $2.6 million in the years ended June 30, 1998, 1997
and 1996, respectively. The property and equipment acquisition amounts, for the
years indicated, represent primarily furniture, fixtures and equipment
replacements and additions.
 
     At June 30, 1998, the Company believes that its cash funds and cash
generated from operations will be sufficient to meet its needs for the next
fiscal year. The Company generally invests its excess cash in securities which
are readily marketable and that are not subject to significant market value
fluctuations.
 
     Future expansion plans for the Reno and Gulfport facilities will be
considered based upon future market conditions, available financial resources
and the need to add hotel rooms and other major facilities. Expansion at the
Gulfport facility, Copa Casino, has also been denied by the Mississippi State
Port Authority at Gulfport and the Mississippi Department of Economic and
Community Development which disapproval is part of litigation as further
discussed below and in Note 9 to the Company's Notes to Consolidated Financial
Statements.
 
     On January 8, 1998, a judgement was rendered in the Chancery Court of
Harrison County, Mississippi lawsuit between Gulfside Casino Partnership ("GCP")
and the Mississippi Department of Economic and Community Development ("MDECD")
and the Mississippi State Port Authority at Gulfport (the "Port"). The Chancery
Court ruled in favor of GCP in denying the Port's efforts to terminate the lease
at the end of the primary term in October 1999. The Court ruled adverse to GCP
in declaring that the Port was not obligated to approve the construction of a
hotel requested by GCP or approve GCP's request to substitute another gaming
vessel for the present gaming vessel. Damages sought by GCP in connection with
such refusals to approve a hotel or the substitution of a gaming vessel, and for
other claims, were also denied.
                                       12
<PAGE>   9
 
 ................................................................................
 
     GCP filed a Notice of Appeal with the Chancery Court to appeal the Chancery
Court's rulings adverse to GCP to the Mississippi Supreme Court. MDECD and the
Port have filed a Notice of Cross-Appeal, claiming that the Chancery Court's
ruling disallowing the termination of the lease was incorrect.
 
     If GCP is unsuccessful and is required to vacate the current leased site in
October 1999, the Company's results of operations could be materially adversely
affected and the Company's investment in the Mississippi gaming operation may
not be recovered. At June 30, 1998, the book value of the Company's net
investment in and advances to (including accrued interest) the Mississippi
gaming operation was approximately $1.8 million.
 
     A judgement has been entered against Gulfside Casino, Inc.("GCI"), as
further discussed in Note 9 to the Company's Notes to Consolidated Financial
Statements, requiring certain payments by GCP to two former shareholders of GCI.
Such payments are to be applied against promissory notes payable and related
accrued interest, aggregating approximately $7.5 million at June 30, 1998, until
such amounts are paid in full. At present, the circumstances requiring such
payments, including excess monies not designated for Gulfside Casino Partnership
operational purposes, have not been met. Further, as a result of filings for
protection under Chapter 11 of the United States Bankruptcy Code by both GCI and
Patrician, Inc. ("Patrician"), management believes that the automatic stay
provisions under the Bankruptcy Code restrict payments by, or for the benefit
of, GCI and Patrician.
 
     Settlement discussions are presently underway between the two former GCI
shareholders, the Company, GCI, Patrician, Artemis, Inc. and GCP. As a result of
such discussions, all court actions have been stayed including in Chancery
Court, U. S. Bankruptcy Court and U. S. District Court. There are no assurances
that a settlement will be reached. In the event that a settlement does not
occur, all court actions will be resumed. The ultimate resolution of this matter
could include a dispossession of a 60% or greater right to receive GCP profits
and surplus.
 
     Inflation has had only a slight impact on the Company's operating results.
Cost and expense increases have generally been passed on to the customers
through moderate price increases, higher table limits and upgraded slot machine
denominations.
 
YEAR 2000
 
     The Year 2000 issue is the result of information technology ("IT") and
non-IT (embedded technology such as microcontrollers) hardware and software
systems and components utilizing two digits, rather than four digits, to define
the year. Date-sensitive hardware and software systems and components may
recognize a date using "00" as the year 1900 rather than the year 2000. This is
generally referred to as the "Year 2000 Problem" or the "Y2K Problem". This
could result in IT and non-IT hardware or software system and component ("Y2K
Systems and Components") failures or miscalculations causing disruptions of
operations and the ability to engage in normal business activities.
 
     The Company has undertaken a study and assessment of its Y2K Systems and
Components in order to determine the impact of the Y2K Problem on such Y2K
Systems and Components. This study and evaluation includes specifically
identifying those Y2K Systems and Components utilized by the Company
 
                                       13
<PAGE>   10
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
 ................................................................................
 
that may be non-Y2K compliant, evaluating necessary corrective actions and
implementing corrective actions, including appropriate testing, so as to
minimize the impact of the Y2K Problem on the Company. Corrective actions may
include software or hardware modifications or the replacement of Y2K Systems and
Components that are non-Y2K compliant. The Company's Y2K study and assessment
will also be utilized with respect to those Y2K Systems and Components that may
be subsequently acquired by the Company with greater reliance given to third
party representations.
 
     The Company has generally completed the identification phase of its study
and evaluation with respect to those Y2K Systems and Components presently
utilized by the Company. The evaluation phase, which includes internal reviews
and testing as well as inquires to third parties supplying or maintaining Y2K
Systems, is also nearing completion. It is anticipated that the evaluation phase
will be finalized in the second quarter of fiscal 1999. The corrective actions
implementation phase is also in progress which is anticipated to be completed by
the fourth quarter of fiscal 1999.
 
     The Company has also undertaken a more limited study and assessment of the
Y2K Problem with respect to third party vendors, suppliers, customers and other
business associates. Recently commenced, such study and assessment is directed
toward third parties that have a material relationship with the Company or may
materially affect the Company's operations such as major customers and
suppliers, financial institution and communications providers. The scope of such
limited study and assessment will generally be limited, by necessity, to
appropriate inquires of such third parties. The Company believes, based on the
wide attention that the Y2K Problem has received, the relative size and
prominence of certain third parties and the preliminary information received, to
date, from select third parties, that the impact of the Y2K Problem on such
third parties will not have a material affect on the Company's operations. The
Company anticipates that the Y2K Problem study and assessment, relative to its
material third party vendors, suppliers, customers and other business
associates, will be completed by the fourth quarter of fiscal 1999.
 
     The Company will utilize both internal and external resources to achieve
Y2K compliance which will include modifying certain Y2K Systems and Components
and replacing others. The Company presently estimates that the remaining costs
to assure material Y2K compliance will be less than $100,000 to be incurred over
the next 18 months. Such estimate is based upon the Company's study and
assessment and is subject to modification as the study and assessment
progresses. There can be no guarantees that this estimate will be achieved and
actual results could materially differ from the estimate. Costs to date have
been immaterial.
 
     The Company believes that the scope and time table of its study and
assessment of Y2K Systems and Components, to achieve Y2K compliance, is adequate
and realistic. Further, the Company believes that those Y2K Systems and
Components with a greater likelihood of adversely impacting the Company's
business and financial performance will be Y2K compliant in a timely manner.
Nevertheless, if one or more of the Company's Y2K Systems and Components fail to
achieve Y2K compliance, or are overlooked, there could be a material adverse
impact on the Company's business operations or financial performance.
Additionally, there can be no assurances that the Y2K Systems and Components of
third parties, which may materially affect the Company, will be timely converted
to assure Y2K compliance.
 
                                       14
<PAGE>   11
 
 ................................................................................
 
     The Company has not formulated a contingency plan in the event one or more
of the Company's, or third party's, Y2K Systems and Components fail to achieve
Y2K compliance. The Company will continue to review the necessity for a
contingency plan as its Y2K study and assessment progresses. The decision to
develop a contingency plan will be based upon an evaluation of potential future
unavoided or unavoidable risks of Y2K noncompliance and the adverse impact to
the Company.
 
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
 
     The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events. Such statements
are identified by the words "anticipates", "believes", "expects", "intends",
"future", or words of similar import. Various important factors that could cause
actual results to differ materially from those in the forward-looking statements
include, without limitation, the following: increased competition in existing
markets or the opening of new gaming jurisdictions; a decline in the public
acceptance of gaming; the limitation, conditioning or suspension of any of the
Company's gaming licenses; adverse outcomes in any of the Company's various
material legal proceedings in Mississippi; increases in or new taxes imposed on
gaming revenues or gaming devices; a finding of unsuitability by regulatory
authorities with respect to the Company's officers, directors or key employees;
loss or retirement of key executives; significant increases in fuel or
transportation prices; adverse economic conditions in the Company's key markets;
severe and unusual weather in the Company's key markets and adverse results of
significant litigation matters.
 
                                       15
<PAGE>   12
 
THE SANDS REGENT
CONSOLIDATED BALANCE SHEETS
 ................................................................................
 
JUNE 30, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 9,203,443    $ 7,643,681
  Short-term investments....................................      250,000        250,000
  Accounts receivable, less allowance for possible losses
     of $72,000 and $119,000................................      549,613        418,018
  Inventories...............................................      624,849        640,023
  Federal income tax refund receivable......................      687,269      1,062,657
  Prepaid expenses and other assets.........................    1,370,792      1,297,392
                                                              -----------    -----------
          Total current assets..............................   12,685,966     11,311,771
                                                              -----------    -----------
Property and equipment:
  Land......................................................    8,092,923      8,092,923
  Buildings, ship and improvements..........................   45,941,607     45,753,424
  Equipment, furniture and fixtures.........................   25,654,167     24,775,831
  Construction in progress..................................      509,247        171,955
                                                              -----------    -----------
                                                               80,197,944     78,794,133
  Less accumulated depreciation and amortization............   34,551,822     31,059,712
                                                              -----------    -----------
       Property and equipment, net..........................   45,646,122     47,734,421
                                                              -----------    -----------
Other assets:
  Deferred federal income tax asset.........................      258,752        422,434
  Note receivable...........................................           --      1,237,156
  Other.....................................................      310,473        347,079
                                                              -----------    -----------
          Total other assets................................      569,225      2,006,669
                                                              -----------    -----------
                                                              $58,901,313    $61,052,861
                                                              ===========    ===========
</TABLE>
 
---------------
See notes to consolidated financial statements.
 
                                       16
<PAGE>   13
 
 ................................................................................
 
<TABLE>
<CAPTION>
                                                                  1998            1997
                                                              ------------    ------------
<S>                                                           <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  1,927,356    $  2,712,531
  Accrued salaries, wages and benefits......................     2,006,096       1,815,841
  Other accrued expenses....................................     2,049,138       1,691,557
  Deferred federal income tax liability.....................       275,541         239,683
  Current maturities of long-term debt......................     6,764,949      17,480,492
                                                              ------------    ------------
          Total current liabilities.........................    13,023,080      23,940,104
Long-term debt..............................................    14,643,172       4,658,474
                                                              ------------    ------------
          Total liabilities.................................    27,666,252      28,598,578
                                                              ------------    ------------
Commitments and contingencies...............................            --              --
Stockholders' equity:
  Preferred stock, $.10 par value, 5,000,000 shares
     authorized, none issued................................            --              --
  Common stock, $.05 par value, 20,000,000 shares
     authorized, 6,898,722 shares issued....................       344,936         344,936
  Additional paid-in capital................................    13,073,803      13,073,803
  Retained earnings.........................................    40,171,157      41,390,379
                                                              ------------    ------------
                                                                53,589,896      54,809,118
  Treasury stock, at cost; 2,400,000 shares.................   (22,354,835)    (22,354,835)
                                                              ------------    ------------
          Total stockholders' equity........................    31,235,061      32,454,283
                                                              ------------    ------------
                                                              $ 58,901,313    $ 61,052,861
                                                              ============    ============
</TABLE>
 
                                       17
<PAGE>   14
 
THE SANDS REGENT
CONSOLIDATED STATEMENTS OF OPERATIONS
 ................................................................................
 
FOR THE YEARS ENDED JUNE 30, 1998, 1997, 1996
 
<TABLE>
<CAPTION>
                                                          1998           1997           1996
                                                       -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Operating revenues:
  Gaming.............................................  $42,971,378    $42,484,575    $43,141,044
  Lodging............................................    8,878,096      8,461,714      9,132,778
  Food and beverage..................................    8,547,651      7,910,110      7,882,377
  Other..............................................    1,687,505      1,545,345      1,692,853
                                                       -----------    -----------    -----------
                                                        62,084,630     60,401,744     61,849,052
  Less complimentary lodging, food and
     beverage included above.........................    2,873,400      2,874,795      2,776,918
                                                       -----------    -----------    -----------
                                                        59,211,230     57,526,949     59,072,134
                                                       -----------    -----------    -----------
Operating costs and expenses:
  Gaming.............................................   22,000,607     21,753,369     20,492,043
  Lodging............................................    4,851,303      4,918,433      5,158,603
  Food and beverage..................................    7,554,325      6,566,859      6,499,231
  Other..............................................      634,543        678,566        665,220
  Maintenance and utilities..........................    5,906,916      5,658,004      5,462,777
  General and administrative.........................   13,977,577     13,901,048     12,967,352
  Depreciation and amortization......................    4,052,727      3,805,522      3,635,219
                                                       -----------    -----------    -----------
                                                        58,977,998     57,281,801     54,880,445
                                                       -----------    -----------    -----------
Income from operations...............................      233,232        245,148      4,191,689
                                                       -----------    -----------    -----------
Other income (deductions):
  Interest and other income..........................      345,936        420,490      1,074,104
  Interest expense...................................   (2,433,271)    (1,926,378)    (2,394,743)
                                                       -----------    -----------    -----------
                                                        (2,087,335)    (1,505,888)    (1,320,639)
                                                       -----------    -----------    -----------
Income (loss) before income taxes....................   (1,854,103)    (1,260,740)     2,871,050
Income tax (provision) benefit.......................      634,881        498,928       (828,688)
                                                       -----------    -----------    -----------
Net income (loss)....................................  $(1,219,222)   $  (761,812)   $ 2,042,362
                                                       ===========    ===========    ===========
Net income (loss) per share:
     Basic...........................................  $      (.27)   $      (.17)   $      0.45
                                                       ===========    ===========    ===========
     Diluted.........................................  $      (.27)   $      (.17)   $      0.45
                                                       ===========    ===========    ===========
Weighted average shares outstanding..................    4,498,722      4,498,722      4,498,722
                                                       ===========    ===========    ===========
</TABLE>
 
---------------
See notes to consolidated financial statements.
 
                                       18
<PAGE>   15
 
THE SANDS REGENT
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
 ................................................................................
 
FOR THE YEARS ENDED JUNE 30, 1998, 1997, 1996
 
<TABLE>
<CAPTION>
                             COMMON STOCK       ADDITIONAL                       TREASURY STOCK
                         --------------------     PAID-IN      RETAINED     ------------------------
                          SHARES      AMOUNT      CAPITAL      EARNINGS      SHARES        AMOUNT         TOTAL
                         ---------   --------   -----------   -----------   ---------   ------------   -----------
<S>                      <C>         <C>        <C>           <C>           <C>         <C>            <C>
Balances, July 1,
  1995.................  6,898,722   $344,936   $13,073,803   $40,784,637   2,400,000   $(22,354,835)  $31,848,541
Net income.............         --         --            --     2,042,362          --             --     2,042,362
Cash dividends
  $(.15 per share).....         --         --            --      (674,808)         --             --      (674,808)
                         ---------   --------   -----------   -----------   ---------   ------------   -----------
Balances, June 30,
  1996.................  6,898,722    344,936    13,073,803    42,152,191   2,400,000    (22,354,835)   33,216,095
Net loss...............         --         --            --      (761,812)         --             --      (761,812)
                         ---------   --------   -----------   -----------   ---------   ------------   -----------
Balances, June 30,
  1997.................  6,898,722    344,936    13,073,803    41,390,379   2,400,000    (22,354,835)   32,454,283
Net loss...............         --         --            --    (1,219,222)         --             --    (1,219,222)
                         ---------   --------   -----------   -----------   ---------   ------------   -----------
BALANCES, JUNE 30,
  1998.................  6,898,722   $344,936   $13,073,803   $40,171,157   2,400,000   $(22,354,835)  $31,235,061
                         =========   ========   ===========   ===========   =========   ============   ===========
</TABLE>
 
---------------
See notes to consolidated financial statements.
 
                                       19
<PAGE>   16
 
THE SANDS REGENT
CONSOLIDATED STATEMENTS OF CASH FLOWS
 ................................................................................
 
FOR THE YEARS ENDED JUNE 30, 1998, 1997, 1996
 
<TABLE>
<CAPTION>
                                                               1998          1997          1996
                                                            -----------   -----------   ----------
<S>                                                         <C>           <C>           <C>
Operating activities:
  Net income (loss).......................................  $(1,219,222)  $  (761,812)  $2,042,362
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
       Depreciation and amortization......................    4,052,727     3,805,522    3,635,219
       (Gain) loss on disposal of property and
          equipment.......................................       73,792        15,341     (482,978)
       (Increase) decrease in accounts receivable.........     (131,595)      (18,000)      77,334
       (Increase) decrease in inventories.................       15,174       149,176      (70,147)
       (Increase) in prepaid expenses and other current
          assets..........................................      (73,400)     (317,837)     (33,181)
       (Increase) decrease in other assets................       26,400       128,420     (494,904)
       Increase (decrease) in accounts payable............     (862,089)      207,268      332,286
       Increase (decrease) in accrued salaries, wages and
          benefits........................................      190,255       128,909     (200,032)
       Increase in other accrued expenses.................      357,581       315,456       59,218
       Change in federal income taxes
          payable/receivable..............................      375,388      (921,288)    (525,579)
       Change in deferred federal income taxes............      199,540       590,688      768,693
       Decrease in other liability........................      --            (18,723)     (37,428)
                                                            -----------   -----------   ----------
Net cash provided by operating activities.................    3,004,551     3,303,120    5,070,863
                                                            -----------   -----------   ----------
Investing activities:
  Purchase of short-term investments......................      --            (50,000)    (583,257)
  Sale and maturity of short-term investments.............      --            --         2,240,760
  Payments received on note receivable....................    1,237,156         7,107        6,635
  Additions to property and equipment.....................   (1,995,750)   (3,105,448)  (2,588,447)
  Proceeds from sale of property, equipment and other
     assets...............................................       44,650       501,490      735,320
                                                            -----------   -----------   ----------
Net cash used in investing activities.....................     (713,944)   (2,646,851)    (188,989)
                                                            -----------   -----------   ----------
</TABLE>
 
---------------
See notes to consolidated financial statements.
 
                                       20
<PAGE>   17
 
 ................................................................................
<TABLE>
<CAPTION>
                                                               1998          1997          1996
                                                            -----------   -----------   ----------
<S>                                                         <C>           <C>           <C>
Financing activities:
  Payment of accounts payable for prior year purchases of
     property and equipment...............................  $   --        $   --        $  (97,893)
  Issuance of long-term debt..............................      --            497,940       --
  Payments on long-term debt..............................     (730,845)   (4,867,508)  (3,108,343)
  Payment of dividends on common stock....................      --            --          (674,808)
                                                            -----------   -----------   ----------
Net cash used in financing activities.....................     (730,845)   (4,369,568)  (3,881,044)
                                                            -----------   -----------   ----------
Increase (decrease) in cash and cash equivalents..........    1,559,762    (3,713,299)   1,000,830
Cash and cash equivalents, beginning of year..............    7,643,681    11,356,980   10,356,150
                                                            -----------   -----------   ----------
Cash and cash equivalents, end of year....................  $ 9,203,443   $ 7,643,681   $11,356,980
                                                            ===========   ===========   ==========
Supplemental cash flow information:
  Property and equipment acquired by accounts payable.....  $    76,914   $   223,977   $   --
                                                            ===========   ===========   ==========
  Property and equipment acquired by long-term debt.......  $   --        $   903,227   $   --
                                                            ===========   ===========   ==========
  Property and equipment acquired by conversion of other
     assets...............................................  $   --        $   400,000   $   --
                                                            ===========   ===========   ==========
  Interest paid, net of amount capitalized................  $ 2,026,378   $ 1,594,085   $2,022,546
                                                            ===========   ===========   ==========
  Federal income taxes paid...............................  $   --        $   --        $1,075,000
                                                            ===========   ===========   ==========
</TABLE>
 
                                       21
<PAGE>   18
 
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 ................................................................................
 
FOR THE YEARS ENDED JUNE 30, 1998, 1997, 1996
 
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a) Principles of consolidation and basis of presentation
 
     The consolidated financial statements include the accounts of The Sands
Regent and its wholly-owned subsidiaries Zante, Inc. ("Zante"), Patrician, Inc.
("Patrician"), Artemis, Inc. ("Artemis") and Gulfside Casino, Inc. ("GCI"), and
Gulfside Casino Partnership ("GCP") (together the "Company"). Patrician, GCI and
Artemis are the sole partners in GCP.
 
     All significant intercompany balances and transactions have been eliminated
in consolidation.
 
(b) Nature of operations
 
     The Company owns and operates The Sands Regency Hotel/Casino in Reno,
Nevada and the Copa Casino in Gulfport, Mississippi. The Company's operations
are conducted in the hotel-casino industry and include gaming activities, hotel,
restaurant and other related support facilities. Because of the integrated
nature of these operations, the Company is considered to be engaged in one
industry segment.
 
     Casino operations are subject to extensive regulation in the States of
Nevada and Mississippi by the respective state Gaming Authorities. Management
believes that the Company's procedures for supervising casino operations and
recording casino and other revenues comply in all material respects with the
applicable regulations.
 
(c) Operating revenues
 
     In accordance with industry practice, the Company recognizes as casino
revenue the net win from gaming activities, which is the difference between
gaming wins and losses.
 
     Lodging, food and beverage furnished without charge to customers are
included in gross revenues at a value which approximates retail and then
deducted as complimentary services to arrive at net revenues. The cost of such
complimentary services is charged to gaming operating costs and expenses.
 
     The estimated costs of providing the complimentary services are as follows:
 
<TABLE>
<CAPTION>
                                                       1998         1997         1996
                                                    ----------   ----------   ----------
<S>                                                 <C>          <C>          <C>
Hotel.............................................  $  442,875   $  445,572   $  380,869
  Food and beverage...............................   2,202,749    2,221,535    2,073,504
  Other...........................................      55,192       51,843       39,112
                                                    ----------   ----------   ----------
                                                    $2,700,816   $2,718,950   $2,493,485
                                                    ==========   ==========   ==========
</TABLE>
 
     Other operating revenue is comprised of hotel/casino ancillary services.
Related costs and expenses are included in other operating costs and expenses.
 
                                       22
<PAGE>   19
 
 ................................................................................
 
(d) Cash and cash equivalents
 
     Cash equivalents include all short-term investments with an original
maturity of three months or less. Such investments, carried at cost which
approximates market, are readily marketable with no significant investment in
any individual issuer.
 
(e) Short-term investments
 
     The Company accounts for its short-term investments in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
115 -- "Accounting for Certain Investments in Debt and Equity Securities". This
statement requires that unrealized gains and losses on securities defined as
"available-for-sale" be excluded from income and be reported in a separate
component of stockholders' equity. Securities that the Company has the ability
and positive intent to hold to maturity are classified as "held-to-maturity" and
are reported at the lower of aggregate cost or market. As of June 30, 1998, the
Company's short-term investments were not subject to the provisions of SFAS No.
115.
 
(f) Inventories
 
     Inventories consist primarily of food, beverage and operating supplies and
are stated at the lower of cost (determined on an average cost basis) or market.
 
(g) Property and equipment
 
     Property and equipment are stated at cost, net of impairment write-downs to
estimated net realizable values. Depreciation and amortization is computed
primarily by the straight line method over the estimated useful lives of the
assets. These lives range between 5 to 35 years for buildings, ship and
improvements and 5 to 20 years for equipment, furniture and fixtures. Assets
sold or otherwise disposed of are removed from the property accounts and the
resulting gains or losses are included in income.
 
(h) Impairment of long-lived assets
 
     The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable.
 
(i) Income taxes
 
     Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109 -- "Accounting for
Income Taxes". In accordance with SFAS No. 109, the asset and liability method
of accounting for income taxes is utilized whereby deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under
 
                                       23
<PAGE>   20
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
 
(j) Fair value of financial instruments
 
     The Company calculates the fair value of financial instruments and includes
this additional information in the Company's Notes to Consolidated Financial
Statements when the fair value is different than the book value of those
financial instruments. When fair value is equal to book value, no additional
disclosure is made. Fair value is determined using quoted market prices whenever
available. When quoted market prices are not available, the Company uses
alternative valuation techniques such as calculating the present value of
estimated future cash flows utilizing discount rates commensurate with the risks
involved. It is estimated that the carrying amounts of the Company's financial
instruments approximate fair value at June 30, 1998.
 
(k) Concentrations of credit risk
 
     Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and short-term investments. The Company maintains cash in bank accounts with
balances, at times, in excess of of Federally insured limits. The Company has
not experienced any losses in such accounts.
 
(l) Recent Pronouncements of the Financial Accounting Standards Board
     ("FASB")
 
     On June 30, 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130 entitled "Reporting Comprehensive Income". This
statement requires companies to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. Such
pronouncement is effective for financial statements issued for years beginning
after December 15, 1997. Management does not believe this new SFAS will have a
material impact on the financial statements of the Company.
 
     On June 30, 1997, the FASB issued SFAS No. 131 entitled "Disclosures About
Segments of an Enterprise and Related Information". This statement redefines how
operating segments are determined and requires qualitative disclosure of certain
financial and descriptive information about a company's operating segments and
is effective for fiscal years beginning after December 15, 1997. Management does
not believe this new SFAS will have a material impact on the financial
statements of the Company.
 
     On June 30, 1998, the FASB issued SFAS No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activies". This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities and is effective for fiscal years beginning after June 15, 1999.
Management does not believe this new SFAS will have a material impact on the
financial statements of the Company.
 
                                       24
<PAGE>   21
 
 ................................................................................
 
(m) Use of estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
(n) Reclassifications
 
     Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
 
NOTE 2 -- SHORT-TERM INVESTMENTS
 
     Short-term investments consist of certificates of deposit which are carried
at cost, which approximates market.
 
NOTE 3 -- OPERATION OF GULFSIDE CASINO PARTNERSHIP
 
     On a stand alone basis, GCP dba Copa Casino incurred a net loss of $2.4
million in the year ended June 30, 1998 and a net loss of $281,000 in the year
ended June 30, 1997. As of June 30, 1998, GCP's total liabilities exceeded its
total assets by $15.4 million. Such excess of total liabilities over total
assets results from advances by the Company to GCP, aggregating approximately
$24.8 million including accrued interest, which are reflected as liabilities of
GCP.
 
     The primary term of GCP's lease with the Mississippi State Port Authority
expires in October 1999. Based upon a January 1998 ruling in a lawsuit between
GCP and the Mississippi State Port Authority, the Port Authority's efforts to
cancel and terminate the lease at the end of such primary term was found not to
be justifiable. GCP has notified the Port Authority that it is exercising its
option to renew the lease upon the completion of the primary term. The Port
Authority, to date, has not accepted such notification of renewal. In the same
lawsuit, the court also ruled that the Port Authority does not have an
obligation to approve GCP's requests to substitute a barge for its present
gaming vessel and to construct land based facilities, including a hotel.
Management of GCP believes that in order to be ultimately successful, it must
have a stable, long-term lease arrangement and be allowed to develop its
leasehold site to provide adequate gaming, lodging and entertainment facilities.
As discussed in Notes 8 and 9, such issues are the subject of an appeal of the
court rulings in the aforementioned lawsuit between the GCP and the Mississippi
State Port Authority.
 
                                       25
<PAGE>   22
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
NOTE 4 -- LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                      June 30,
                                                              -------------------------
                                                                 1998          1997
                                                              -----------   -----------
<S>                                                           <C>           <C>
Bank term loan; interest at prime plus 1.5% through January
  31, 1999, subject to a maximum of 11% per annum, and at
  prime plus 2.5% from February 1, 1999 to maturity in
  January 2000, subject to a maximum of 14% per annum; at
  June 30, 1998, the interest rate was 10% per annum;
  monthly principal and interest payments of $112,000
  through January 31, 1999 and the greater of $120,000 or
  the monthly accrued interest from February 1, 1999 to
  maturity when the remaining balance is due in full;
  semi-annual principal payments due in the amount of
  average cash and cash equivalents in excess of $5.5
  million for June and December of each year; secured by
  deeds of trust on all real property and otherwise
  collateralized by all furniture, fixtures, equipment and
  all other properties of the Company.......................  $10,849,143   $10,975,000
Capital lease obligation; imputed interest at 8.6%; payable
  in monthly principal and interest payments in the amount
  of $26,794 over 60 months at which time a one dollar
  purchase option is exercisable; assets under the capital
  lease, with an original cost of $1,481,000 and accumulated
  depreciation of approximately $331,000 at June 30, 1998,
  are included in property and equipment and are being
  depreciated over their estimated useful lives.............      980,767     1,259,600
Contract payable to International Game Technology ("IGT");
  principal and interest payments of $55,000, including
  interest at 10% per annum, due monthly commencing
  September 1, 1996 through August 1, 1999 at which time the
  remaining unpaid principal balance of $3.2 million is due
  in full; secured by certain gaming equipment..............    3,537,143     3,831,186
Notes payable by GCI to former minority stockholders of GCI
  as issued pursuant to a settlement agreement in August
  1993; interest at 6% per annum and unpaid since May 1994;
  secured by GCI's ownership interest in GCP which is .006%
  at June 30, 1998; principal payments past due since 1994;
  in accordance with a Chancery Court judgement, as further
  discussed in Note 9, the entire principal balance, is due
  in full and is included in current maturities at June 30,
  1998 and 1997.............................................    6,000,000     6,000,000
Other.......................................................       41,068        73,180
                                                              -----------   -----------
                                                               21,408,121    22,138,966
Less current maturities.....................................    6,764,949    17,480,492
                                                              -----------   -----------
Long-term portion...........................................  $14,643,172   $ 4,658,474
                                                              ===========   ===========
</TABLE>
 
     The bank term loan was restructured, effective January 31, 1998, to
eliminate prior events of default as a result of the Company's noncompliance
with certain financial covenants, which have since been modified or eliminated,
and the Company's past failure to make certain principal payments in accordance
with the prior loan agreement. The former bank term and revolving line of credit
loan provided for monthly
 
                                       26
<PAGE>   23
 
 ................................................................................
 
interest payments and semi-annual principal payments. The Company had incurred a
default interest rate of prime plus 3%, effective July 1, 1997, on such former
loan obligation.
 
     The restructured bank loan is covered under a loan agreement which requires
the Company to comply with certain financial covenants, restricts future
encumbrances and requires certain existing major shareholders of the Company to
continue to hold a significant ownership interest in the Company and to be
involved in the management of the Company. The financial covenants include
restrictions on investment activities and the sale or disposition of a
significant portion of the Company's assets and also require minimum capital
expenditures in each fiscal year, subject to a maximum per fiscal year. The
financial covenants additionally require that a minimum EBITDA (earnings before
interest expense, taxes, depreciation and amortization) be maintained and
restrict advances by Zante to the Company. The loan agreement also requires that
no shareholder, other than the existing major shareholders, may own 20% or more
of the issued and outstanding voting stock of the Company.
 
     Long-term debt at June 30, 1998 is payable as follows:
 
<TABLE>
<CAPTION>
                        YEAR ENDING
                          JUNE 30,                              AMOUNT
                        -----------                           -----------
<S>                                                           <C>
  1999......................................................  $ 6,764,949
  2000......................................................   14,152,102
  2001......................................................      285,346
  2002......................................................      205,724
                                                              -----------
                                                              $21,408,121
                                                              ===========
</TABLE>
 
     The Company entered into an interest rate swap agreement, effective April
1, 1994, to fix the variable interest rate due under the original,
pre-restructured, bank term and revolving line of credit loan. Under such
agreement, the Company pays the bank interest at a fixed rate of 6.25% per annum
on the notional amount and the bank pays the Company interest at a variable rate
(currently 5.75%) based on the London Interbank Offer Rate ("LIBOR") on the
notional amount. The notional amount of the swap coincides with the original
principal reduction schedule of the superceded bank term and revolving line of
credit loan (currently $7.3 million) which will be fully amortized in April
2000. The notional amount may be reduced by the Company, in whole or in part,
upon notice by the Company to the bank and a fair market settlement of such
reduction between the parties. The fair value of the interest rate swap
agreement is a liability of approximately $36,000 at June 30, 1998 which was
based on estimated termination values. The interest rate swap, which is also
secured by a deed of trust and all properties of the Company, is subject to
market risk as interest rates fluctuate.
 
     Of the total interest expense of $2,433,000, $1,926,000 and $2,395,000 in
1998, 1997 and 1996, respectively, none, $97,000 and none has been capitalized
into construction costs.
 
                                       27
<PAGE>   24
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
NOTE 5 -- STOCK OPTION AND STOCK INCENTIVE PLANS
 
     The Company's amended and restated stock option plan provides for the
granting of incentive stock options as well as non-qualified stock options to
executives and key employees. The plan presently permits for the grant of
options covering a maximum of 800,000 shares of the Company's common stock. The
Company has reserved shares to cover these requirements. The plan will continue
until the year 2007, unless terminated earlier. Under the plan, the per share
exercise price of an option cannot be less than 100% of the fair market value of
the shares at date of grant or 110% of the fair market value in the case of
incentive stock options granted to stockholders owning more than 10% of the
outstanding common shares. The options generally vest 20% to 25% each year after
grant. In December 1997, The Board of Directors of the Company authorized the
repricing of certain incentive stock options. The effect of the repricing
resulted in the cancellation and reissuance of 318,000 options with a price
equal to the market value of the common stock at the date of repricing. The
options granted to replace the cancelled options that were previously vested
will vest on the first anniversary date of the repricing. The options granted to
replace the unvested cancelled options will vest 25% each year commencing on the
first anniversary date of the repricing.
 
     The following table summarizes activity of the Company's stock option plan
which includes only incentive stock option grants:
 
<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                                              NUMBER OF      AVERAGE
                                                               OPTIONS    EXERCISE PRICE
                                                              ---------   --------------
<S>                                                           <C>         <C>
Options Outstanding
  Outstanding, July 1, 1996.................................   334,000        $ 4.71
                                                              --------        ------
  Outstanding, June 30, 1997................................   334,000          4.71
     Options granted........................................   394,000          1.83
     Options cancelled......................................  (318,000)        (4.77)
                                                              --------        ------
  OUTSTANDING, JUNE 30, 1998................................   410,000        $ 1.90
                                                              ========        ======
Options Exercisable
  At June 30, 1996..........................................    60,000        $ 6.25
                                                              ========        ======
  At June 30, 1997..........................................   122,000        $ 5.78
                                                              ========        ======
  AT JUNE 30, 1998..........................................    16,000        $ 3.50
                                                              ========        ======
</TABLE>
 
     At June 30, 1998, options to purchase 235,864 shares were available for
grant under the stock option plan.
 
                                       28
<PAGE>   25
 
 ................................................................................
 
     The following table sets forth certain information with respect to
incentive stock option grants outstanding at June 30, 1998:
 
<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING
                                      ------------------------------------    OPTIONS EXERCISABLE
                                                     WEIGHTED                ----------------------
                                                      AVERAGE     WEIGHTED                 WEIGHTED
              RANGE OF                               REMAINING    AVERAGE                  AVERAGE
              EXERCISE                  NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
               PRICES                 OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
              --------                -----------   -----------   --------   -----------   --------
<S>                                   <C>           <C>           <C>        <C>           <C>
$1.81 to $2.25......................    394,000      9.5 years     $1.83        --          $--
$3.50 to $3.50......................     16,000       .5 years      3.50       16,000        3.50
                                        -------     ----------     -----       ------       -----
$1.81 to $3.50......................    410,000      9.1 years     $1.90       16,000       $3.50
                                        =======     ==========     =====       ======       =====
</TABLE>
 
     In fiscal 1998, the Board of Directors approved a non-qualified stock
option grant to a newly appointed outside Director to purchase 10,000 shares of
common stock. Granted at fair market value, the option vests one year from the
date of grant. Such grant was under a separate Non-Qualified Stock Option
Agreement since the Company's Stock Option Plan does not presently provide for
the granting of options to outside directors. As further discussed below, the
Board of Directors has approved an amendment to the Company's Stock Option Plan,
subject to shareholder approval, to provide for the granting of non-qualified
stock options to outside directors.
 
     In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123- "Accounting for Awards of
Stock-Based Compensation" which was issued by the Financial Accounting Standards
Board in October 1995 and is effective for years beginning after December 15,
1995. This statement establishes financial accounting and reporting standards
for stock-based employee compensation plans and for transactions where equity
securities are issued for goods and services. It defines a fair value based
method of accounting for an employee stock option, or similar equity instrument,
and encourages such method of accounting for all employee stock compensation
plans.
 
     As provided by SFAS No. 123, the Company has elected to continue to follow
the provisions of APB Opinion No. 25- "Accounting for Stock Issued to Employees"
which measures compensation costs for employee stock compensation plans using
the intrinsic value based method of accounting. Accordingly, no compensation
cost has been recognized.
 
     The following table indicates the Company's net income and net income per
share assuming that compensation costs for the Company's stock option plan
grants were determined using the fair value based method prescribed by SFAS 123.
The table also discloses the weighted average assumptions used in estimating the
fair value of each option grant on the date of the grant, using the
Black-Scholes option
 
                                       29
<PAGE>   26
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
pricing model, and the estimated weighted average fair value of the options
granted. The model assumes no expected future dividend payments on the Company's
common stock for the options granted:
 
<TABLE>
<CAPTION>
                                                                   June 30,
                                                     ------------------------------------
                                                        1998         1997         1996
                                                     -----------   ---------   ----------
<S>                                                  <C>           <C>         <C>
Net income (loss):
  As reported......................................  $(1,219,222)  $(761,812)  $2,042,362
  Pro forma........................................   (1,322,397)   (888,768)   2,017,065
Net income (loss) per share:
  As reported, Basic and diluted...................       $(0.27)     $(0.17)       $0.45
  Pro forma, Basic and diluted.....................        (0.29)      (0.20)        0.45
Weighted average assumptions:
  Expected stock price volatility..................        100.0%         --         80.0%
  Risk-free interest rate..........................          6.3%         --          6.1%
  Expected option lives............................    2.3 YEARS          --    3.6 years
  Estimated fair value of options granted..........        $1.06          --        $2.03
</TABLE>
 
     Because the accounting method prescribed by SFAS 123 has not been applied
to options granted prior to July 1, 1995, the compensation costs reflected in
the above proforma amounts may not be representative of that to be expected in
future years.
 
     The Company's Board of Directors, in order to attract and retain qualified
independent directors, has approved an amendment to the Company's Stock Option
Plan to provide for the grant of non-qualified stock options to independent,
non-employee, directors. Such amendment provides for the automatic grant of
options to purchase 7,500 shares to an independent director on each annual
meeting date that such director continues to service. Further, the Board of
Directors may grant an option to purchase up to 25,000 shares upon the
appointment of a new director. All options granted to independent directors have
an exercise price equal to fair market value of the common stock on the date of
grant, and vest in full in one year. The amendment also provides for additional
alternative methods of payment to the Company upon the exercise of stock options
by an employee or independent director as allowed under rules governing the
operation of stock option plans. Such amendment is subject to shareholder
approval which is being sought at the November 1998 annual meeting of
shareholders.
 
NOTE 6 -- FEDERAL INCOME TAXES
 
     The Company's income tax (provision) benefit consists of the following:
 
<TABLE>
<CAPTION>
                                                       1998         1997        1996
                                                     ---------   ----------   ---------
<S>                                                  <C>         <C>          <C>
Current............................................  $ 834,421   $1,089,616   $ (59,995)
  Deferred.........................................   (199,540)    (590,688)   (768,693)
                                                     ---------   ----------   ---------
                                                     $ 634,881   $  498,928   $(828,688)
                                                     =========   ==========   =========
</TABLE>
 
                                       30
<PAGE>   27
 
 ................................................................................
 
     The Company's effective tax rate differs from the federal statutory rate as
follows:
 
<TABLE>
<CAPTION>
                                                              1998      1997      1996
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Federal statutory tax rate..................................  (35.0)%   (35.0)%    35.0%
  Surtax exemption..........................................    1.0       1.0      (1.0)
  Tax effect of tax-free interest income....................   (0.2)     (3.0)     (2.5)
  General business credits..................................   (2.0)     (2.3)     (2.3)
  Other.....................................................    2.0      (0.3)     (0.3)
                                                              -----     -----     -----
                                                              (34.2)%   (39.6)%    28.9%
                                                              =====     =====     =====
</TABLE>
 
     The components of the Company's net deferred federal income tax asset
(liability) are as follows at June 30:
 
<TABLE>
<CAPTION>
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
Deferred tax assets:
     License acquisition costs..............................  $ 1,419,009    $ 1,558,015
     Pre-opening costs......................................       43,046        301,330
     Alternative minimum tax credit.........................    1,670,777        980,725
     Accrued expenses.......................................      147,993        160,681
     Other..................................................       38,650         45,636
                                                              -----------    -----------
                                                                3,319,475      3,046,387
                                                              -----------    -----------
  Deferred tax liabilities:
     Property and equipment.................................   (2,859,429)    (2,404,650)
     Prepaid expenses.......................................     (455,725)      (441,113)
     Other..................................................      (21,110)       (17,873)
                                                              -----------    -----------
                                                               (3,336,264)    (2,863,636)
                                                              -----------    -----------
       Net deferred federal income tax asset (liability)....  $   (16,789)   $   182,751
                                                              ===========    ===========
</TABLE>
 
     The Company has a March 31 tax year-end.
 
NOTE 7 -- EARNINGS PER SHARE
 
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per Share" which
became effective for periods ending after December 15, 1997. SFAS 128 replaces
earnings per share as previously reported with "basic", or undiluted earnings
per share, and "diluted" earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding during the period, while diluted earnings per share reflects the
additional dilution for all potentially dilutive securities, such as stock
options.
 
                                       31
<PAGE>   28
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
     The Company adopted the provisions of SFAS 128 in its fiscal year ended
June 30, 1998 and the impact has been considered with respect to all previously
reported and presented earnings per share amounts. For each of the years ended
June 30, 1998, 1997 and 1996, there were no outstanding convertible securities
that would result in dilution of basic earnings per common share.
 
NOTE 8 -- LEASE COMMITMENTS
 
     GCP leases its dockside facilities from the Mississippi Department of
Economic and Community Development ("MDECD") and the Mississippi State Port
Authority in Gulfport, Mississippi (the "Port"). The lease provides for an
initial lease term of seven years commencing in October 1992. The lease also
provides for three extension options of five years each and a final extension
option of ten years. The final ten year extension option may only be exercised
if the GCP constructs, within the city limits of Gulfport, Mississippi, a
minimum of 350 hotel/motel rooms during the first ten years of the lease
agreement.
 
     The lease provides for a monthly base rent plus 5% of gross annual gaming
revenue in excess of $25 million. Additionally, the lease requires monthly
payments equal to 3% of non-gaming revenue. The base rent, which is presently
$42,542 per month, shall be adjusted, annually, in accordance with changes in
the consumer price index.
 
     In January 1998, the Chancery Court in Harrison County Mississippi ruled,
in a lawsuit between the GCP and MDECD and the Port, that the Port's July 1996
efforts to terminate and cancel the lease at the end of the primary term in
October 1999 were inappropriate and void. The Court found that the Port did not
have sufficient and legitimate needs to accommodate a purported expansion of
Port facilities to warrant the cancelation of the lease as further discussed in
Note 9.
 
     Total rental expense charged to operations was $530,000, $523,000 and
$538,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
 
     Future minimum payments under the remaining noncancellable term of the
operating lease are as follows:
 
<TABLE>
<CAPTION>
                        YEAR ENDING
                          JUNE 30,                             AMOUNT
                        -----------                           --------
<S>                                                           <C>
  1999......................................................  $510,501
  2000......................................................   127,625
                                                              --------
                                                              $638,126
                                                              ========
</TABLE>
 
NOTE 9 -- CONTINGENCIES
 
  GCI matter
 
     In December 1994, a lawsuit was filed in Mississippi Chancery Court against
GCI because of GCI's failure to make payments on promissory note obligations of
GCI to two of its former shareholders. These note obligations, in the aggregate
amount of $6 million, plus interest of $1.5 million at June 30, 1998, were
secured by a pledge of GCI's partnership interest in GCP and are reflected, upon
consolidation, as
 
                                       32
<PAGE>   29
 
 ................................................................................
 
current liabilities in the Company's Consolidated Balance Sheets at June 30,
1998 and 1997. These promissory notes were owed by GCI when The Sands Regent
purchased GCI in February 1994 and have not been assumed or guaranteed by The
Sands Regent.
 
     In addition to demanding payment of the $6 million plus interest, for which
a partial summary judgement was entered, the lawsuit also demanded the
appointment of a receiver to take possession of and sell GCI's ownership
interest in GCP and sought attorney fees of $54,000 which were awarded in
January 1997. In May 1995, GCP and Patrician were joined as necessary parties to
the lawsuit.
 
     In July 1996, following a court hearing, the Chancery Court rendered a
judgement that the reallocation of GCI's interest in the partnership may be
appropriate as to the GCP partners but had no effect on the lien position of the
two former GCI shareholders. This ruling related to the reduction in GCI's
ownership interest in GCP from an original 60% interest to a .006% interest as a
result of an amendment to the partnership agreement and a partner capital call.
The amendment to the GCP partnership agreement was entered in April 1994 whereby
the profit and loss allocation percentages were amended from 40% to 80% for
Patrician and from 60% to 20% for GCI. Such amendment was entered into to cure a
monetary partnership breach by GCI which occurred prior to the Company's
acquisition of GCI and to properly reflect the relative financial risks of
Patrician and GCI. The partner capital call occurred in January 1996 and was for
the purpose of improving the partnership capital structure. Patrician and
Artemis complied with the capital call; however, GCI failed to comply. As a
result, and in accordance with the partnership agreement, GCI's interest in GCP
was reduced from 20% to .006%.
 
     The effect of the July 1996 judgement was that the two former shareholders
of GCI are secured by GCI's pre-amendment, pre-capital call 60% ownership
interest in GCP. The fact that the partnership amendments which provided or
allowed for the change in partner ownership interests were found to be valid in
a June 1996 arbitration award between Patrician and GCI was ruled as
inconsequential relative to the two former shareholders. GCI subsequently filed
a motion for reconsideration of the judgement with the Chancery Court, which was
unsuccessful.
 
     In January 1997, the Chancery Court issued an amended judgement which
reaffirmed the prior judgements and reserved ruling on the necessity to appoint
a receiver. The ruling also charged GCP, under Mississippi law, with the
obligation to pay the GCI judgement amounts to the two former shareholders and
to pay the two former shareholders 60% of all monies not designated for normal
operational expenses on a monthly basis, commencing February 1, 1997, until the
judgements due the two former shareholders were satisfied. GCP was also
required to provide a monthly accounting of income and operating expenses to the
two former shareholders.
 
     To date, the required monthly reports have been made and report that no
monies are available for distribution by GCP and that no monies have been
distributed by GCP. Such reports were discontinued, by agreement, in March 1998
in connection with the settlement negotiations discussed below.
 
     GCI, GCP and Patrician, as joined parties to such lawsuit, have filed an
appeal with the Mississippi Supreme Court because it is the Company's belief
that the Chancery Court's rulings are incorrect and not supported by the facts
or the law. A hearing was scheduled for July 1998 and it was agreed, immediately
 
                                       33
<PAGE>   30
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
before such hearing was to take place, that briefs are to be submitted in lieu
of a hearing because of ongoing settlement negotiations discussed below.
 
     On January 31, 1997, GCI filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. A Disclosure Statement with related Plan
of Reorganization has been filed. A hearing for confirmation has not been
scheduled.
 
     In February 1997, the two former GCI shareholders each filed separate
lawsuits in U. S. District Court for the Southern District of Mississippi,
Biloxi Division, against The Sands Regent and certain officers and directors of
The Sands Regent and GCI. Such lawsuits allege breach of various common law
duties and contractual interference by the defendants and seek compensatory and
punitive damages. Such actions are presently stayed pending settlement
negotiations described below. Nonetheless, management, and the individual
defendants, believe these legal actions to be without merit and will vigorously
defend them.
 
     In October 1997, the U. S. Bankruptcy Court for the Southern District of
Mississippi ruled that GCI's ownership interest in GCP was .006% and that the
automatic stay provisions of the Bankruptcy Code only applied as to this .006%
interest. The Court further held that a May 1997 partnership amendment to
restore GCI's ownership interest in the Company to the original 60%, undertaken
in order to resolve the GCI ownership/security dilemma created by the Chancery
Court judgement and to facilitate a resolution of the Chancery Court proceeding
by and through the Chapter 11 reorganization of GCI, was ineffective and void.
 
     In November 1997, as a result of this ruling, Patrician, holder of the
98.744% interest in GCP, also filed a petition under Chapter 11 of the
Bankruptcy Code. This action was deemed necessary in order to protect the
59.994% ownership interest in GCP which was initially owned by GCI and which is
now part of the interest held by Patrician. A Disclosure Statement and Plan of
Reorganization for Patrician have not yet been filed.
 
     Settlement negotiations are presently underway between the two former
shareholders, the Company, GCI, Patrician, Artemis and GCP. As a result of such
discussions, all court actions have been stayed including in Chancery Court, U.
S. Bankruptcy Court and U. S. District Court. There are no assurances that a
settlement will be reached. In the event that a settlement does not occur, all
court actions will be resumed. The ultimate resolution of this matter could
include a dispossession of a 60% or greater right to receive GCP profits and
surplus.
 
  Port matter
 
     On January 8, 1998, a judgement was rendered in the Chancery Court of
Harrison County, Mississippi lawsuit between GCP and the MDECD and Port. The
Chancery Court ruled in favor of GCP in denying the Port's efforts to terminate
the lease at the end of the primary term in October 1999. The Court ruled
adverse to GCP in declaring that the Port was not obligated to approve the
construction of a hotel requested by GCP or approve GCP's request to substitute
another gaming vessel for the present gaming vessel. Damages sought by GCP in
connection with such refusals to approve a hotel or the substitution of a gaming
vessel, and for other claims, were also denied.
 
                                       34
<PAGE>   31
 
 ................................................................................
 
     On February 6, 1998, GCP filed a Notice of Appeal with the Chancery Court
to appeal to the Missisippi Supreme Court certain of the Court's rulings adverse
to GCP. Specifically, GCP's appeal included appealing the Court's rulings
denying the Port's obligations to reasonably approve a hotel and the
substitution of a gaming vessel and the Court's ruling denying damages. MDECD
and the Port have filed a Notice of Cross-Appeal, claiming that the Chancery
Court's ruling disallowing the termination of the lease was incorrect.
Appropriate appeal briefs are to be filed with the Mississippi Supreme Court in
accordance with a briefing schedule which has not been determined.
 
     Management believes that the outcome of this appeal is not presently
predictable or subject to reasonable estimation. At June 30, 1998, the book
value of the Company's net investment in and advances to (including accrued
interest) the Mississippi gaming operation was approximately $1.8 million.
 
  Other
 
     GCP is a defendant in a wrongful termination action, seeking damages in the
amount of $650,000, which claims violation of the Family Medical Leave Act.
Management believes the lawsuit is without merit and will vigorously defend
against it. The likelihood of an unfavorable outcome is uncertain and a
potential range of losses is not subject to reasonable estimation. Therefore, no
provision for a liability has been made in the Company's consolidated financial
statements.
 
     GCP has been notified by a governmental agency that it has failed to timely
file certain currency transaction reports required by the U.S. Bank Secrecy Act
for the period September 1993 to December 1994. Management believes that the
resolution of this matter will not have a material effect on the financial
position or results of operations of the Company. Accordingly, no provision for
a liability has been made in the Company's consolidated financial statements.
 
     In addition to the above, the Company is party to other legal actions,
proceedings and pending claims arising in the normal conduct of business.
Management believes that the final outcomes of these matters will not have a
material adverse effect upon the Company's financial position and results of
operations.
 
                                       35
<PAGE>   32
THE SANDS REGENT
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
 ................................................................................
 
NOTE 10 -- CONDENSED QUARTERLY RESULTS (UNAUDITED)
 
<TABLE>
<CAPTION>
                                              FIRST        SECOND         THIRD        FOURTH
                                             QUARTER       QUARTER       QUARTER       QUARTER
                                           -----------   -----------   -----------   -----------
<S>                                        <C>           <C>           <C>           <C>
1998
  Operating revenues.....................  $15,481,926   $13,369,598   $14,316,046   $16,043,660
  Income (loss) from operations..........      479,429    (1,436,957)      (48,833)    1,239,593
  Net income (loss)......................       28,509    (1,254,550)     (378,923)      385,742
  Net income (loss) per share:
     Basic...............................        $0.01        $(0.28)       $(0.08)        $0.09
     Diluted.............................        $0.01        $(0.28)       $(0.08)        $0.09
 
1997
  Operating revenues.....................  $15,411,664   $13,198,041   $13,475,698   $15,441,546
  Income (loss) from operations..........      837,879    (1,322,500)     (196,830)      926,599
  Net income (loss)......................      303,908      (808,794)     (371,069)      114,143
  Net income (loss) per share:
     Basic...............................        $0.07        $(0.18)       $(0.08)        $0.02
     Diluted.............................        $0.07        $(0.18)       $(0.08)        $0.02
</TABLE>
 
                                       36
<PAGE>   33
 
INDEPENDENT AUDITORS' REPORT
 ................................................................................
 
To the Board of Directors and
Shareholders of The Sands Regent:
 
     We have audited the accompanying consolidated balance sheets of The Sands
Regent and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 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, such consolidated financial statements present fairly, in
all material respects, the financial position of The Sands Regent and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
 
     As discussed in Note 9 to the consolidated financial statements, the
primary term of Gulfside Casino Partnership's site lease expires in October
1999. Gulfside Casino Partnership's rights to renew the lease and to develop the
leasehold site has been litigated and is presently under appeal. The Company
believes that in order for Gulfside Casino Partnership to be ultimately
successful, it must have a stable, long-term lease arrangement and be allowed to
develop its leasehold site to provide adequate gaming, lodging and entertainment
facilities. Also, as discussed in Note 9, settlement discussions are presently
underway between the Company's subsidiaries (Gulfside Casino, Inc., Gulfside
Casino Partnership, and Patrician, Inc.) and two former shareholders of Gulfside
Casino, Inc.
 
/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP
Reno, Nevada
September 2, 1998
 
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<PAGE>   34
 
 ................................................................................
 
CORPORATE OFFICERS
Katherene Latham
  Chairman of the Board
 
Pete Cladianos, Jr.
  Vice Chairman of the Board
 
Ferenc B. Szony
  President and Chief Executive Officer
 
David R. Wood
  Executive Vice President,
  Treasurer and Chief Financial Officer
 
Pete Cladianos III
  Executive Vice President and Secretary
 
BOARD OF DIRECTORS
Katherene Latham
  Chairman of the Board
 
Pete Cladianos, Jr.
  Vice Chairman of the Board
 
Ferenc B. Szony(1)
  President and Chief Executive Officer

David R. Wood
  Executive Vice President,
  Treasurer and Chief Financial Officer
 
Pete Cladianos III
  Executive Vice President and Secretary
 
Jon N. Bengtson
 
Louis J. Phillips(1)
 
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
  Reno, Nevada
 
SECURITIES COUNSEL
Latham & Watkins
  Costa Mesa, California
 
TRANSFER AGENT & REGISTRAR
U.S. Stock Transfer Corporation
  Glendale, California
 
------------
 
(1) Standing for election to the Board of Directors at the November 2, 1998
    Annual Meeting.
 
FORM 10-K REPORT
 
     A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K is available to shareholders without charge by writing
to The Sands Regent, Attention: David R. Wood, 345 North Arlington Avenue, Reno,
Nevada 89501.
 
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