<PAGE>
 
                                   FORM 10-K
                      SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C.
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended DECEMBER 31, 1998
                          -----------------

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ________________ to ____________________

Commission file number 1-6339
                       ------

                         GREATE BAY CASINO CORPORATION
                         -----------------------------
            (Exact name of registrant as specified in its charter)

              DELAWARE                                      75-1295630
-------------------------------------                 -----------------------
    (State or other jurisdiction of                       (I.R.S. Employer
    incorporation or organization)                       Identification No.)
 
 C/O ADVANCED CASINO SYSTEMS CORPORATION
      200 DECADON DRIVE, SUITE 100
     EGG HARBOR TOWNSHIP, NEW JERSEY                            08234
------------------------------------------                 --------------
 (Address of principal executive offices)                    (Zip Code)
 
(Registrant's telephone number, including area code): (609) 441-0704
                                                      --------------

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

           COMMON STOCK,
      PAR VALUE $.10 PER SHARE      
-----------------------------------    _________________________________________
               Title of each class       Name of exchange on which registered

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   YES  X         NO______
                                                --- 

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price of such stock on March 26, 1999, was
$824,502. For the purposes of this computation, all officers, directors and 5%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officer, directors and
beneficial owners are, in fact, affiliates of the registrant. As of March 26,
1999, 5,186,627 shares of Common Stock, $.10 par value per share, were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated by reference into the
indicated part or parts of this report.

                                     None

                                       1
<PAGE>
 
                                    PART I


ITEM 1.   BUSINESS

GENERAL
-------

     Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC" or the "Company") are engaged in the operation and management of casino
properties and the development and sale of casino-related information technology
systems.  GBCC's principal casino-related operations consist of management and
consulting contracts with gaming facilities located in Aurora, Illinois (the
"Aurora Casino") and Tunica County, Mississippi (the "Tunica Casino") and
ownership of the Sands Hotel and Casino in Atlantic City, New Jersey (the
"Sands").  GBCC's common stock is listed on the OTC Bulletin Board Service under
the trading symbol "GEAAQ".  On December 31, 1996, Hollywood Casino Corporation
("HCC", a Delaware corporation), owner of approximately 80% of the outstanding
common stock of GBCC, distributed such stock to its shareholders.  As a result,
approximately 36% of GBCC's outstanding stock is owned by Jack E. Pratt, Edward
T. Pratt, Jr. and William D. Pratt and by certain general partnerships and
trusts controlled by the Pratts and by other family members (collectively, the
"Pratt Family").  The Pratt Family also owns approximately 54% of HCC which owns
the Aurora Casino and the Tunica Casino.  The principal executive offices of
GBCC are located at 200 Decadon Avenue, Suite 100, Egg Harbor Township, New
Jersey 08234, telephone (609) 441-0704.

     PPI Corporation is a wholly owned subsidiary of GBCC which owns various
entities related to GBCC's current operations.  Included in this Annual Report
on Form 10-K as wholly-owned subsidiaries of PPI Corporation are:

     Advanced Casino Systems Corporation ("ACSC") - the Company's computer
        services and information technology subsidiary.

     New Jersey Management, Inc. ("NJMI") -- the subsidiary which, prior to July
        7, 1998, was responsible for the operations of the Sands under a
        management agreement. 

     PRT Funding Corp. ("PRT Funding") -- issuer of $85 million of 11 5/8%
        senior notes, due 2004 (the "PRT Funding Notes").

     Pratt Management, L.P. ("PML") - a limited partnership which manages the
        operations of the Aurora Casino and which, prior to April 1, 1997, was
        wholly owned by PPI Corporation (see below).

     Pratt Casino Corporation ("PCC") - the management entity which earns
        consulting fees from the Tunica Casino and is the sole limited partner
        of PML.

     Greate Bay Hotel and Casino, Inc. ("GBHC") - owner of the Sands.

     GB Property Funding Corp. ("GB Property Funding") -- issuer of $185 million
        of 10 7/8% First Mortgage Notes, due 2004 (the "10 7/8% First Mortgage
        Notes").

     GB Holdings, Inc. ("Holdings") - a holding company  which owns GBHC and GB
        Property Funding.

     On January 5, 1998, GBHC, Holdings, and GB Property Funding, each filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court").  Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's officers and directors remain in office, subject to the supervision of
the Bankruptcy Court.  On January 11, 1999, the Bankruptcy Court terminated the
debtors' exclusive right to file a plan of reorganization.  As of March 26,
1999, no reorganization plan has been formally presented by the debtors or any
other party.

                                       2
<PAGE>
 
     As a result of the Chapter 11 filings discussed above, GBCC's control over
the filing subsidiaries is subject to supervision of the Bankruptcy Court and
GBCC does not expect to have ownership or operating control of such subsidiaries
after reorganization.  Furthermore, as a result of a settlement agreement
reached by GBCC and Holdings during September 1998, GBCC no longer participates
in the management of the Sands.  Accordingly, Holdings, GB Property Funding and
GBHC are no longer included on the accompanying consolidated balance sheets of
GBCC.  As more fully explained in Note 1 of the Notes to Consolidated Financial
Statements, during the period from January 1, 1998 through June 30, 1998, the
operations of Holdings and its subsidiaries were accounted for by GBCC under the
equity method of accounting.  As a result of GBCC no longer controlling the
operations of the Sands, the expectation that ownership control of Holdings will
only be temporary and the September 1998 settlement agreement which resolved
certain significant uncertainties, GBCC's investment in Holdings and its
subsidiaries was revalued to a zero basis effective on July 1, 1998.
Accordingly, for periods subsequent to June 30, 1998, GBCC is accounting for its
investment in Holdings under the cost method of accounting.

     The filings of such petitions constitute a default under the indenture for
the PRT Funding Notes; accordingly, the outstanding principal amount of the PRT
Funding Notes has accelerated and is currently due and payable. PRT Funding
deferred payment of interest due on the April 15 and October 15, 1998 interest
payment dates.  On October 22, 1998, PRT Funding paid to bondholders an amount
equal to a single semiannual interest payment ($4,941,000) while negotiations to
restructure the PRT Funding Notes continued.

     In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached
an agreement in principle with HCC for HCC to acquire the stock of PCC, the
parent of PRT Funding, from GBCC for nominal consideration as of part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC. Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for the Aurora Casino and a
consulting contract for the Tunica Casino. These assets will serve as collateral
for $39.25 million of 11 7/8% Senior Secured Notes due November 1, 2003 (the
"PCC Notes") which PCC will issue to the PRT Funding noteholders as part of the
Restructuring. For the year ended December 31, 1998, these assets generated pre-
tax earnings to PCC of approximately $7.7 million. The revenues and resulting
net earnings generated by these assets will be the sole source of funds for
PCC's payment obligations under the PCC Notes. Cash available from the
management contract and consulting agreement in excess of interest payment
requirements will be used to make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.

     PCC is the sole limited partner of PML which manages the Aurora Casino.
Effective April 1, 1997, HCC acquired the general partnership interest in PML
from another subsidiary of GBCC.  PCC also has a consulting agreement with HWCC-
Tunica, Inc. ("HCT"), a wholly owned subsidiary of HCC, which owns and operates
the Tunica Casino.  The contract, which expires on December 31, 2003, provides
for a monthly fee of $100,000.  Historically, debt service on the PRT Funding
Notes has been funded primarily from management fees earned by NJMI from the
Sands, from distributions made to PCC by PML (resulting from fees generated
under the Aurora Casino Management Contract - see "Pratt Management, 

                                       3
<PAGE>
 
L.P." below) and from consulting fees earned from the Tunica Casino,
supplemented by dividends, if any, received from GBHC.

ADVANCED CASINO SYSTEMS CORPORATION
-----------------------------------

     In implementing its marketing and operating strategy, the Aurora Casino,
the Tunica Casino and the Sands all use proprietary casino information
technology of ACSC. This technology includes ACSC's table game and slot machine
monitoring systems which enable casinos to track and rate patron play through
the use of a casino player's card. These systems provide management with the key
characteristics of patron play as slot machines are connected with, and
information with respect to table games can be input into its data base
monitoring system. When patrons use the casino player's card at slot machines or
table games, the information is immediately available to management and allows
management to implement marketing programs to recognize and reward patrons
during their visits to the casino. Certain of these marketing programs allow
patrons to automatically credit themselves with complimentaries based on their
levels of play. Such promotions and complimentaries include free meals, hotel
accommodations, retail merchandise, parking and sweepstakes giveaways based on
slot machine patrons' gross wagering. ACSC's systems also allow casino
management to monitor, analyze and control the granting of gaming credit,
promotional expenses and other marketing costs.

     During 1997, ACSC began marketing its slot system, previously restricted to
use by its affiliates, to unaffiliated gaming companies.  To date, ACSC has
completed contracts to implement such systems in three unaffiliated casinos, is
in the process of implementing systems for two other unaffiliated casinos and is
currently negotiating to obtain additional contracts.

THE SANDS MANAGEMENT CONTRACT
-----------------------------

     Prior to May 1, 1998, NJMI, was responsible for the operations of the Sands
under a management agreement with GBHC.  Under such agreement, NJMI was entitled
to receive annually (1) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation between 5% and 7.5% of
gross operating profits in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000.  On May 22, 1998, GBHC filed
a motion with the Bankruptcy Court seeking to reject the existing management
agreement with NJMI.  The Interim Agreement was entered into on June 27, 1998
and was approved by the Bankruptcy Court on July 7, 1998.  Under the Interim
Agreement, effective as of May 1, 1998 and terminating on September 28, 1998,
NJMI continued to provide certain agreed upon services to GBHC at a monthly fee
of $165,000 of which $122,000 was paid on a monthly basis in arrears and the
remaining $43,000 was deferred and is to be paid upon confirmation of GBHC's
plan of reorganization by the Bankruptcy Court.  All management fees terminated
upon the granting of GBHC's motion to reject the management contract by the
Bankruptcy Court on September 28, 1998.  As a consequence of a settlement
agreement entered into in September 1998, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract and, with the passage of time, the cancellation thereof.

PRATT MANAGEMENT, L.P.
----------------------

     PML manages the Aurora Casino pursuant to the Aurora Casino Management
Contract, which was executed in June 1991 and has an initial term of 99 years.
PML acts as the sole and exclusive agent in the supervision, direction and
control of the management of the Aurora Casino and any additions or expansions
thereof.

     PML receives a quarterly base management fee equal to 5% of operating
revenues (as defined in the agreement).  However, for so long as certain
indebtedness of HCC remains outstanding, payment of the base services fee is (i)
subject to a maximum of $5.5 million in any consecutive 12 month period; 

                                       4
<PAGE>
 
(ii) subordinate to payment of interest on the HCC indebtedness; and (iii)
conditioned upon compliance with the indenture governing such indebtedness. PML
also receives an incentive fee equal to 10% of gross operating profit (as
defined in the agreement).

     Pursuant to the Agreement of Limited Partnership, PML makes distributions
to PCC in an amount equal to 1% of the first $84,000 of net income earned by PML
each month and 99% of any net income earned above such amount, all of which
comes from management fees received from the management of the Aurora Casino
pursuant to the Aurora Casino Management Contract. For the year ended December
31, 1998, distributions totaled $5.6 million.

     The Aurora Casino Management Contract can be terminated by either party
upon 45 days prior written notice in the event of the other party's material
breach of the agreement, inability to pay debts generally as they become due,
bankruptcy or other similar proceedings, action to suspend normal business
operations, or imposition of any materially adverse levy or judgment.
Furthermore, PML has the right to terminate if the HCC subsidiary which owns the
Aurora Casino fails to furnish funds required for PML to manage the Aurora
Casino or fails to compensate or reimburse PML. In such case, PML is entitled to
liquidated damages in an amount equal to 10 times the aggregate base services
fee and incentive fee earned by PML in the preceding fiscal year.

     State Regulation - Supplier's License.  PML is required to maintain a
     -------------------------------------                                
supplier's license with respect to the management services it provides to the
Aurora Casino.  PML's supplier's license expired in December 1998 and was
renewed by the Illinois Gaming Board (the "IGB") through December 1999 with the
condition that PML provide justification for future renewal.  The IGB has
expressed its opposition to the licensing of holders of management services
contracts with percentage-based fees for Illinois riverboat gaming operations.
PML's existing management contract is currently the only percentage-based
management contract between a supplier and a riverboat gaming operation.  PCC
believes that the successful completion of the Restructuring previously
described will enable PML to provide acceptable justification for renewal of the
PML supplier's license in December 1999.  A supplier's license is eligible for
renewal upon payment of the applicable fee, a determination by the IGB that the
licensee continues to meet all of the requirements of the Illinois Riverboat
Gambling Act (the "Riverboat Act") and if any and all conditions placed on prior
renewals have been met.  The IGB also requires that officers, directors and
employees of suppliers be licensed.  Licenses issued by the IGB may not be
transferred to another person or entity.  All licenses must maintain their
suitability for licensure and have a continuing duty to disclose any material
changes in information provided to the IGB.

     A holder of any license is subject to imposition of penalties and fines,
suspension or revocation of such license, or other action for any act or failure
to act by such holder or his or her agents or employees, that is injurious to
the public health, safety, morals, good order and general welfare of the people
of the State of Illinois, or that would discredit or tend to discredit the
Illinois gaming industry or the State of Illinois.  The Illinois Gaming Board
may revoke or suspend licenses, as the Board may see fit and in compliance with
applicable laws of Illinois regarding administrative procedures.

THE AURORA CASINO
-----------------

     The Aurora Casino commenced operations on June 17, 1993 and is one of only
four casinos in Illinois now operating within 50 miles of downtown Chicago.  In
addition five riverboat casinos operate in northwestern Indiana and serve the
Chicago-area market.  The Aurora Casino currently consists of two multi-level
riverboat casinos containing an aggregate of approximately 32,100 square feet of
gaming space with approximately 975 slot machines and approximately 55 table
games.  The Aurora Casino also includes an approximately 64,000 square foot
land-based Pavilion through which patrons board the facility's two riverboat
casinos via enclosed passenger loading ramps.  The highly-themed Pavilion
features a glass-domed, four-story atrium with two grand staircases, two upscale
lounges, a gourmet restaurant, a large 

                                       5
<PAGE>
 
buffet and a diner. Patrons of the Aurora Casino are offered valet and self-
parking in two multi-level parking garages that accommodate approximately 1,340
cars, as well as surface parking.

     One parking garage is located directly across the street and is connected
to the Pavilion through a climate controlled tunnel. The structure also houses
the "Hollywood Casino(R) Studio Store," 1,500 square feet of highly themed
retail space selling logo items licensed from motion picture studios as well as
first-run movies on videocassette.

     In 1995, the Company completed a 10,000 square foot expansion of one of the
Aurora Casino's riverboats.  The casino expansion increased the Aurora Casino's
gaming space by approximately 45% to the current 32,100 square feet, allowed the
facility to offer patrons the maximum number of gaming positions permitted by
Illinois gaming regulations in a spacious, highly-themed setting.  The Company
also completed a renovation of the Aurora Casino's second riverboat casino in
September 1995 which included the installation of new interior decor more
extensively utilizing the Company's Hollywood Theme and the reconfiguration of
gaming areas to provide a more spacious and comfortable setting.

     Business Strategy.  The Aurora facility's primary market is the affluent
     -----------------                                                       
suburbs north and west of Chicago.  Based on a sampling of its patrons, the
Company believes that the casino drew approximately 50% of its patrons from such
suburbs during 1998.  Approximately 7.1 million people live within a 40-mile
radius and approximately 11.6 million people live within a 100-mile radius of
the Aurora Casino.  The facility is easily accessible from major highways, can
be reached from downtown Chicago in approximately 50 minutes by trains which
average 20 trips a day, and is approximately 30 miles from O'Hare International
Airport.  The four operating Chicago-area casinos, including the Aurora Casino,
have approximately 135,000 square feet of combined gaming space.  No additional
casinos may be licensed in Illinois without the passage of new state
legislation; however, one existing license is currently available for reissue.
There are also five riverboat casino operations in northwestern Indiana which
compete within the Chicago-area market.

     The Aurora Casino's riverboats currently offer as many as 16 daily cruises
on weekdays and 17 daily cruises on weekends, commencing at various times from
9:00 a.m. until 4:30 a.m. This schedule may be varied, based on experience and
seasonal factors. The use of a staggered cruise schedule with two vessels
significantly reduces the waiting time until the next gaming session for patrons
who miss a cruise departure. Once passengers board, they are permitted to game
during the half hour prior to the time the riverboat departs. After the
excursion, passengers are permitted to game for another half hour before new
passengers board, for a total of two to three hours of gaming per cruise,
depending on the cruising schedule. In addition, Illinois regulations permit
dockside gaming if the riverboat captain reasonably determines that it is unsafe
to cruise due to inclement weather, mechanical or structural problems or river
icing. During dockside gaming, the Aurora riverboats operate on their normal
schedules and passengers may leave the vessels at any time but may board only
during the half hour prior to the regularly scheduled start of the cruise.

     The Aurora Casino employs a marketing strategy designed to take advantage
of its proximity to the affluent northern and western suburbs of Chicago and the
large population base of the Chicago metropolitan area. Management uses a patron
data base developed through ACSC's systems to focus its marketing efforts on
patrons who have been identified through the system as having the
characteristics of a higher value patron. Given the limited number of gaming
positions available on each daily casino excursion, management believes that its
process of identifying the premium patron, encouraging participation in its
various casino players' card programs and tailoring promotions and special
events to cater to this market segment will enhance profitability.

     The Aurora Casino also markets to the "mass" casino patron market segment
through various forms of advertising media as well as through group and bus tour
packages.  Once new patrons are introduced 

                                       6
<PAGE>
 
to the Company's gaming facility and its casino players' card programs,
management uses its data base capabilities to direct market to these patrons in
an attempt to convert them into higher value patrons.

     Management believes that the Aurora Casino's facilities, in particular its
highly-themed dockside Pavilion and its close proximity to the Paramount
Theatre, an 1,800-seat art deco theatre in which the Company features headliner
entertainment, are appealing to both the premium and mass casino patron markets.
Entertainers who have appeared include Wayne Newton, Tom Jones, Paul Anka, the
Commodores, Frankie Valli, Englebert Humperdink and the Doobie Brothers.

     Competition.  The gaming industry is highly fragmented and characterized 
     -----------                                            
by a high degree of competition among a large number of participants, some of
which have greater financial and other resources than HCC. Competitive gaming
activities include land-based casinos, dockside casinos, riverboat casinos,
video lottery terminals, Indian gaming and other forms of legalized gaming in
the United States and other jurisdictions. Casino gaming is currently permitted
in a number of states, including Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota,
several Canadian providences, as well as on Native American Indian lands in
certain states. Other jurisdictions may legalize gaming in the near future
through the introduction of proposals to legalize gaming in their state
legislatures. In addition, established gaming jurisdictions could award
additional gaming licenses or permit the expansion of existing gaming
operations. New or expanded operations by other persons can be expected to
increase competition and could have a material adverse impact on the Aurora
Casino.

     The Riverboat Act and the rules promulgated by the Illinois Gaming Board
thereunder authorize only ten owner's licenses for riverboat gaming operations
in Illinois and permits a maximum of 1,200 gaming positions (as defined by the
Illinois Gaming Board) at any time for each of the ten licensed sites.  All
authorized owner's licenses have been granted and no additional licenses or
gaming positions can be permitted without further state legislation; however,
one licensed site ceased gaming operations in July 1997.  Four riverboat sites,
including the Aurora Casino, are currently licensed in Illinois within 50 miles
of downtown Chicago.  Two of these riverboat sites are in Joliet, approximately
42 miles southwest of downtown Chicago, and a third is in Elgin, Illinois,
approximately 20 miles from Aurora, 45 miles from downtown Chicago and amid the
affluent northern and western suburbs.  The Aurora Casino also competes directly
with five riverboat operations opened since 1996 in northwestern Indiana within
25 miles of downtown Chicago.  Increased competition from casinos in Indiana has
resulted in greater competition for patrons from the downtown Chicago market and
from the suburban Chicago market.  The next closest operating casinos are in
Milwaukee, Wisconsin, approximately 90 miles from downtown Chicago, and in
Peoria, and Rock Island, Illinois, approximately 160 miles from downtown
Chicago.  Legislation could also be introduced in the Illinois legislature to
authorize one or more land-based and/or riverboat casinos in downtown Chicago
and/or the granting of additional casino licenses elsewhere in Illinois
including within the Company's principal market.  In addition, three groups have
been chosen to operate casinos in the Detroit, Michigan market; however, the
establishment of a regulatory system and subsequent licensing have yet to be
accomplished.  Accordingly, it is not anticipated that any Detroit casino will
be operational until 2001.  Native American Indian tribes are seeking to open
casino facilities in northwestern Indiana, Michigan and Wisconsin under the
Indian Gaming Regulatory Act.  The opening of additional casinos proximate to
Chicago could have a material adverse impact on the Aurora Casino.

     Casino Credit.  Casino operations are conducted on both a credit and a cash
     -------------                                                              
basis.  Gaming debts arising in Aurora in accordance with applicable regulations
are enforceable under Illinois law.  For the year ended December 31, 1998,
gaming credit extended to customers accounted for less than 2% of overall
wagering.  At December 31, 1998, gaming receivables amounted to $1.6 million
before allowances for uncollectible gaming receivables which amounted to
$655,000.  Management of the Aurora Casino believes that the allowances for
uncollectible gaming receivables are adequate.

                                       7
<PAGE>
 
     Employees and Labor Relations.  In Aurora, all casino employees must be
     -----------------------------                                          
licensed by the Illinois Gaming Board.  At December 31, 1998 there were
approximately 1,615 employees at the Aurora Casino, none of whom are represented
under collective bargaining agreements.  Management considers its labor
relations to be good.

     Casino Regulation.  The Riverboat Act authorizes riverboat gaming on
     -----------------                                                   
navigable streams within or forming a boundary of the State of Illinois except
for Lake Michigan and any waterway in Cook County, which includes Chicago.  The
Riverboat Act strictly regulates the facilities, persons, associations  and
practices related to gaming operations pursuant to the police powers of the
State of Illinois, including comprehensive law enforcement supervision.  The
Riverboat Act grants the Illinois Gaming Board specific powers and duties, and
all other powers necessary and proper to fully and effectively execute the
Riverboat Act for the purpose of administering, regulating and enforcing the
system of riverboat gaming.  The Illinois Gaming Board's jurisdiction extends to
every person, association, corporation, partnership and trust involved in
riverboat gaming operations in the State of Illinois.

     The Riverboat Act does not limit the maximum bet or per patron loss and
licensees may set any maximum or minimum limits on wagering. Vessels must have
the capacity to hold a minimum of 500 persons if operating on the Mississippi
River or the Illinois River south of Marshall County, and a minimum of 400
persons on any other waterway.  The number of gaming positions is limited to a
maximum of 1,200 per license.  Gaming sessions are limited to a four hour
duration; however, special event extended cruises may be authorized by the
Illinois Gaming Board.

     If a riverboat captain reasonably determines for reasons of safety that
although seaworthy, the riverboat should not leave the dock or should return
immediately thereto, due to inclement weather, river icing, or unforseeable
mechanical difficulties, a gaming excursion may commence or continue while the
gangplank or its equivalent is raised and remains raised, in which event the
riverboat is not considered docked.  Recently, the Illinois Gaming Board amended
its rules to clarify the circumstances under which dockside gaming will be
permitted and to require the imposition of a fine for violations of the cruising
requirements.

     A $2 per person admission tax is imposed on the owner of a riverboat
operation.  Such admission tax for the Aurora Casino amounted to $6.6 million,
$7.2 million and $6.4 million, respectively, during 1998, 1997 and 1996.
Additionally, a wagering tax is imposed on the adjusted gross receipts, as
defined in the Riverboat Act, of a riverboat operation at graduated rates
ranging from 15% to 35%.  The licensee is required to wire transfer all such
gaming tax payments to the Illinois Gaming Board.  The wagering tax for the
Aurora Casino amounted to $42.4 million, $30.7 million and $31.3 million,
respectively, for the years 1998, 1997 and 1996.  Prior to January 1, 1998 the
wagering tax rate was 20% on adjusted gross receipts.

     The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming employees and into alleged violations of the Riverboat Act and
to take such disciplinary and enforcement action as it may deem necessary and
proper.  Employees and agents of the Illinois Gaming Board have access to and
may inspect any facilities relating to the riverboat gaming operations at all
times.

     Any riverboat operation not conducted in compliance with the Riverboat Act
may constitute an illegal gaming place and consequently may be subject to
criminal penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Riverboat Act also provides for civil
penalties equal to the amount of gross receipts derived from wagering on the
gaming, whether unauthorized  or authorized, conducted on the day of any
violation.

                                       8
<PAGE>
 
     The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.

THE TUNICA CASINO CONSULTING AGREEMENT
--------------------------------------

     PCC, by virtue of its ownership and past management of the Sands and its
management of the Aurora Casino, had certain casino management experience and
expertise which, at the time of its opening, the Tunica Casino did not have. In
order to utilize PCC's experience and expertise, the Tunica Casino entered into
a consulting agreement with PCC as of January 1, 1994. The agreement has a term
of 10 years and provides, among other things, for PCC to advise and consult the
Tunica Casino on any matters relating to business and for monthly payments of
$100,000 to PCC for its performance thereunder. The Tunica Casino is also
obligated to reimburse PCC for its direct costs and expenses incurred under the
agreement.

OTHER OPERATIONS
----------------

     During 1996 and early 1997, GBCC disposed of its remaining non-casino hotel
operations.  GBCC managed and had an ownership interest (but no obligation to
fund future losses) in the hotel operations of the Sands Hotel and Casino in San
Juan, Puerto Rico.  GBCC also managed two non-casino hotels and had an ownership
interest in one of the hotels.

ITEM 2.   PROPERTIES

     The Sands Hotel and Casino in Atlantic City, New Jersey, which is owned by
GBHC, is the only property held by GBCC or any of its subsidiaries.  As a result
of the Chapter 11 filings previously described, GBCC's control over the filing
subsidiaries, including GBHC, is subject to supervision of the Bankruptcy Court.
GBCC does not expect to have operating control of or any significant equity
ownership in the filing subsidiaries after reorganization.

     Although it has no ownership interest in the Aurora Casino, PCC manages the
facility under the Aurora Casino Management Contract.  For a description of the
facility, see "Business - The Aurora Casino" above.

     ACSC, GBCC's computer services subsidiary, leases approximately 13,000
square feet of office space for its operating and administrative needs in Egg
Harbor Township, New Jersey.  The lease is for a period terminating in July
2002.

ITEM 3.  LEGAL PROCEEDINGS

SUBSIDIARY CHAPTER 11 FILINGS AND RELATED LITIGATION
----------------------------------------------------

     On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code.  Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court.  On January 11, 1999, the Bankruptcy
Court terminated the debtors' exclusive right to file a plan of reorganization.
As of March 26, 1999, no reorganization plan has been formally presented by the
debtors or any other party.

     As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. In March 1999, PCC, GBCC and the holders of the
PRT Funding Notes reached an agreement in principle with HCC for HCC to acquire
the stock of PCC, the parent of PRT Funding, from GBCC for nominal consideration
as part of a debt restructuring  

                                       9
<PAGE>
 
(the "Restructuring") of PRT Funding, PCC and other subsidiaries of PCC.
Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for the Aurora Casino and a
consulting contract for the Tunica Casino. These assets will serve as collateral
for $39.25 million of 11 7/8% Senior Secured Notes due November 1, 2003 (the
"PCC Notes") which PCC will issue to the PRT Funding noteholders as part of the
Restructuring. For the year ended December 31, 1998, these assets generated pre-
tax earnings to PCC of approximately $7.7 million. The revenues and resulting
net earnings generated by these assets will be the sole source of funds for
PCC's payment obligations under the PCC Notes. Cash available from the
management contract and consulting agreement in excess of interest payment
requirements will be used to make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.

     On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject its existing management agreement with NJMI.  A substitute agreement (the
"Interim Agreement") was entered into and approved by the Bankruptcy Court on
July 7, 1998.  Under the Interim Agreement, effective May 1, 1998 and
terminating on September 28, 1998, NJMI continued to provide certain agreed upon
services to GBHC at a reduced monthly fee.  The motion to reject the management
agreement was granted on September 28, 1998.  As a consequence of the September
1998 settlement agreement described below, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract and, with the passage of time, the cancellation thereof.

     On July 27, 1998, GBHC filed a motion with the Bankruptcy Court against
GBCC seeking, among other things, to enjoin GBCC from using the tax net
operating loss carryovers ("NOL's") of GBHC. On September 2, 1998, GBCC reached
a settlement with GBHC which was approved by the Bankruptcy Court. The terms of
the settlement agreement provided, among other things, that GBHC be included in
the consolidated federal income tax return of GBCC for 1997 and 1998 enabling
GBCC to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from GBCC for federal income tax purposes by means of
transferring 21% of the stock ownership of Holdings to an unconsolidated entity.
Such transfer was accomplished effective as of December 31, 1998.

     GBCC licenses the "Sands" name under a license agreement dated as of May
19, 1987, which rights are sublicensed to GBHC. The license agreement has a term
of 99 years and requires a royalty payment of the greater of 1.5% of gross room
charges, as defined in the agreement, payable monthly, or $100,000 per calendar
year. The license agreement may be terminated by either party in the event of a
material breach, bankruptcy, suspension of normal business operations or certain
other actions by the other party. GBCC intends to terminate the license
agreement as a result of the licensor's suspension of normal business operations
evidenced by the destruction of the Sands Hotel and Casino in Las Vegas in 1996.
Pursuant to the terms of the sublicense agreement, termination of the license
agreement results in automatic termination of the sublicense agreement. GBCC
filed a motion with the Bankruptcy Court to allow GBCC's termination of the
license agreement and the resulting termination of the sublicense agreement; the
Bankruptcy Court denied such motion. As a result, GBCC may not be able to
terminate the license agreement, although the Bankruptcy Court may, at some
future time, allow GBCC to do so. If unable to  

                                       10
<PAGE>
 
terminate the license agreement, GBCC may remain liable for future royalty
payments. GBCC filed an appeal to the decision of the Bankruptcy Court on March
10, 1999.

PLANET HOLLYWOOD LITIGATION
---------------------------

     Planet Hollywood International, inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, Hollywood Casino  -
Aurora, Inc. ("HCA"), the wholly owned subsidiary of HCC which owns and operates
the Aurora Casino, and a member of the Pratt Family (collectively, the "Original
Hollywood Defendants").  The Original Hollywood Defendants filed with the Court
on September 18, 1996 an answer to PHII's lawsuit, along with numerous
counterclaims against PHII, Robert Earl and Keith Barish (collectively, the
"PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment
to their complaint which, among other things, added HWCC-Tunica, Inc. ("HCT"),
the HCC subsidiary which owns and operates the Tunica Casino (together with the
Original Hollywood Defendants, the "Hollywood Defendants"), and GBCC as
defendants.  The Original Hollywood Defendants filed with the Court on February
4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and
counterclaims to such amended complaint.

     In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices.  In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.

     Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants and GBCC will prevail in this litigation; however,
the Hollywood Defendants and GBCC believe that PHII's claims are without merit
and intend to defend their position and pursue their counterclaims vigorously.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.

OTHER LITIGATION
----------------

     On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, GBCC and HCC's former
independent accountants, and certain of its partners alleging negligent advice
and breach of contract with respect to the tax consequences resulting from the
spin-off of GBCC's stock to HCC's shareholders on December 31, 1996.  The
lawsuit is currently in the initial stages of discovery.

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

     During the fourth quarter of 1998, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.

                                       11
<PAGE>
 
                                    PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
          MATTERS

     GBCC's common stock traded on the American Stock Exchange under the symbol
"GBY" until January 8, 1998.  The common stock of GBCC is now traded on the OTC
Bulletin Board Service under the trading symbol "GEAAQ".  The prices set forth
in the following table represent actual transactions.
 
          Period                        High    Low    
          ------                       ------  ------  
          
          1998                                           
              First Quarter            $ 2.13  $ 0.61              
              Second Quarter             1.17    0.33              
              Third Quarter              0.75    0.13              
              Fourth Quarter             0.34    0.02              
                                                                   
          1997                                                     
              First Quarter            $ 2.00  $ 1.25              
              Second Quarter             1.63    1.25              
              Third Quarter              1.88    1.19              
              Fourth Quarter             1.63    0.63               
 
     At March 26, 1999, there were approximately 3,900 holders of record of
GBCC's common stock.

     No dividends have been paid on GBCC's common stock in the past and GBCC has
no plans to pay dividends in the foreseeable future.  See Note 4 of "Notes to
Consolidated Financial Statements" for a description of certain agreements that
impose certain restrictions upon the ability of certain subsidiaries to transfer
funds to GBCC.

                                       12
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA

     The following tables present selected financial data for GBCC and are
qualified in their entirety by the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Form 10-K.  The data as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996, have been derived from the audited consolidated financial statements of
GBCC presented in Item 8.

<TABLE>
<CAPTION>
 
STATEMENT OF OPERATIONS DATA:                                                YEAR ENDED DECEMBER 31,
                                                        --------------------------------------------------------------
                                                          1998(1)         1997         1996        1995        1994
                                                        ------------  ------------  ----------  ----------  ----------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>           <C>           <C>         <C>         <C>
Net revenues..........................................  $   8,971     $ 263,691     $ 284,563   $ 305,420   $ 297,655
                                                        ---------     ---------     ---------   ---------   ---------
Expenses:
 Departmental.........................................      1,314       216,247       240,944     230,749     222,490
 General and administrative...........................      4,724        16,192        19,363      21,983      22,916
 Depreciation and amortization........................        129        14,464        19,868      20,553      19,547
                                                        ---------     ---------     ---------   ---------   ---------
  Total expenses......................................      6,167       246,903       280,175     273,285     264,953
                                                        ---------     ---------     ---------   ---------   ---------
Income from operations................................      2,804        16,788         4,388      32,135      32,702
                                                        ---------     ---------     ---------   ---------   ---------
Non-operating income (expenses):
 Interest income......................................        942         1,486         1,852       2,397       3,101
 Interest expense.....................................    (16,194)      (38,246)      (39,851)    (38,975)    (39,292)
 Equity in earnings of limited partnership............      6,494         5,012             -           -           -
 Equity in earnings of and gain on elimination of
  investment in GB Holdings, Inc......................     31,233             -             -           -           -
 Restructuring costs..................................     (1,548)         (505)            -           -           -
 Gain (loss) on disposal of assets....................        472         2,120        (1,795)         56          73
                                                        ---------     ---------     ---------   ---------   ---------
  Total non-operating income (expense), net...........     21,399       (30,133)      (39,794)    (36,522)    (36,118)
                                                        ---------     ---------     ---------   ---------   ---------
Income (loss) before income taxes, extraordinary and
 other items..........................................     24,203       (13,345)      (35,406)     (4,387)     (3,416)
Write off deferred financing costs....................          -        (6,515)            -           -           -
                                                        ---------     ---------     ---------   ---------   ---------
 
Income (loss) before income taxes and
 extraordinary item...................................     24,203       (19,860)      (35,406)     (4,387)     (3,416)
Income tax benefit (provision)........................        287        (1,014)         (160)        100      (1,080)
                                                        ---------     ---------     ---------   ---------   ---------
 
Income (loss) before extraordinary item...............     24,490       (20,874)      (35,566)     (4,287)     (4,496)
Extraordinary item:
 Gain on early extinguishment of debt.................          -           310             -           -           -
                                                        ---------     ---------     ---------   ---------   ---------
  Net income (loss)...................................  $  24,490     $ (20,564)    $ (35,566)  $  (4,287)  $  (4,496)
                                                        =========     =========     =========   =========   =========
 
Basic and diluted income (loss) per common share:
 Income (loss) before extraordinary item..............      $4.72        $(4.02)       $(6.86)      $(.83)      $(.87)
 Extraordinary item...................................          -           .06             -           -           -
                                                        ---------     ---------     ---------   ---------   ---------
  Net income (loss)...................................      $4.72        $(3.96)       $(6.86)      $(.83)      $(.87)
                                                        =========     =========     =========   =========   =========
 
BALANCE SHEET DATA:                                                                DECEMBER 31,
                                                        -------------------------------------------------------------
                                                          1998(1)       1997(1)       1996        1995        1994
                                                        ---------     ---------     ---------   ---------   ---------
                                                                                 (IN THOUSANDS)
 
Total assets..........................................  $  19,946     $  15,752     $ 221,345   $ 250,116   $ 249,673
Total debt............................................  $ 120,040     $ 115,949     $ 326,024   $ 329,123   $ 328,400
Shareholders' deficit.................................  $(118,626)    $(143,116)    $(159,207)  $(138,415)  $(134,073)
</TABLE>

__________________
(1)  As a result of the Chapter 11 filings by Holdings, GB Property Funding and
     GBHC, GBCC's control over these subsidiaries is subject to supervision of
     the Bankruptcy Court and GBCC does not expect to be in control of such
     subsidiaries after reorganization. 

                                       13
<PAGE>
 
     Furthermore, as a result of a settlement agreement reached by GBCC and
     Holdings in September 1998, GBCC no longer participates in the management
     of the Sands. Accordingly, these subsidiaries are excluded from the
     consolidated balance sheets of GBCC at December 31, 1998 and 1997. As more
     fully explained in Note 1 of the Notes to Consolidated Financial Statements
     of GBCC, during the period from January 1, 1998 through June 30, 1998, the
     operations of Holdings and its subsidiaries were accounted for by GBCC
     under the equity method of accounting. As a result of GBCC no longer
     controlling the operations of the Sands, the expectation that ownership
     control of Holdings will only be temporary and the September 1998
     settlement agreement which resolved certain significant uncertainties,
     GBCC's investment in Holdings and its subsidiaries was revalued to a zero
     basis effective on July 1, 1998. Accordingly, for periods subsequent to
     June 30, 1998, GBCC is accounting for its investment in Holdings under the
     cost method of accounting.

                                       14
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of GBCC.  The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or GBCC in particular, and other
risks indicated in GBCC's filing with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management.  When used in this Annual Report
on Form 10-K, the words "believes", "estimates", "anticipates" and similar
expressions as they relate to GBCC or its management are intended to identify
forward-looking statements.

LIQUIDITY AND CAPITAL RESOURCES

     OPERATING ACTIVITIES

     GBCC and its subsidiaries conduct three major business activities.  These
activities may be grouped by company as follows:  (i) GBCC, PPI Corporation and
their direct, wholly owned subsidiaries, (ii) PCC and NJMI and (iii) Holdings
and GBHC.

     GBCC, PPI Corporation and their direct subsidiaries have provided
management personnel for GBCC's non-casino hotel operations, including its joint
ventures, in the United States and Puerto Rico. GBCC completed its planned exit
from these operations in 1997.  ACSC licenses casino information technology
systems to HCC's casino facilities, the Sands and non-affiliated casino
companies.  Income from operations provided by ACSC during the year ended
December 31, 1998 amounted to $1.3 million compared with losses from operations
of $284,000 during 1997 and income from operations of $350,000 during 1996.  The
decrease in operating income in 1997 from 1996 was due to increased salaries and
overhead costs incurred during 1997 in anticipation of ACSC's new marketing
efforts to sell its information technology products to unaffiliated third
parties.  As further explained under the caption "Results of Operations - GBCC
Group", the corresponding sales increase primarily occurred in 1998 as a result
of ACSC's successful efforts in obtaining contracts to provide and install its
slot monitoring systems.

     PCC and NJMI provide management and consulting services or invest in
entities which provide such services to affiliates which own hotel and casino
properties.  Prior to 1998, cash flow from such activities, specifically the PML
limited partnership interest held by PCC, the Tunica Consulting Contract and the
Sands Management Contract were sufficient to meet debt service obligations on
the PRT Funding Notes ($9.9 million annually) and, when permitted by the PRT
Funding Note indenture, on the Junior Subordinated Notes.

     As a consequence of the Chapter 11 filings by Holdings, GB Property Funding
and GBHC on January 5, 1998, PRT Funding is in default on the $85 million
principal amount of PRT Funding Notes which, together  with accrued interest,
accelerated and became immediately due and payable.  The bankruptcy filing of
GBHC also permitted it to reject the Sands Management Agreement, an important
source of funds for debt service on the PRT Funding Notes.  Management of GBHC
requested modification to the fee arrangement under the Sands management
agreement and reserved its right to reject the agreement.  A modified agreement
was entered into effective May 1, 1998 and expired on September 28, 1998 which
reduced the monthly fee to $165,000 compared to an average monthly fee of
$532,000 during the same period in 1997.  GBHC's motion to reject the management
agreement was approved by the Bankruptcy Court on September 28, 1998.  As a
consequence of the September 1998 settlement agreement (see Note 10 of the Notes
to Consolidated Financial Statements), GBCC and GBHC may no longer assert claims
against each other with respect to the operations of the management contract
and, with the passage 

                                       15
<PAGE>
 
of time, the cancellation thereof. PCC does not have the financial resources or
the capacity to borrow sufficient cash to satisfy the $85 million principal
amount of the PRT Funding Notes which have accelerated. PRT Funding deferred
payment of interest due on the April 15 and October 15, 1998 interest payment
dates. On October 22, 1998, PRT Funding paid to the bondholders an amount equal
to a single semiannual interest payment ($4.9 million) while negotiations to
restructure the PRT Funding Notes continued.

     In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached
an agreement in principle with HCC for HCC to acquire the stock of PCC, the
parent of PRT Funding, from GBCC for nominal consideration as of part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC.  Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for the Aurora Casino and a
consulting contract for the Tunica Casino. These assets will serve as collateral
for $39.25 million of 11 7/8% Senior Secured Notes due November 1, 2003 (the
"PCC Notes") which PCC will issue to the PRT Funding noteholders as part of the
Restructuring.  For the year ended December 31, 1998, these assets generated
pre-tax earnings to PCC of approximately $7.7 million.  The revenues and
resulting net earnings generated by these assets will be the sole source of
funds for PCC's payment obligations under the PCC Notes.  Cash available from
the management contract and consulting agreement in excess of interest payment
requirements will be used to make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC.  Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization.  Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement. There
can be no assurance at this time that the Restructuring will be successfully
completed.

     After consummation of the Restructuring, GBCC's only significant remaining
operating activity will be the development, installation and maintenance of
casino systems by ACSC.  GBCC and its subsidiaries will continue to have debt
outstanding to HCC consisting of (i) demand notes and accrued interest thereon
totaling approximately $8.5 million at December 31, 1998 and (ii) a 14 7/8%
secured promissory note due 2006 in the amount of approximately $35 million at
December 31, 1998.  The current level of ACSC's operations is not sufficient to
provide debt service on the HCC obligations and, consequently, GBCC will be
insolvent after the Restructuring.  GBCC has commenced discussions with HCC to
restructure its obligations; however, there can be no assurance at this time
that such discussions will result in a restructuring of GBCC's obligations with
HCC.

     The insolvency of GBCC raises substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
 
     Holdings and GBHC own the Sands Hotel and Casino in Atlantic City.  Prior
to 1996, the Sands' cash flow was sufficient to meet debt service obligations
and fund a substantial portion of annual capital expenditures.  The Sands also
used short-term borrowings to fund seasonal cash needs for certain capital
projects.  During 1996 and 1997, declines in operating cash flow at the Sands
resulted in the need for periodic financial assistance from PCC and GBCC in
order to meet debt service obligations.  Substantial 

                                       16
<PAGE>
 
additional financial assistance would have been required to make the January 15,
1998 principal and interest payments due on the 10 7/8% First Mortgage Notes.

     GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, Holdings, GB Property Funding and
GBHC filed petitions seeking protection under Chapter 11 of the Bankruptcy Code.

     As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. On January 11, 1999, the
Bankruptcy Court terminated the debtors' exclusive right to file a plan of
reorganization. As of March 26, 1999, no plan of reorganization has been
formally presented by the debtors or any other party. Capital expenditures,
other than normal recurring capital expenditures in the ordinary course of
business, will require prior approval of the Bankruptcy Court. The Bankruptcy
Court has approved a $13.6 million, two-year capital expenditure program
including $7.1 million for rooms renovations and $6.5 million for the
replacement of slot machines. There can be no assurance at this time that GBHC's
plan of reorganization, when submitted, will be accepted by its creditors or the
Bankruptcy Court. In any event, it is not anticipated that GBCC will retain a
substantial equity position in Holdings as a result of a reorganization and,
accordingly, it is not anticipated that the Holdings group will contribute
significantly to the future cash flows of the GBCC consolidated group.

     FINANCING ACTIVITIES

     During 1994, GBCC issued $40.5 million discounted principal amount of
deferred interest notes (the "PPI Funding Notes") to HCC in exchange for $38.8
million principal amount of 15 1/2% notes issued by another GBCC subsidiary and
held by HCC. Effective as of April 1, 1997, HCC acquired from PPI Corporation
the general partnership interest in the limited partnership which holds the
Aurora Management contract. The acquisition price for the general partnership
interest included a note in the amount of $3.8 million and the assignment of
$7.6 million discounted amount of the PPI Funding Notes to PPI Corporation.
Annual principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of annual partnership distributions
which are now being made to HCC. During 1997, HCC forgave $23.6 million
discounted principal amount of the PPI Funding Notes. The remaining PPI Funding
Notes have a maturity value of $47. 6 million. Payment of interest on the PPI
Funding Notes is deferred through February 17, 2001 at which time interest will
become payable semiannually with the unpaid balance due on February 17 , 2006.

     During the third quarter of 1996, GBCC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996.  GBCC loaned such funds to GBHC on similar terms.  The loans to
GBHC together with the related interest were cancelled as part of a settlement
agreement approved by the Bankruptcy Court on September 2, 1998.

     CAPITAL EXPENDITURES

     Property and equipment additions during 1998 totaled $247,000, consisting
primarily of ongoing equipment replacements and enhancements at ACSC.

RESULTS OF OPERATIONS

     GENERAL

     As a result of the filings by Holdings, GB Property Funding and GBHC,
GBCC's control over the filing subsidiaries is subject to the supervision of the
Bankruptcy Court. GBCC does not expect to have 

                                       17
<PAGE>
 
ownership or operating control of such subsidiaries after reorganization.
Accordingly, the accompanying consolidated statement of operations for the year
ended December 31, 1998 reflects the operations of the filing subsidiaries for
the period from January 1, 1998 through June 30, 1998 under the equity method of
accounting and for the period subsequent to June 30, 1998 under the cost method
of accounting. For the years ended December 31, 1997 and 1996, however, the
accompanying consolidated statements of operations include the operations of
Holdings and its subsidiaries on a consolidated basis.

     Accordingly, management's discussion of the results of operations is
divided into three parts: (i) a comparison of income from operations of GBCC
exclusive of Holdings and its subsidiaries, (ii) a comparison of income from
operations of Holdings and its subsidiaries for the years 1997 and 1996 and
(iii) a comparison of all other income and expense items on a consolidated
basis.

     Prior to April 1, 1997, GBCC controlled both the general and limited
partnership interests in PML, the entity which holds the management contract on
the Aurora Casino.  Accordingly, the operations of PML were consolidated with
GBCC on the accompanying consolidated statement of operations for the first
quarter of 1997 and for the year ended December 31, 1996.  As previously
discussed under "Liquidity and Capital Resources - Financing Activities", HCC
acquired the general partnership interest in PML from a subsidiary of GBCC
effective April 1, 1997.  From that date forward, GBCC holds only the limited
partnership interest in PML, which is presented under the equity method of
accounting on the accompanying consolidated statements of operations.

       The following table sets forth GBCC's proforma income from operations for
the years ended December 31, 1997 and 1996, exclusive of Holdings and its
subsidiaries and PML ("the GBCC Group"), on a basis comparable to the 1998
presentation.

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,           
                                   -------------------------------------------
                                      1998       PROFORMA 1997   PROFORMA 1996
                                   -----------   -------------   ------------- 
<S>                                <C>           <C>             <C>          
Revenues:                                                                     
 Computer services                 $ 5,255,000     $ 1,529,000    $ 1,342,000 
 Sands management fee                2,405,000       5,430,000      4,644,000 
 Rooms, food and beverage                  -               -        5,274,000 
 Other                               1,311,000       3,180,000      3,826,000 
                                   -----------     -----------    ----------- 
                                                                              
 Total revenues                      8,971,000      10,139,000     15,086,000 
                                   -----------     -----------    ----------- 
Expenses:                                                                     
 General and administrative (1)      4,724,000       3,795,000      3,583,000 
 Other operating expenses (1)        1,314,000         340,000      5,659,000 
 Depreciation and                                                             
  amortization                         129,000         402,000        558,000 
                                   -----------     -----------    ----------- 
                                                                              
  Total expenses                     6,167,000       4,537,000      9,800,000 
                                   -----------     -----------    ----------- 
                                                                              
Income from operations             $ 2,804,000     $ 5,602,000    $ 5,286,000 
                                   ===========     ===========    ===========  
</TABLE>

__________________
(1)  General and administrative and other operating expenses attributable to
     ACSC for the year ended December 31, 1998 amounted to $2,492,000 and
     $1,304,000, respectively.

GBCC GROUP
----------

     REVENUES

     Computer service revenues at ACSC increased by $3.7 million (243.7%) during
the year ended December 31, 1998 compared to 1997 and by $187,000 (13.9%) during
1997 compared to 1996.  As previously noted, the increases result from sales and
marketing efforts implemented in 1997 to expand and 

                                       18
<PAGE>
 
sell ACSC's slot monitoring system to third party purchasers. To date, five
contracts for the installation of such systems have been obtained, with three
contracts completed during 1998. Management fees earned by NJMI under the NJMI
management contract with the Sands decreased by $3 million (55.7%) during the
year ended December 30, 1998 compared to 1997. As discussed in Note 6 of the
Notes to Consolidated Financial Statements, such decrease resulted from a
revised fee arrangement providing for a fixed fee of $165,000 per month. The
original management agreement provided for significantly higher fees which were
based on revenues and gross operating profits at the Sands. The 1998 decrease
also results from the rejection of the management contract in September 1998.
Sands management fees increased by $786,000 (16.9%) during 1997 compared to 1996
as a result of improved operating results at the Sands (see "Results of
Operations -- Holdings and Subsidiaries" below). Rooms and food and beverage
revenues in 1996 relate to the operation of a non-casino hotel property in
Dallas, Texas. This hotel property was sold in September 1996. Other revenues
decreased by $1.9 million (58.8%) in 1998 compared to 1997 due to the loss of
management and termination fees in the amounts of $263,000 and $1.5 million,
respectively, earned by GBCC in 1997 with respect to a hotel/casino it managed
in San Juan, Puerto Rico. The $646,000 (16.9%) decrease in other revenues during
1997 compared to 1996 was primarily due to the loss of management fees earned
with respect to a non-casino hotel property in Orlando, Florida which was sold
in November 1996.

     GENERAL AND ADMINISTRATIVE EXPENSES

     The GBCC Group's general and administrative expenses increased by $929,000
(24.5%) during the year ended December 31, 1998 compared to 1997 and by $212,000
(5.9%) during 1997 compared to 1996. Such increases result primarily from costs
associated with the additional sales volume at ACSC coupled with the provision
of reserves for collectability with respect to certain receivables from GBHC.

     OTHER OPERATING EXPENSES

     Other operating expenses increased by $974,000 (286.5%) during the year
ended December 31, 1998 compared to 1997 primarily due to costs associated with
ACSC's sales and installation activities. Other operating expenses decreased by
$5.3 million (94%) during 1997 compared to 1996. Approximately $4.7 million of
the costs incurred in 1996 relate to the aforementioned non-casino hotel sold in
1996.

     DEPRECIATION AND AMORTIZATION

     The GBCC Group's depreciation and amortization expense decreased by
$273,000 (67.9%) during the year ended December 31, 1998 compared to 1997 and
$156,000 (28%) during 1997 compared to 1996. As a result of the default under
the indenture for the PRT Funding Notes, all deferred financing costs were
written off at December 31, 1997. The resulting $358,000 decrease in
amortization expense compared to 1997 was partially offset by an $85,000
increase in depreciation expense due to an increase in ACSC's depreciable
assets. The 1997 decrease from 1996 reflects the absence of depreciation on
certain non-casino hotel assets sold in September 1996.

                                       19
<PAGE>
 
HOLDINGS AND SUBSIDIARIES
-------------------------

     The following table presents the income (loss) from operations of Holdings
and its subsidiaries for the years ended December 31, 1997 and 1996 during which
such operations were consolidated with those of PCC.

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                             ----------------------------
                                                 1997           1996
                                             -------------  -------------
<S>                                          <C>            <C>
Revenues:
 Casino                                      $234,477,000   $242,889,000
 Rooms                                          9,691,000      9,446,000
 Food and beverage                             32,968,000     34,638,000
 Other                                          4,123,000      5,717,000
                                             ------------   ------------
 
                                              281,259,000    292,690,000
 Less - promotional allowances                (25,004,000)   (27,929,000)
                                             ------------   ------------
 
  Net revenues                                256,255,000    264,761,000
                                             ------------   ------------
Expenses:
 Casino                                       199,746,000    218,990,000
 Rooms                                          2,590,000      2,419,000
 Food and beverage                             10,815,000     10,618,000
 Other                                          2,756,000      3,258,000
 General and administrative                    17,409,000     18,486,000
 Depreciation and amortization                 14,062,000     19,310,000
                                             ------------   ------------
 
 Total expenses                               247,378,000    273,081,000
                                             ------------   ------------
 
Income (loss) from operations                $  8,877,000   $ (8,320,000)
                                             ============   ============
</TABLE>

     GAMING OPERATIONS

     The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:

<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31,
                               ----------------------------------
                                     1997              1996
                               ----------------  ----------------
                               (IN THOUSANDS, EXCEPT PERCENTAGES)
<S>                            <C>                    <C>
REVENUES:
 Table games                        $   74,083        $   79,127
 Slot machines                         157,312           159,972
 Other (1)                               3,082             3,790
                                    ----------        ----------
 
  Total                             $  234,477        $  242,889
                                    ==========        ==========
TABLE GAMES:
 Gross Wagering
  (Drop) (2)                        $  524,040        $  576,577
                                    ==========        ==========
 
 Hold Percentages: (3, 4)
  Sands                                   14.1%             13.7%
  Atlantic City                           15.0%             15.5%
 
SLOT MACHINES:
 Gross Wagering
  (Handle) (2)                      $1,916,350        $1,954,612
                                    ==========        ==========
 Hold Percentages: (3, 4)
  Sands                                    8.2%              8.2%
  Atlantic City                            8.4%              8.3%
</TABLE>

____________________________

                                       20
<PAGE>
 
(1)  Consists of revenues from poker and simulcast horse racing wagering.

(2)  Gross wagering consists of the total value of chips purchased for table
     games (excluding poker) and keno wagering (collectively, the "drop") and
     coins wagered in slot machines ("handle").

(3)  Casino revenues consist of the portion of gross wagering that a casino
     retains and, as a percentage of gross wagering, is referred to as the "hold
     percentage".

(4)  The Sands' hold percentages are reflected on an accrual basis.  Comparable
     data for the Atlantic City gaming industry is not available; consequently,
     industry percentages have been calculated based on information available
     from the New Jersey Casino Control Commission.

     Table games drop at the Sands declined $52.5 million (9.1%) during 1997
compared with 1996. The Sands' decrease compares with an increases of 4% in
table drop for all other Atlantic City casinos during the same period. As a
result, the Sands' table game market share (expressed as a percentage of the
Atlantic City industry aggregate table game drop) decreased to 6.8% during 1997
from 7.7% during 1996. The Sands' 1997 table game drop decrease is attributable
to declines in patron volume from both the rated and unrated segments.
Expansions of other Atlantic City casinos resulted in an increase of
approximately 92,000 square feet of gaming space and 73 tables at December 31,
1997 compared to December 31, 1996. Such expansions typically result in intense
marketing campaigns which lure the "mass" segment to the new facility. Gaming
space at the Sands has remained virtually unchanged since mid-1996 and the
number of table games has decreased by 3.1%. The decline in table game drop
during 1997 also reflects management's decision to discontinue certain
promotional activities, including the use of "special odds" offered at table
games, which has caused a decline in the rated table market segment.

     Slot machine handle decreased $38.3 million (2%) during 1997 compared with
1996. The Sands' decrease compares with an increase in slot machine handle of
2.2% for all other Atlantic City casinos during the same period. As a result,
the Sands' market share of slot machine play declined to 5.9% in 1997 from 6.1%
in 1996. The Sands' average number of slot machines remained virtually unchanged
during 1997 compared to an increase of 7.8% for all other Atlantic City casinos.
The below industry-wide performance in handle experienced by the Sands during
1997 is a result of the same competitive pressures resulting from casino
expansions and related marketing campaigns at other properties as discussed
above with respect to table games.

     REVENUES

     Casino revenues at the Sands decreased by $8.4 million (3.5%) during 1997
compared with 1996. Decreases in both slot machine and table game wagering
during 1997 were partially offset by improvements in the table game hold
percentage.

     Rooms revenue did not change significantly during 1997 compared with 1996.
Food and beverage revenues decreased $1.7 million (4.8%) during 1997 compared to
1996 reflecting the decline in patron volume. Other revenues decreased $1.6
million (27.9%) during 1997 compared to 1996 as a result of replacing ongoing
"review show" type entertainment with less frequent "star show" entertainment.

     Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 53.4% during 1997 from 56.1% during 1996. Such
decrease was primarily attributable to reductions in certain marketing programs
and other promotional activities.

                                       21
<PAGE>
 
     DEPARTMENTAL EXPENSES

     Casino expenses at the Sands decreased $19.2 million (8.8%) during 1997
compared to 1996. During 1996, an unprecedented and highly aggressive industry-
wide attempt to increase market share resulted in significantly higher costs
with respect to coin incentive packages. The abatement of these competitive
pressures during 1997, together with management's ongoing efforts to create
operating efficiencies, significantly reduced expenses. Such factors also
resulted in a reduction in the allocation of rooms, food and beverage and other
expenses to casino expense.

     Rooms expense increased $171,000 (7.1%) during 1997 compared to 1996 due to
a lesser percentage of rooms being sold on a complimentary basis which reduced
the allocation of room costs to the casino department. Food and beverage expense
did not change significantly during 1997 compared to 1996. Other expenses
decreased $502,000 (15.4%) in 1997 from 1996 primarily due to cost savings with
respect to theater entertainment.

     GENERAL AND ADMINISTRATIVE

     General and administrative expenses decreased by approximately $1.1 million
(5.8%) during 1997 compared to 1996 due to the success of cost containment
measures implemented by management.

     DEPRECIATION AND AMORTIZATION

     As a result of revising the estimated useful life of the Sands' buildings
effective October 1, 1996 and the completion of amortization with respect to
certain long lived assets, depreciation and amortization expense during 1997
decreased by $5.2 million (27.2%) compared to 1996.

GBCC CONSOLIDATED
------------------

     INTEREST

     Consolidated interest income for GBCC decreased $544,000 (36.6%) during the
year ended December 31, 1998 compared to 1997 as less cash was available for
investment purposes. Interest income decreased $366,000 (19.8%) in 1997 compared
to 1996 primarily due to the loss of interest income associated with a non-
casino hotel property sold in September 1996.

     Interest expense declined $22.1 million (57.7%) during 1998 compared to the
prior year primarily due to the absence of interest on Holdings' 10 7/8% First
Mortgage Notes ($19.9 million during 1997) and to HCC's forgiveness of $23.6
million discounted value of PPI Funding Notes at December 31, 1997.  Interest
expense did not change significantly during 1997 compared to 1996.

     EQUITY IN EARNINGS OF LIMITED PARTNERSHIP

     Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to the general partner. GBCC's equity in the earnings of PML
increased to $6.5 million during the year ended December 31, 1998 compared to $5
million earned during 1997. Prior to April 1, 1997, PML's results of operations
were consolidated with those of GBCC; therefore, the $5 million equity in
earnings for 1997 only reflects nine months of such earnings. Restated on a
comparable twelve month period basis, GBCC's equity in the earnings of PML for
1997 would have been $7 million. The resulting decline to $6.5 million in 1998
reflects the reduction in management fees earned

                                       22
<PAGE>
 
by PML due to a significant increase in gaming taxes imposed on the Aurora
Casino's operations. Management fees are based, in part, on the operating
results of the Aurora Casino. There was no equity in the earnings of PML for the
year ended December 31, 1996 as PML's results of operations were consolidated
with those of GBCC.

    EQUITY IN EARNINGS OF AND GAIN ON ELIMINATION OF INVESTMENT IN GB HOLDINGS,
INC.

    GBCC's equity in the earnings of Holdings for the year ended December 31,
1998 amounted to $3.7 million and represents equity in earnings for the period
from January 1, 1998 through June 30, 1998. Effective July 1, 1998, GBCC
eliminated its investment in Holdings and is no longer recognizing equity in the
earnings of Holdings and its subsidiaries. For the year ended December 31, 1997,
the results of operations of Holdings and its subsidiaries were consolidated
with those of GBCC. Had such operating results been accounted for under the
equity method of accounting, GBCC would have reported equity in losses of $17.1
million and $31.4 million, respectively, for the years ended December 31, 1997
and 1996. The significant improvement in earnings during 1998 compared to the
prior year is primarily due to declines in interest expense which have more than
offset costs associated with the reorganization under Chapter 11. The 1997
improvement from 1996 has previously been addressed under the caption "Results
of Operations - Holdings and Subsidiaries".

    Generally, the Sands experienced small increases in operating income during
1998 compared to 1997 despite declines in net revenues. The revenue decreases
are a direct result of significant declines in total gross wagering at the Sands
due to increased competition in the Atlantic City market, the reduction of
promotional marketing activities in an effort to control costs and the negative
publicity resulting from GBHC's filing under Chapter 11. Operating costs have
decreased due to decreased patron volume as well as to management's efforts to
eliminate certain marginally effective marketing programs and create operating
efficiencies. Reorganization and other related costs attributable to the Chapter
11 filing amounted to $2.8 million during the period from January 1 through June
30, 1998.

    The most significant change in Holdings' operations has been its reduction
in interest expense. As a result of the filing, the accrual of interest expense
on Holdings' debt obligations has been suspended. Had the contractual interest
expense been accrued, GBCC's equity in the losses of Holdings for the 1998
period would have been comparable to the similar prior year period.

    As a result of GBCC no longer controlling the operations of the Sands, the
expectation that control of Holdings will only be temporary and the September
1998 settlement agreement which resolved certain significant uncertainties,
GBCC's investment in Holdings and its subsidiaries as well as certain
intercompany balances with Holdings were revalued to a zero basis effective on
July 1, 1998. The elimination of the investment in and intercompany balances
with Holdings resulted in a gain amounting to $27.5 million during the year
ended December 31, 1998.

    RESTRUCTURING COSTS

    The 1998 increase in restructuring costs results from professional fees and
other corporate overhead costs associated with the default of the PRT Funding
Notes and efforts to restructure the obligations. Management believes that such
reorganization costs will continue in the near term pending the Restructuring.
Professional fees with respect to GBHC's Chapter 11 filing ($505,000) were
expensed during 1997.

    GAIN (LOSS) ON DISPOSAL OF ASSETS

    The 1998 gain results from the sale to GBHC of GBCC's rights under an option
agreement to acquire a parcel of land in Atlantic City from an unrelated third
party. GBCC recognized gains during 

                                       23
<PAGE>
 
1997 from liquidating distributions received from a joint venture with respect
to the sale of a managed hotel property in Orlando, Florida and from the early
termination of a leasehold arrangement. GBCC experienced a loss on disposal of
assets amounting to $1.8 million during 1996 resulting from the write off of
deferred option costs with respect to the planned purchase of a site for future
expansion.

    INCOME TAX PROVISION

    As previously disclosed in GBCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company was advised by HCC, its former parent,
that a revised tax treatment with respect to the distribution of GBCC stock
owned by HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to GBCC
for federal income tax purposes. In addition, the revised tax treatment resulted
in adjustments to GBCC's deferred tax assets and liabilities as previously
reported. The revised tax treatment had no effect on GBCC's assets, liabilities
or operating results as reflected in its consolidated financial statements for
any period presented as GBCC had provided valuation allowances to fully reserve
its net deferred tax assets, including NOL's, for all such reporting periods.
The comments with respect to federal income taxes which follow reflect the
changes arising from the revised tax treatment.

    In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. As a result of the revised tax treatment and the
ensuing litigation, GBCC has replaced its independent accountants. The Company
continues to work with its new outside advisors and consultants to review these
tax issues.

    As a result of the distribution of GBCC's stock by HCC to its shareholders
at December 31, 1996, GBCC is no longer included in HCC's consolidated federal
income tax return. In addition, as a result of a settlement agreement entered
into in September 1998 (see Note 10 of Notes to Consolidated Financial
Statements), Holdings and its subsidiaries will no longer be included in the
consolidated tax return of GBCC for periods subsequent to December 31, 1998. As
of December 31, 1998, GBCC and its subsidiaries, exclusive of Holdings and its
subsidiaries, have NOL's for federal income tax purposes totaling approximately
$33 million, most of which do not begin to expire until the year 2005.
Additionally, GBCC and its subsidiaries have various tax credits available
totaling approximately $2.3 million, most of which expire by the year 2004.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" requires that the tax benefit of such NOL's, credit carryforwards and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that utilization of such asset
is more likely than not, a valuation allowance should be recorded. Due to the
continued availability of NOL's originating in prior years and uncertainties
regarding GBCC's ability to continue as a going concern, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for substantially all of the deferred tax asset
at December 31, 1998. The remaining deferred tax asset represents state timing
differences expected to be utilized.

    On July 27, 1998 GBHC filed an action in the Bankruptcy Court against GBCC,
certain affiliates of GBCC and Jack E. Pratt, Edward T. Pratt, Jr. and William
D. Pratt as directors of GBCC and former directors of GBHC (collectively, the
"GBCC Parties"), which sought, among other things, to enjoin GBCC from using the
tax NOL's of GBHC. On September 2, 1998, the GBCC Parties reached a settlement
with GBHC which was approved by the Bankruptcy Court. The terms of the
settlement agreement provided, among other things, that GBHC be included in the
consolidated federal income tax return of GBCC for 1997 and 1998 enabling GBCC
to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from the GBCC federal income tax return by means of transferring
21% of the stock ownership of Holdings to an unconsolidated entity. Such
transfer was accomplished effective as of December 31, 1998.

                                       24
<PAGE>
 
    WRITE OFF DEFERRED FINANCING COSTS

    At December 31, 1997, remaining deferred financing costs associated with the
10 7/8% First Mortgage Notes ($4.3 million) and the PRT Funding Notes ($2.2
million) were written off.

    EXTRAORDINARY ITEM

    A subsidiary of Holdings acquired $2.5 million of 10 7/8% First Mortgage
Notes at a discount of $375,000 with which to make its scheduled July 1997
principal payment. Such gain was partially offset by the write off of associated
financing costs, resulting in a net gain from early extinguishment of debt
amounting to $310,000.

    YEAR 2000 COMPLIANCE

    In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.

    Management has initiated a program to prepare the Company's computer systems
and applications for the year 2000. Such program includes the use of both
internal and external resources to test and, if necessary, modify or replace
software applications. The costs of acquiring, testing and converting such
systems are expected to be minimal. Management expects its Year 2000 date
conversion projects to be completed on a timely basis. The Company has also
initiated formal communication with its significant suppliers to determine the
extent to which its information systems are vulnerable to those third parties'
failure to resolve their Year 2000 issues. While there can be no assurance that
the Company and its suppliers and customers will fully resolve the Year 2000
issues, neither the estimated cost nor the outcome of the Year 2000 problem is
expected to have a material impact on the Company's operations, liquidity or
financial position.

    INFLATION

    Management believes that in the near term, modest inflation, together with
competition for qualified and experienced personnel, will continue to cause
increases in operating expenses, particularly labor and employee benefits costs.

    SEASONALITY

    Historically, the Sands' operations were highly seasonal in nature, with the
peak activity occurring from May to September. Consequently, the results of
GBCC's operations for the first and fourth quarters were historically less
profitable than the other quarters of the fiscal year. The Aurora Casino also
experiences some seasonality, but to a lesser degree than the Sands, and, as a
result, the management fees earned have fluctuated with such seasonality. In
addition, the Aurora Casino's operations may fluctuate significantly due to a
number of factors, including chance. Such seasonality and fluctuations may
materially affect GBCC's profitability. 

                                       25
<PAGE>
 
ITEM 8.  INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                   PAGE
                                                                   ----
<S>                                                                <C>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES:

   Report of Independent Auditors..................................  27

   Report of Predecessor Independent Public Accountants............  28

   Consolidated Balance Sheets as of December 31, 1998
    and 1997.......................................................  29

   Consolidated Statements of Operations for the Years
    Ended December 31, 1998, 1997 and 1996.........................  31

   Consolidated Statement of Changes in Shareholders'
    Deficit for the Three Years Ended December 31, 1998............  32

   Consolidated Statements of Cash Flows for the Years
    Ended December 31, 1998, 1997 and 1996.........................  33

   Notes to Consolidated Financial Statements......................  34
</TABLE>

                                       26
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------


To Greate Bay Casino Corporation:

     We have audited the accompanying consolidated balance sheet of Greate Bay
Casino Corporation (the Company and a Delaware corporation) and subsidiaries as
of December 31, 1998, and the related consolidated statements of operations,
changes in shareholders' deficit and cash flows for the year then ended. 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 audit.

     We conducted our audit 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 audit provides a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Greate Bay Casino Corporation
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company is in violation of
certain indenture covenants, which has resulted in the acceleration of the due
date of the Company's debt obligations. In addition, the insolvency of the
Company raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.



Deloitte & Touche LLP
Dallas, Texas
March 19, 1999

                                       27
<PAGE>
 
             REPORT OF PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS
              FOR THE TWO YEARS ENDED DECEMBER 31, 1997 AND 1996



     The financial statements of Greate Bay Casino Corporation ("GBCC") for the
two years ended December 31, 1997 and 1996 were examined by Arthur Andersen LLP,
independent public accountants, whose report thereon dated March 23, 1998 was
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.  Such report was qualified with respect to the Company's ability to
continue as a going concern due to acceleration of the due date of the Company's
debt obligations.

     In October 1998, GBCC filed a complaint against Arthur Andersen LLP and
others alleging negligent advice with respect to certain tax consequences
resulting from the spin-off of GBCC's stock held by Hollywood Casino Corporation
to its shareholders on December 31, 1996. The Company subsequently engaged
Deloitte & Touche LLP as its new certifying accountants.

     Because of the foregoing litigation, Arthur Andersen LLP believes that it
is no longer independent with respect to GBCC and consequently has informed the
Company that it is unable to reissue its report for the years ended December 31,
1997 and 1996. As a result, Arthur Andersen LLP's report for those two years is
not included in this Annual Report on Form 10-K.

     Even if Arthur Andersen LLP were to reissue its report for the years 1997
and 1996, there can be no assurance that such report would be identical to the
report dated March 23, 1998, or that such reissued report would not include
additional qualifications. However, GBCC is not aware of any subsequent events,
transactions or other matters that would affect Arthur Andersen LLP's report.

                                       28
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                    ASSETS

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                     --------------------------
                                                         1998          1997
                                                     ------------  ------------
<S>                                                  <C>           <C>
Current Assets:
 Cash and cash equivalents                           $10,616,000   $ 6,555,000
 Accounts receivable                                     367,000        61,000
 Inventories                                             378,000       164,000
 Due from affiliates                                   1,303,000       723,000
 Option payment                                                -     1,000,000
 Refundable deposits and other
  current assets                                         938,000       878,000
                                                     -----------   -----------
 
  Total current assets                                13,602,000     9,381,000
                                                     -----------   -----------
 
Investment in Limited Partnership                      3,104,000     2,256,000
                                                     -----------   -----------
 
Property and Equipment:
 Land                                                          -       864,000
 Operating equipment                                   1,564,000     1,317,000
                                                     -----------   -----------
 
                                                       1,564,000     2,181,000
 Less - accumulated depreciation
  and amortization                                    (1,100,000)     (971,000)
                                                     -----------   -----------
 
  Net property and equipment                             464,000     1,210,000
                                                     -----------   -----------
 
Other Assets:
 Due from affiliates, net of valuation allowances      2,767,000     2,897,000
 Other assets                                              9,000         8,000
                                                     -----------   -----------
 
  Total other assets                                   2,776,000     2,905,000
                                                     -----------   -----------
 
                                                     $19,946,000   $15,752,000
                                                     ===========   ===========
</TABLE>



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

                                       29
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                     LIABILITIES AND SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                          DECEMBER 31,          
                                                 ------------------------------
                                                      1998            1997      
                                                 --------------  --------------
<S>                                              <C>             <C>            
Current Liabilities:                                                            
 Current maturities of long-term debt            $  85,000,000   $  85,055,000  
 Borrowings from affiliate                           6,750,000      12,422,000  
 Accounts payable                                    2,232,000         967,000  
 Accrued liabilities -                                                          
  Salaries and wages                                   235,000         133,000  
  Interest                                           8,780,000       6,875,000  
  Other                                                239,000         190,000  
 Other current liabilities                             296,000         730,000  
                                                 -------------   -------------  
                                                                                
  Total current liabilities                        103,532,000     106,372,000  
                                                 -------------   -------------  
                                                                                
Investment in and Advances to GB Holdings, Inc.              -      20,996,000  
                                                 -------------   -------------  
                                                                                
Long-Term Debt                                      35,040,000      30,894,000  
                                                 -------------   -------------  
                                                                                
Other Noncurrent Liabilities                                 -         606,000  
                                                 -------------   -------------  
                                                                                
Commitments and Contingencies                                                   
                                                                                
Shareholders' Deficit:                                                          
 Common stock, $.10 par value per                                               
  share; 10,000,000 shares authorized;                                          
  5,186,627 shares issued and outstanding              519,000         519,000  
 Additional paid-in capital                         75,212,000      75,212,000  
 Accumulated deficit                              (194,357,000)   (218,847,000)
                                                 -------------   -------------  
                                                                                
  Total shareholders' deficit                     (118,626,000)   (143,116,000)
                                                 -------------   -------------  
                                                                                
                                                 $  19,946,000   $  15,752,000  
                                                 =============   =============
</TABLE>



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

                                       30
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                  -------------------------------------------
                                                      1998           1997           1996
                                                  -------------  -------------  -------------
<S>                                               <C>            <C>            <C>
Revenues:
 Casino                                           $        -     $234,477,000   $242,889,000
 Rooms                                                     -        9,691,000     13,505,000
 Food and beverage                                         -       32,968,000     35,853,000
 Computer services                                   5,255,000      1,529,000      1,342,000
 Other                                               3,716,000     10,030,000     18,903,000
                                                  ------------   ------------   ------------
 
                                                     8,971,000    288,695,000    312,492,000
 Less - Promotional allowances                             -      (25,004,000)   (27,929,000)
                                                  ------------   ------------   ------------
 
  Net revenues                                       8,971,000    263,691,000    284,563,000
                                                  ------------   ------------   ------------
Expenses:
 Casino                                                    -      199,746,000    218,990,000
 Rooms                                                     -        2,590,000      4,456,000
 Food and beverage                                         -       10,815,000     12,030,000
 Other                                               1,314,000      3,096,000      5,468,000
 General and administrative                          4,724,000     16,192,000     19,363,000
 Depreciation and amortization                         129,000     14,464,000     19,868,000
                                                  ------------   ------------   ------------
 
  Total expenses                                     6,167,000    246,903,000    280,175,000
                                                  ------------   ------------   ------------
 
  Income from operations                             2,804,000     16,788,000      4,388,000
                                                  ------------   ------------   ------------
Non-operating income (expenses):
 Interest income                                       942,000      1,486,000      1,852,000
 Interest expense                                  (16,194,000)   (38,246,000)   (39,851,000)
 Equity in earnings of Limited Partnership           6,494,000      5,012,000            -  
 Equity in earnings of and gain on elimination
   of investment in GB Holdings, Inc.               31,233,000            -              -  
 Restructuring costs                                (1,548,000)      (505,000)           -  
 Gain (loss) on disposal of assets                     472,000      2,120,000     (1,795,000)
                                                  ------------   ------------   ------------
 
  Total non-operating income (expense), net         21,399,000    (30,133,000)   (39,794,000)
                                                  ------------   ------------   ------------
 
Income (loss) before income taxes,
  extraordinary and other items                     24,203,000    (13,345,000)   (35,406,000)
Write off deferred financing costs                         -       (6,515,000)           -  
                                                  ------------   ------------   ------------
 
Income (loss) before income taxes and
 extraordinary item                                 24,203,000    (19,860,000)   (35,406,000)
 
Income tax benefit (provision)                         287,000     (1,014,000)      (160,000)
                                                  ------------   ------------   ------------
 
Income (loss) before extraordinary item             24,490,000    (20,874,000)   (35,566,000)
 
Extraordinary item:
 Gain on early extinguishment of debt                      -          310,000            -  
                                                  ------------   ------------   ------------
 
Net income (loss)                                 $ 24,490,000   $(20,564,000)  $(35,566,000)
                                                  ============   ============   ============
 
Basic and diluted net income (loss)
 per common share:
 Income (loss) before extraordinary item          $       4.72   $      (4.02)  $      (6.86)
 Extraordinary item                                       -               .06           -   
                                                  ------------   ------------   ------------
 
 Net income (loss)                                $       4.72   $      (3.96)  $      (6.86)
                                                  ============   ============   ============
</TABLE>

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

                                       31
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
          CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
 
 
                                                                  ADDITIONAL
                                               COMMON STOCK         PAID-IN     ACCUMULATED
                                          ----------------------
                                             SHARES      AMOUNT     CAPITAL       DEFICIT
                                          ------------  --------  -----------  --------------
<S>                                       <C>           <C>       <C>          <C>
BALANCE, JANUARY 1, 1996                     5,186,627  $519,000  $23,783,000  $(162,717,000)
  Capital contribution                             -         -     14,774,000            -  
  Net loss                                         -         -            -      (35,566,000)
                                          ------------  --------  -----------  -------------
 
BALANCE, DECEMBER 31, 1996                   5,186,627   519,000   38,557,000   (198,283,000)
  Sale of general partnership interest             -         -     13,024,000            -  
  Forgiveness of affiliate debt                    -         -     23,631,000            -  
 Net loss                                          -         -            -      (20,564,000)
                                          ------------  --------  -----------  -------------
 
BALANCE, DECEMBER 31, 1997                   5,186,627   519,000   75,212,000   (218,847,000)
  Net income                                       -         -            -       24,490,000
                                          ------------  --------  -----------  -------------
 
BALANCE, DECEMBER 31, 1998                   5,186,627  $519,000  $75,212,000  $(194,357,000)
                                          ============  ========  ===========  =============
</TABLE>


          The accompanying notes to consolidated financial statements
             are an integral part of this consolidated statement.

                                       32
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                 -------------------------------------------
                                                                     1998           1997           1996
                                                                 -------------  -------------  -------------
<S>                                                              <C>            <C>            <C>
OPERATING ACTIVITIES:
 Net income (loss)                                               $ 24,490,000   $(20,564,000)  $(35,566,000)
 Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Extraordinary item                                                    -           (310,000)         -    
  Write off deferred financing costs                                    -          6,515,000
  Depreciation and amortization, including
   accretion of debt discount                                       4,848,000     21,952,000     27,163,000
  (Gain) loss on disposal of assets                                  (472,000)    (2,120,000)     1,795,000
  Provision for doubtful accounts                                     115,000      3,408,000      2,167,000
  Equity in earnings of Limited Partnership                        (6,494,000)    (5,012,000)           -  
  Distributions received from Limited Partnership                   5,646,000      4,856,000            -  
  Equity in earnings of and gain on elimination of investment
   in GB Holdings, Inc.                                           (31,233,000)           -              -  
  Deferred income tax (benefit) provision                            (287,000)       220,000         51,000
  Increase in accounts receivable                                    (306,000)      (607,000)      (972,000)
  Increase (decrease) in accounts payable and
   other accrued liabilities                                        7,923,000       (902,000)     2,108,000
  Net change in other current assets and liabilities               (1,235,000)     2,991,000        388,000
  Net change in other noncurrent assets and liabilities              (807,000)     1,922,000       (161,000)
                                                                 ------------   ------------   ------------
 
     Net cash provided by (used in) operating activities            2,188,000     12,349,000     (3,027,000)
                                                                 ------------   ------------   ------------
 
INVESTING ACTIVITIES:
 Purchases of property and equipment                                 (247,000)    (3,915,000)    (8,085,000)
 Deconsolidation of GB Holdings, Inc.                                     -      (13,871,000)           -  
 Increase in cash from sale of subsidiary                             245,000            -              -  
 Decrease in cash from sale of Limited Partnership                        -         (451,000)           -  
 Proceeds from disposal of assets                                   1,300,000         59,000      2,594,000
 Collections on notes receivable                                      611,000        353,000      9,361,000
 Obligatory investments                                                   -       (2,876,000)    (3,062,000)
 Short-term investments                                                   -        2,000,000     (2,000,000)
 Investments in and advances to unconsolidated affiliates                 -       (6,500,000)    (2,946,000)
 Distributions from unconsolidated affiliate                              -          750,000            -  
                                                                 ------------   ------------   ------------
 
   Net cash provided by (used in) investing activities              1,909,000    (24,451,000)    (4,138,000)
                                                                 ------------   ------------   ------------
 
FINANCING ACTIVITIES:
 Issuance of long-term debt                                               -              -          700,000
 Net (repayments) borrowings on short-term credit facilities              -       (2,000,000)     2,000,000
 Net borrowings from affiliate                                            -              -        1,750,000
 Deferred financing costs                                                 -              -          (10,000)
 Repayments of long-term debt                                         (36,000)    (2,334,000)    (2,351,000)
                                                                 ------------   ------------   ------------
 
  Net cash (used in) provided by financing activities                 (36,000)    (4,334,000)     2,089,000
                                                                 ------------   ------------   ------------
 
  Net increase (decrease) in cash and cash equivalents              4,061,000    (16,436,000)    (5,076,000)
  Cash and cash equivalents at beginning of year                    6,555,000     22,991,000     28,067,000
                                                                 ------------   ------------   ------------
 
  Cash and cash equivalents at end of year                       $ 10,616,000   $  6,555,000   $ 22,991,000
                                                                 ============   ============   ============
</TABLE>
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       33
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

     Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC"), are engaged in the operation and management of casino properties.
GBCC's principal operations consist of the Sands Hotel and Casino located in
Atlantic City, New Jersey (the "Sands") and management and consulting contracts
with gaming facilities located in Aurora, Illinois (the "Aurora Casino") and
Tunica County, Mississippi (the "Tunica Casino") (see Note 6).  GBCC, through
its subsidiaries and various joint ventures, has also engaged to a lesser extent
in other hotel and casino operations in the United States and the Caribbean.

     On December 31, 1996, Hollywood Casino Corporation ("HCC"), owner of
approximately 80% of the outstanding common stock of GBCC, distributed such
stock to its shareholders.  As a result, approximately 36% of GBCC's outstanding
stock is owned by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and
by certain general partnerships and trusts controlled by the Pratts and by other
family members (collectively, the "Pratt Family").  The Pratt Family also owns
approximately 54% of HCC. HCC owns the Aurora Casino and the Tunica Casino.

     Effective April 1, 1997, HCC acquired the general partnership interest in
Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino from PPI Corporation, a wholly owned
subsidiary of GBCC.  As a result, GBCC's investment in PML is now being
presented under the equity method of accounting (see Note 7).  For all periods
through March 31, 1997, PML was wholly owned by subsidiaries of GBCC;
accordingly, the operating results of PML, together with its assets and
liabilities, were consolidated with GBCC for financial statement purposes.

     On January 5, 1998, GB Holdings, Inc. ("Holdings"), a wholly owned
subsidiary of GBCC at that date, together with its wholly owned subsidiaries GB
Property Funding Corp. ("GB Property Funding") and Greate Bay Hotel and Casino,
Inc. ("GBHC"), filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court"). Each company continues
to operate in the ordinary course of business, as set forth in the Bankruptcy
Code, and each company's executive officers and directors remain in office,
subject to the jurisdiction of the Bankruptcy Court. On January 11, 1999, the
Bankruptcy Court terminated the debtors' exclusive right to file a plan of
reorganization. No plan of reorganization has been formally presented by the
debtors or any other party.

     The accompanying consolidated financial statements have been prepared
assuming that GBCC will continue as a going concern.  As discussed above,
certain affiliates of GBCC filed for Chapter 11 bankruptcy protection on January
5, 1998.  The affiliate filings under Chapter 11 have resulted in a default
under the indenture for $85,000,000 principal amount of 11 5/8% senior notes due
2004 (the "PRT Funding Notes") issued by PRT Funding Corp. ("PRT Funding"), an
indirect, wholly owned subsidiary of GBCC.  Accordingly, the outstanding
principal amount of the PRT Funding Notes has accelerated and is currently due
and payable.  As a result of the Chapter 11 filings, GBHC filed a motion seeking
to reject the Sands' management contract with New Jersey Management, Inc.
("NJMI"), a wholly owned subsidiary of GBCC.  An interim agreement entered into
by NJMI and GBHC significantly reduced the fees paid to NJMI (see Note 6).  The
motion to reject the management contract was granted by the Bankruptcy Court on
September 28, 1998.  As a consequence of the September 1998 settlement agreement
(see Note 10), GBCC and GBHC may no longer assert claims against each other with
respect to the operation of the management contract and, with the passage of
time, the cancellation thereof.  Pratt Casino Corporation 

                                       34
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



("PCC"), a wholly owned subsidiary of GBCC and guarantor of the PRT Funding
Notes, does not have sufficient assets to satisfy the outstanding amounts
applicable to the PRT Funding Notes. PRT Funding deferred payment of interest
due on the April 15 and October 15, 1998 interest payment dates. On October 22,
1998, PRT Funding paid to the bondholders an amount equal to a single semiannual
interest payment ($4,941,000) while negotiations to restructure the PRT Funding
Notes continued.

     In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached
an agreement in principle with HCC for HCC to acquire the stock of PCC, the
parent of PRT Funding, from GBCC for nominal consideration as part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC. Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for the Aurora Casino and a
consulting contract for the Tunica Casino. These assets will serve as collateral
for $39,250,000 of 11 7/8% Senior Secured Notes due November 1, 2003 (the "PCC
Notes") which PCC will issue to the PRT Funding noteholders as part of the
Restructuring. For the year ended December 31, 1998, these assets generated pre-
tax earnings to PCC of $7,694,000. The revenues and resulting net earnings
generated by these assets will be the sole source of funds for PCC's payment
obligations under the PCC Notes. Cash available from the management contract and
consulting agreement in excess of interest payment requirements will be used to
make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement. There
can be no assurance at this time that the Restructuring will be successfully
completed.

     After consummation of the Restructuring, GBCC's only significant remaining
operating activity will be the development, installation and maintenance of
casino systems by its wholly owned subsidiary, Advanced Casino Systems
Corporation ("ACSC").  GBCC and its subsidiaries will continue to have debt
outstanding to HCC consisting of (i) demand notes and accrued interest thereon
totaling $8,531,000 at December 31, 1998 (see Notes 3 and 6) and (ii) a 14 7/8%
secured promissory note due 2006 in the amount of $35,040,000 at December 31,
1998 (see Note 4).  The current level of ACSC's operations is not sufficient to
provide debt service on the HCC obligations and, consequently, GBCC will be
insolvent after the Restructuring.  GBCC has commenced discussions with HCC to
restructure its obligations; however, there can be no assurance at this time
that such discussions will result in a restructuring of GBCC's obligations with
HCC.

     The insolvency of GBCC raises substantial doubt about its ability to
continue as a going concern. The consolidated financial statement do not include
any adjustments that might result from the outcome of these uncertainties.

                                       35
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below.  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.

 PRINCIPLES OF CONSOLIDATION -

     Except as noted in the following paragraph, the consolidated financial
statements include the operating activities and cash flows of GBCC and its
wholly owned subsidiaries prior to December 31, 1998.  All significant
intercompany transactions have been eliminated.  Investments in unconsolidated
affiliates, including joint ventures, that are 50% or less owned are accounted
for by the equity method.

     As a result of the Chapter 11 filings discussed in Note 1, GBCC's control
over the filing subsidiaries is subject to supervision of the Bankruptcy Court
and GBCC does not expect to have ownership or operating control of such
subsidiaries after reorganization. Prior to July 7, 1998, NJMI was responsible
for the operations of the Sands under a management agreement with GBHC (see Note
6). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the existing management agreement with NJMI. A substitute agreement (the
"Interim Agreement") was entered into on June 27, 1998 and approved by the
Bankruptcy Court on July 7, 1998. Under the Interim Agreement, NJMI continued to
provide certain agreed upon services to GBHC until September 28, 1998.
Furthermore, as the result of a settlement agreement reached by GBCC and
Holdings during September 1998 (see Note 10), GBCC no longer controls the
management of the Sands. Accordingly, Holdings, GB Property Funding and GBHC are
no longer included on the accompanying consolidated balance sheets. GBCC's
negative investment in Holdings and its subsidiaries on the accompanying
consolidated balance sheet at December 31, 1997 reflects GBCC's investment under
the equity method of accounting. During the period from January 1, 1998 through
June 30, 1998, the operations of Holdings and its subsidiaries were accounted
for under the equity method of accounting (see Note 9). As a result of GBCC no
longer controlling the operations of the Sands, the expectation that ownership
control of Holdings will only be temporary and the September 1998 settlement
agreement which resolved certain significant uncertainties, GBCC's investment in
Holdings and its subsidiaries as well as certain amounts due to Holdings (see
Note 3) were revalued to a zero basis effective on July 1, 1998. Accordingly,
for periods subsequent to June 30, 1998, GBCC is accounting for its investment
in Holdings under the cost method of accounting. The elimination of the
investment in and amounts due to Holdings has resulted in a gain of $27,510,000
which has been combined with equity in the earnings of Holdings on the
accompanying consolidated statement of operations for the year ended December
31, 1998.

 REVENUE RECOGNITION -

     ACSC, a wholly owned subsidiary of GBCC, licenses casino information
technology systems to affiliates of GBCC as well as to non-affiliated casino
companies. Certain of ACSC's sales of software to third parties are pursuant to
agreements which specify modifications to be made, require on-going vendor

                                       36
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



support or provide for other specialized terms and conditions. In recognizing
revenue under such agreements, ACSC has adopted and complies with the reporting
requirements of Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2") issued by the American Institute of Certified Public Accountants. The
provisions of SOP 97-2 require, among other things, that revenue from software
sales that do not require significant production, modification or customization
be recognized when evidence of an arrangement exists, delivery has occurred, the
fee is fixed as determinable and collectability is probable. Software sales for
which significant modifications are required are recognized under a percentage-
of-completion method based on costs incurred to date compared with total
estimated costs.
 
 CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -

     The Sands recognized the net win from gaming activities (the difference
between gaming wins and losses) as casino revenues.  Casino revenues are net of
accruals for anticipated payouts of progressive and certain other slot machine
jackpots and certain progressive table game payouts.

     The estimated value of rooms, food and beverage and other items which were
provided to customers without charge was included in revenues and a
corresponding amount was deducted as promotional allowances.  The costs of such
complimentaries were included as casino expenses on the accompanying
consolidated statements of operations.  Costs of complimentaries allocated from
the rooms, food and beverage and other operating departments to the casino
department during the years ended December 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
 
                                                     1997           1996     
                                                  -----------    ----------- 
<S>                                               <C>            <C>         
Rooms                                             $ 5,617,000    $ 6,170,000 
Food and beverage                                  28,144,000     29,357,000 
Other                                               2,991,000      4,435,000 
                                                  -----------    ----------- 
                                                                             
                                                  $36,752,000    $39,962,000 
                                                  ===========    =========== 
</TABLE>

 CASH AND CASH EQUIVALENTS -

     Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.

 ALLOWANCE FOR DOUBTFUL ACCOUNTS -

     The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses.  A provision for doubtful
accounts amounting to $115,000 was made during 1998. Provisions for doubtful
accounts at the Sands amounting to $3,195,000 and $2,167,000 were made during
the years ended December 31, 1997 and 1996, respectively.

                                       37
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



 INVENTORIES -

     Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.

 PROPERTY AND EQUIPMENT -

     Operating equipment is recorded at cost and is being depreciated utilizing
the straight-line method over estimated useful lives of three to 15 years.

     On October 1, 1996, GBHC revised the estimated useful life of its buildings
from 25 years to 40 years.  Management believes the change in estimated life
more appropriately reflected the timing of the economic benefit to be received
from these assets.  The effect of this change reduced depreciation and
amortization expense and net loss by approximately $761,000 for the year ended
December 31, 1996.

 DEFERRED FINANCING COSTS -

     The costs of issuing long-term debt, including all underwriting, legal and
accounting fees, were capitalized and were being amortized over the term of the
related debt issue.  As a result of the filings under Chapter 11 on January 5,
1998, remaining deferred financing costs in the amount of $6,515,000 were
determined to be unrealizable and were written off on the accompanying
consolidated statement of operations for the year ended December 31, 1997.  The
unamortized balance of deferred financing costs amounted to $7,653,000 at
December 31, 1996.  Amortization of deferred financing costs was $1,072,000 and
$1,087,000 for the years ended December 31, 1997 and 1996, respectively.

 LONG-LIVED ASSETS -

     Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.  As
a result of its review, GBCC does not believe that any such changes have
occurred.

 ACCRUED INSURANCE -

     GBCC is self insured for a portion of its general liability, certain health
care and other liability exposures.  Accrued insurance includes estimate of such
accrued liabilities based on an evaluation of the merits of individual claims
and historical claims experience; accordingly, GBCC's ultimate liability may
differ from the amounts accrued.

                                       38
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



 INCOME TAXES -

     From May 1992 through December 31, 1996, GBCC's results of operations were
included in HCC's consolidated federal income tax return.  Pursuant to
agreements between HCC and GBCC,  GBCC's provision for federal income taxes was
based on the amount of tax which would have been provided if a separate federal
income tax return had been filed.

 INTEREST EXPENSE -

     Interest expense includes the accretion of debt discount amounting to
$4,719,000, $7,488,000 and $7,295,000, respectively, during the years ended
December 31, 1998, 1997 and 1996.

  NET INCOME (LOSS) PER COMMON SHARE -

     During 1997, GBCC adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128").  SFAS 128 requires the calculation
and disclosure of earnings per common share assuming no dilution (basic earnings
per share) and earnings per common share assuming full dilution (diluted
earnings per share).  SFAS 128 requires the restatement of earnings per share
for all prior years presented.

     Under SFAS 128, basic earnings per common share is calculated by dividing
the net income (loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share is calculated for periods in
which income from continuing operations was earned by dividing the components of
net income by the weighted average number of shares of common stock and
potential common shares outstanding. All potential common shares are excluded
from the calculation of diluted net loss per share for periods during which a
loss was incurred because the effect of their inclusion would be antidilutive.

     For each of the years ended December 31, 1998, 1997 and 1996, there were no
potential common shares outstanding and basic and diluted income (loss) per
share were the same.  The weighted average number of shares of common stock used
in the calculation of both basic and diluted income (loss) per share was
5,186,627 for each of the years ended December 31, 1998, 1997, and 1996.

 RECENT ACCOUNTING PRONOUNCEMENTS -

     The Financial Accounting Standards Board (the "FASB") has issued a new
standard, "Reporting Comprehensive Income" ("SFAS 130").  SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the reclassification of
all prior periods presented.  GBCC has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income.  GBCC
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.

                                       39
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     The FASB has also issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131").  SFAS 131, which became
effective for fiscal years beginning after December 15, 1997, requires publicly-
held companies to report financial and descriptive information concerning its
reportable operating segments.  An operating segment is defined as a component
of a business which (i) earns revenues and incurs expenses, (ii) has its
operating results reviewed on a regular basis by the company's chief operating
decision maker to determine how the company's resources should be allocated and
to assess its performance and (iii) has separate financial information
available.  During the years ended December 31, 1997 and 1996, the operations of
the Sands accounted for in excess of 90% of consolidated net revenues and
comprised virtually all of GBCC's consolidated assets.  As a result of the
filings under Chapter 11 and the resulting presentation of Holdings and its
subsidiaries under the cost and equity methods of accounting (see Note 2),
GBCC's single remaining operating segment is comprised of ACSC. Accordingly, for
each year presented, management believes that GBCC's operations have consisted
of a single operating segment and additional segment information is not
presented herein.

     In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), effective for fiscal years
beginning after June 15, 1999.  SFAS 133 requires, among other things, that
derivatives be recorded on the balance sheet at fair value.  Changes in the fair
value of derivatives may, depending on circumstances, be recognized in earnings
or deferred as a component of shareholders' equity until a hedged transaction
occurs.  GBCC does not believe the adoption of SFAS 133 will have a significant
impact on its financial position or results of operations.

 RECLASSIFICATIONS -

     Certain reclassifications have been made to the prior years' financial
statements to conform to the 1998 consolidated financial statement presentation.

(3)  SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES

     GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 as of both December 31, 1998 and 1997.  During the third quarter of
1996, GBCC borrowed $6,500,000 from HCC on a demand basis with interest at the
rate of 13 3/4% per annum payable quarterly commencing October 1, 1996; such
funds were loaned by GBCC to GBHC for working capital purposes on the same
terms.  On September 2, 1998, the working capital loans to GBHC were cancelled
as part of a settlement agreement among GBCC and Holdings, together with certain
of their subsidiaries, and HCC (see Note 10). In addition, a $250,000 loan from
HCC with interest at the rate of 14% per annum payable semiannually was due on
April 1, 1998; to date, such payment has not been made.

     GBHC made an advance to a GBCC subsidiary in the amount of $5,672,000. The
GBCC subsidiary which received the advance is insolvent and GBCC has no
obligation with respect to the advance. At December 31, 1997, the accompanying
consolidated balance sheet reflects such advance in borrowings from affiliates
and reflects accrued interest in the amount of $3,978,000 in interest payable. A
settlement agreement entered into by GBCC and GBHC during September 1998 (see
Note 10) provides, among other things, that GBHC preserves whatever rights of
offset, if any, it might have with respect to such advance together with accrued
interest thereon against $15,000,000 of subordinated loans made to GBHC by other
GBCC subsidiaries (see Note 6). As GBHC's only recourse, if any, is against
intercompany obligations 

                                       40
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


already fully reserved by GBCC, the advance and accrued interest amounting to
$4,602,000 were eliminated from the consolidated balance sheet of GBCC and are
included in the gain of $27,510,000 on elimination of investment in Holdings
included on the accompanying consolidated statement of operations for the year
ended December 31, 1998 (see Note 1).

     During January 1997 GBCC repaid $2,000,000 outstanding on a $5,000,000 bank
line of credit and the line of credit was cancelled.

(4)  LONG-TERM DEBT AND PLEDGE OF ASSETS

     On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code.  Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court.  The Bankruptcy Court continued to
extend the exclusive period of the debtors to file a plan of reorganization
until January 11, 1999.  No additional period of exclusivity has been granted.
The filings of such petitions constitute a default under the indenture for the
PRT Funding Notes.  Accordingly, the outstanding principal amount of the PRT
Funding Notes has accelerated, is currently due and payable and is classified as
current on the accompanying consolidated balance sheets.

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      ---------------------------
                                                          1998          1997
                                                      ------------  -------------
<S>                                                   <C>           <C>
 11 5/8% senior notes, due 2004 (a)                   $ 85,000,000  $ 85,000,000
 14 7/8% secured promissory note, due 2006, net of
   discount of $12,562,000 and $17,281,000,
   respectively (b)                                     35,040,000    30,321,000
 Other (Note 11)                                                 -       628,000
                                                      ------------  ------------
 
     Total indebtedness                                120,040,000   115,949,000
   Less - current maturities                            85,000,000   (85,055,000)
                                                      ------------  ------------
 
     Total long-term debt                             $ 35,040,000  $ 30,894,000
                                                      ============  ============
</TABLE>

___________________________

(a)  On February 17, 1994, PRT Funding issued the PRT Funding Notes.  Interest
     on the PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
     semiannually commencing October 15, 1994.  The PRT Funding Notes are
     redeemable at the option of the issuer, in whole or in part, on or after
     April 15, 1999 at stated redemption prices ranging up to 104.36% of par
     plus accrued interest.  The indenture for the PRT Funding Notes contains
     various provisions which, among other things, restrict the ability of
     certain subsidiaries of GBCC to pay dividends to GBCC, to merge,
     consolidate or sell substantially all of their assets or to incur
     additional indebtedness beyond certain limitations.  The indenture also
     contains certain cross default provisions with respect to first mortgage
     debt obligations of GB Property Funding.

                                       41
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(b)  On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
     $40,524,000 discounted principal amount of new deferred interest notes (the
     "PPI Funding Notes") to HCC in exchange for the $38,779,000 principal
     amount of 15 1/2% unsecured notes (the "PCPI Notes") held by HCC and issued
     by PCPI Funding Corp., another subsidiary of GBCC. The PPI Funding Notes
     were discounted to yield interest at the rate of 14 7/8% per annum and had
     a face value of $110,636,000. Subsequent principal payment by PPI Funding
     Corp. reduced the maturity value of the notes to $98,353,000 at December
     31, 1996. During the second quarter of 1997, HCC assigned $13,750,000
     undiscounted principal amount of the PPI Funding Notes to PPI Corporation
     as consideration, in part, for HCC's acquisition of the general partnership
     interest in PML (see Note 6). Such assignment reduced the maturity value of
     the notes to $84,603,000. At December 31, 1997, an additional $37,000,000
     undiscounted face value ($23,631,000 discounted value) of the PPI Funding
     Notes was forgiven by HCC, further reducing the maturity value to
     $47,603,000. Because of the continued affiliation of HCC and GBCC, the
     forgiveness of debt was reflected by GBCC as a credit to paid-in capital on
     the accompanying consolidated statement of changes in shareholders' deficit
     at December 31, 1997. Payment of interest on the PPI Funding Notes is
     deferred through February 17, 2001 at which time interest will become
     payable semiannually, with the unpaid principal balance due on February 17,
     2006. The PPI Funding Notes are collateralized by a pledge of all of the
     common stock of a subsidiary of GBCC.

     Scheduled payments of long-term debt as of December 31, 1998, exclusive of
the PRT Funding Notes which are currently in default and accelerated, are
$47,603,000 in 2006.

     Interest paid, net of amounts capitalized, amounted to $4,968,000,
$30,102,000 and $31,206,000, respectively, during the years ended December 31,
1998, 1997 and 1996.

(5)  INCOME TAXES

     During 1998, the Company was advised by HCC, its former parent, that a
revised tax treatment with respect to the distribution of GBCC stock owned by
HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to GBCC
for federal income tax purposes. In addition, the revised tax treatment resulted
in adjustments to GBCC's deferred tax assets and liabilities as previously
reported. The revised tax treatment had no effect on GBCC's assets, liabilities
or operating results as reflected in its consolidated financial statements for
any period presented as GBCC had provided valuation allowances to fully reserve
its net deferred tax assets, including NOL's, for all such reporting periods.
The effects on deferred taxes and on the valuation allowance resulting from the
revised tax treatment have been included herein as adjustments during the year
ended December 31, 1998.

     In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract (see Note 10).

                                       42
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Components of GBCC's benefit (provision) for income taxes consist of the
following:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,         
                                             ----------------------------------------
                                                 1998          1997          1996    
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>         
Federal income tax (provision) benefit:                                              
 Current                                     $         -   $         -   $         - 
 Deferred                                     (9,012,000)   (7,322,000)    5,757,000 
State income tax (provision) benefit:                                                
 Current                                               -      (794,000)     (109,000)
 Deferred                                        (21,000)      (36,000)      (51,000)
 Valuation allowance                           9,320,000     7,138,000    (5,757,000)
                                             -----------   -----------   ----------- 
                                                                                     
                                             $   287,000   $(1,014,000)  $  (160,000)
                                             ===========   ===========   ===========  
</TABLE>

     GBCC did not pay any federal income taxes during the years ended December
31, 1998, 1997 or 1996. Total state income taxes paid by GBCC for the years
ended December 31, 1998, 1997 and 1996 amounted to $319,000, $193,000 and
$123,000, respectively.

     A reconciliation between the calculated tax (provision) benefit based on
the statutory rates in effect and the effective tax rates follows:

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 1998          1997           1996
                                             ------------  -------------  -------------
<S>                                          <C>           <C>            <C>
Calculated income tax (provision) benefit    $(8,229,000)  $  6,647,000   $ 12,038,000
Tax benefit of operating
 losses not recognized                                 -              -    (11,098,000)
Forgiveness of debt by affiliate                       -      8,035,000              -
Amortization of excess
 purchase price                                        -              -       (601,000)
Other                                           (804,000)       506,000       (499,000)
Valuation allowance change                     9,320,000    (16,202,000)             -
                                             -----------   ------------   ------------
Tax benefit (provision) as shown on
 consolidated statements of operations       $   287,000   $ (1,014,000)  $   (160,000)
                                             ===========   ============   ============
</TABLE>

     As a result of the distribution of GBCC's stock by HCC to its shareholders
at December 31, 1996, GBCC is no longer included in HCC's consolidated federal
income tax return. In addition, as a result of a settlement agreement entered
into in September 1998 (see Note 10), Holdings and its subsidiaries will no
longer be included in the consolidated tax return of GBCC for periods subsequent
to December 31, 1998. As of December 31, 1998, GBCC and its subsidiaries,
exclusive of Holdings and its subsidiaries, have NOL's totaling approximately
$33,000,000 for federal income tax purposes, most of which do not begin to
expire until the year 2005. Additionally, GBCC and its subsidiaries have various
tax credits available totaling approximately $2,300,000 most of which expire by
the year 2004. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109") requires that the tax benefit 

                                       43
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


of such NOL's, credit carryforwards and deferred tax assets resulting from
temporary differences be recorded as an asset and, to the extent that management
can not assess that the utilization of such asset is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years and uncertainties regarding GBCC's ability to
continue as a going concern, management is unable to determine that realization
of such asset is more likely than not and, thus, has provided valuation
allowances for substantially all of the deferred tax asset for all periods
presented. The remaining deferred tax asset at December 31, 1998 represents
state timing differences expected to be utilized and is included in other
current assets on the accompanying consolidated balance sheet.

   The components of the net deferred tax asset are as follows:

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                          ----------------------------
                                              1998           1997
                                          -------------  -------------
<S>                                       <C>            <C>
Deferred tax assets:
 Net operating loss carryforwards         $ 11,946,000   $  9,388,000
 Forgiveness of affiliate debt                       -      9,438,000
 Allowance for doubtful accounts               130,000         85,000
 Alternative minimum tax credit                      -        270,000
 Investment and jobs tax credits             2,339,000      3,378,000
 Investment in consolidated subsidiary       2,866,000      4,428,000
 Other liabilities and accruals                113,000        298,000
 Deferred financing costs                    1,374,000        899,000
 Other                                         242,000        97,0000
                                          ------------   ------------
 
Deferred tax asset                          19,010,000     28,281,000
Valuation allowance                        (18,961,000)   (28,281,000)
                                          ------------   ------------
 
                                          $     49,000   $          -
                                          ============   ============
</TABLE>

     Sales or purchases of GBCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of GBCC to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of annual
loss carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect GBCC's future utilization of its loss carryforwards.

     The Internal Revenue Service is currently examining the consolidated
federal income tax returns of HCC for the years 1993 through 1996 in which GBCC
was included. Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position or results
of operations of GBCC.

                                       44
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(6)  TRANSACTIONS WITH RELATED PARTIES

     PML, a limited partnership wholly owned through March 31, 1997 by GBCC,
earns management fees pursuant to a management agreement with Hollywood Casino -
Aurora, Inc. ("HCA"), an HCC subsidiary. Such fees include a base management fee
equal to 5% of the Aurora Casino's operating revenues (as defined in the
agreement) subject to a maximum of $5.5 million annually, and an incentive fee
equal to 10% of gross operating profit (as defined in the agreement to generally
include all revenues, less expenses other than depreciation, interest,
amortization and taxes). Effective as of April 1, 1997, HCC acquired the general
partnership interest in PML from PPI Corporation. Management fees earned by GBCC
prior to the April 1, 1997 sale of the general partnership interest amounted to
$2,727,000. Such fees amounted to $9,360,000 during the year ended December 31,
1996.

     In April 1997, HCC issued a five-year note in the original amount of
$3,800,000 and assigned $13,750,000 undiscounted principal amount ($7,597,000
discounted value) of PPI Funding Notes (see Note 4) and $350,000 of accrued
interest due from GBCC to PPI Corporation in exchange for the general
partnership interest in PML. The difference between the historical cost of PPI
Corporation's investment in PML and the selling price ($13,024,000) was recorded
as a credit to paid-in capital in 1997 (see Note 11). The $3,800,000 note is
payable in monthly installments of $83,000, including interest at the rate of
14% per annum, commencing on May 1, 1997, with additional quarterly variable
principal payments commencing on July 1, 1997 in an amount equal to the general
partner's share of quarterly cash distributions, as defined, from PML. The
remaining note balances at December 31, 1998 and 1997 are $2,836,000 and
$3,447,000, respectively. Of those balances, $622,000 and $552,000 are included
in current amounts due from affiliates and $2,214,000 and $2,895,000 are
included in noncurrent amounts due from affiliates at December 31, 1998 and
1997, respectively. Interest income on the note from HCC amounted to $439,000
and $383,000, respectively, during the years ended December 31, 1998 and 1997.
Accrued interest receivable of $34,000 and $41,000, respectively, is included in
amounts due from affiliates on the accompanying consolidated balance sheets at
December 31, 1998 and 1997.

     Prior to May 1, 1998, NJMI was responsible for the operations of the Sands
under a management agreement with GBHC. NJMI was entitled to receive annually
(i) a basic consulting fee of 1.5% of "adjusted gross revenues," as defined, and
(ii) incentive compensation of between 5% and 7.5% of gross operating profits in
excess of certain stated amounts should annual "gross operating profits," as
defined, exceed $5,000,000. On May 22, 1998, GBHC filed a motion with the
Bankruptcy Court seeking to reject the existing management agreement with NJMI.
The Interim Agreement was entered into on June 27, 1998 and was approved by the
Bankruptcy Court on July 7, 1998. Under the Interim Agreement, effective as of
May 1, 1998 and terminating on September 28, 1998, NJMI continued to provide
certain agreed upon services to GBHC at a monthly fee of $165,000 of which
$122,000 was paid on a monthly basis in arrears and the remaining $43,000 was
deferred and is to be paid upon confirmation of GBHC's plan of reorganization by
the Bankruptcy Court. All management fees terminated upon the granting of GBHC's
motion to reject the management contract by the Bankruptcy Court on September
28, 1998. As a consequence of the September 1998 settlement agreement (see Note
10), GBCC and GBHC may no longer assert claims against each other with respect
to the operation of the management contract and, with the passage of time, the
cancellation thereof.

                                       45
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Fees earned by NJMI under the management agreement and Interim Agreement
amounted to $2,405,000 for the year ended December 31, 1998.  Management fees
receivable from the Sands at December 31, 1998 and 1997 amounted to $267,000 and
$34,000, respectively, net of a valuation allowance of $115,000 at December 31,
1998.  Of the amount receivable at December 31, 1998, $30,000, net of the
aforementioned valuation allowance, which was earned prior to GBHC's bankruptcy
filing, is included in noncurrent due from affiliates on the accompanying
consolidated balance sheet and is subject to terms of a reorganization plan
which requires confirmation by the Bankruptcy Court.

     Pursuant to a ten-year consulting agreement with Hollywood Casino - Tunica,
Inc. ("HCT"), the HCC subsidiary which owns and operates the Tunica Casino, a
subsidiary of GBCC receives monthly consulting fees of $100,000.  Total fees
earned for each of the years ended December 31, 1998, 1997 and 1996 amounted to
$1,200,000.

     HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to services agreements. During 1996 HCC was obligated
under the terms of an administrative services agreement to pay GBCC $50,000 per
month. Net allocated costs and fees charged to GBCC and its subsidiaries by HCC
amounted to $928,000, $1,843,000 and $2,486,000, respectively, during the years
ended December 31, 1998, 1997 and 1996. In connection with such charges,
payables in the amount of $170,000 and $149,000 are included in accounts payable
on the accompanying consolidated balance sheets at December 31, 1998 and 1997,
respectively.

     ACSC provides computer, marketing and other administrative services to GBHC
and to HCC and its subsidiaries. Computer services provided include hardware,
software and operator support and, for the most part, such services are billed
by ACSC at its direct cost plus expenses incurred. ACSC and HCT entered into a
Computer Services Agreement dated as of January 1, 1994 and renewed through
December 31, 1999 to provide such services and to license or sublicense to HCT
computer software necessary to operate HCT's casino, hotel and related
facilities and business operations. HCT pays ACSC for such equipment and
licenses such software at amounts and on terms and conditions that ACSC provides
to unrelated third parties. HCT also pays ACSC a fixed license fee of $33,600
per month. ACSC's billings to HCC and its subsidiaries for such services
amounted to $1,147,000, $809,000 and $618,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Such charges to GBHC amounted to $787,000 for
the year ended December 31, 1998. Unpaid charges from HCC and its subsidiaries
included in due from affiliates on the accompanying consolidated balance sheets
for the years ended December 31, 1998 and 1997 amounted to $122,000 and $78,000,
respectively.

     Many of the marketing and administrative services now provided to HCC and
its subsidiaries by ACSC were previously provided by GBHC. Such charges amounted
to $704,000 and $1,344,000 during the years ended December 31, 1997 and 1996,
respectively.

     On February 17, 1994, PRT Funding issued $15,000,000 of 14 5/8% junior
subordinated notes (the "Junior Subordinated Notes") to HCC. Principal totaling
$6,262,000 with respect to the Junior Subordinated Notes was subsequently
assigned to GBCC by HCC in recognition of tax net operating losses of GBCC used
by HCC. The remaining $8,738,000 of Junior Subordinated Notes, together with
interest accrued thereon, was assigned to GBCC by HCC in connection with the
distribution of its stock in GBCC to HCC's shareholders on December 31, 1996.

                                       46
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     Interest expense with respect to borrowings from HCC is set forth below:

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                                  ----------------------------------
                                     1998        1997        1996
                                  ----------  ----------  ----------
<S>                               <C>         <C>         <C>
 
PPI Funding Notes (Note 4)        $4,719,000  $7,488,000  $7,295,000
Junior Subordinated Notes                  -           -   1,277,000
Short-term borrowings (Note 3)       942,000     977,000   1,050,000
</TABLE>

     During 1994, a GBCC subsidiary issued $40,524,000 discounted principal
amount of PPI Funding Notes in exchange for the PCPI Notes held by HCC (see Note
4). Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balance at December 31, 1998 and 1997.

     Interest accrued on short-term borrowings at December 31, 1998 and 1997,
which amounted to $1,781,000 and $839,000, respectively, is included in interest
payable on the accompanying consolidated balance sheets.

     GBHC issued a promissory note in the amount of $10,000,000 on February 17,
1994 to PRT Funding. Such note accrues interest at the rate of 14 5/8% per annum
and is payable semiannually commencing on August 17, 1994. The principal amount
of the note is due on February 17, 2005. During the first quarter of 1997, GBHC
also borrowed $5,000,000 from PCC for working capital purposes. Such borrowing
accrues interest at the rate of 14 5/8% per annum payable semiannually
commencing July 15, 1997. Prior to December 31, 1997, such notes and related
interest were eliminated in consolidation. As a result of (i) GBHC no longer
being included as a consolidated subsidiary and (ii) GBHC's filing under Chapter
11 making prospects for ultimate collection doubtful, the notes, together with
accrued interest receivable aggregating $3,458,000, were reflected as an
adjustment to GBCC's negative investment in Holdings on the accompanying
consolidated balance sheet at December 31, 1997. In accordance with certain
provisions of the September 1998 settlement agreement with GBCC (see Note 10),
GBHC preserves whatever rights of offset, if any, it might have with respect to
an advance made by GBHC to a GBCC subsidiary (see Note 3) against the
$10,000,000 and $5,000,000 loans described above. The notes, together with
accrued interest of $5,652,000, are fully reserved on the accompanying
consolidated balance sheet at December 31, 1998.

     During the third quarter of 1996, GBCC loaned $6,500,000 to GBHC for
working capital purposes. Such advance accrues interest at the rate of 13 3/4%
per annum, payable quarterly commencing October 1, 1996. An additional
$1,500,000 was loaned to GBHC during the first quarter of 1997 on the same
terms. Repayment of such advances and the payment of the related interest are
subject to terms of a reorganization plan which requires confirmation by the
Bankruptcy Court and to approval by the New Jersey Casino Control Commission
(the "Casino Commission"). Prior to December 31, 1997, such notes and the
related interest were eliminated in consolidation. For the same reasons cited in
the previous paragraph, the total advances to GBHC of $8,000,000, together with
the related interest receivable of $1,496,000, were reflected as an adjustment
to GBCC's negative investment in Holdings on the accompanying consolidated
balance sheet at December 31, 1997. On September 2, 1998, the working capital
loans to GBHC were cancelled as part of a settlement agreement among GBCC and
Holdings, together with certain of their subsidiaries, and HCC (see Note 10).

                                       47
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(7)  INVESTMENT IN PRATT MANAGEMENT, L.P.

     Effective as of April 1, 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 6) from PPI Corporation. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. The general partner receives 99% of the first $84,000
of net income earned by the partnership each month and 1% of any income earned
above such amount. PML earned management fees amounting to $8,872,000 for the
year ended December 31, 1998 and $6,882,000 for the period from April 1, 1997
through December 31, 1997. PML also incurred operating and other expenses
amounting to $1,313,000 for the year ended December 31, 1998 and $1,070,000 for
the period from April 1, 1997 through December 31, 1997.

(8)  REGULATORY MATTERS

     ILLINOIS -

     Riverboat gaming operations in Illinois are subject to regulatory control
by the Illinois Gaming Board (the "IGB"). Under the provisions of the Illinois
gaming regulations, PML is required to maintain its supplier's license, which
was most recently renewed in 1998 and expires in December 1999 with the
condition that PML provide justification for future renewal. The IGB has
expressed its opposition to the licensing of holders of management services
contracts with percentage-based fees for Illinois riverboat gaming operations.
PML's existing management contract is currently the only percentage-based
management contract between a supplier and a riverboat gaming operation. PCC
believes that the successful completion of the Restructuring previously
described will enable PML to provide acceptable justification for renewal of the
PML supplier's license in December 1999. If it were determined that gaming laws
were violated by a licensee, the license held could be limited, conditioned,
suspended or revoked. In addition, the licensee and other persons involved could
be subject to substantial fines.

     NEW JERSEY -

     GBHC and NJMI conducted gaming operations in Atlantic City, New Jersey and
operated a hotel and several restaurants, as well as related support facilities.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control.  During 1996, the Casino Commission renewed GBHC's license
to operate the Sands through September 30, 2000 (subject to review of the Sands'
financial stability) and renewed NJMI's license to manage the Sands through
September 30, 2000.  Terms of the current license require GBHC to comply with
periodic financial reporting requirements as well as obtain prior Casino
Commission approval of certain cash transactions with affiliates.  If it were
determined that gaming laws were violated by a licensee, the gaming license held
by each licensee could be conditioned, suspended or revoked.  In addition, the
licensees and other persons involved could be subject to substantial fines.

     Casino licensees are required to make certain approved investments in New
Jersey or to pay an investment alternative tax.  Casino licensees may obtain
investment credits by purchasing bonds at below-market interest rates from the
Casino Reinvestment Development Authority (the "CRDA") or by making qualified
investments ("obligatory investments") approved by the CRDA.  This governmental
agency administers the statutorily mandated investments made by casino licensees
and is required to expend the monies received by it for eligible projects
defined in the statute.   Provisions for valuation allowances on 

                                       48
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


obligatory investments during the years ended December 31, 1997 and 1996
amounted to $1,241,000 and $1,344,000, respectively.

(9)  SUMMARIZED COMBINED FINANCIAL INFORMATION OF AND TRANSACTIONS WITH
     UNCONSOLIDATED AFFILIATES

     HOLDINGS -

     As discussed in Note 2, the operations of Holdings and its subsidiaries
were accounted for under the equity method of accounting for the six month
period from January 1, 1998 through June 30, 1998. Due to the significance of
Holdings' operations, summarized consolidated results of operations of Holdings
for the six month period ended June 30, 1998 are set forth below. For the years
ended December 31, 1997 and 1996, Holdings' results of operations were included
on the accompanying consolidated statements of operations. Additionally, certain
summarized financial information concerning the assets and liabilities of
Holdings and its subsidiaries as of December 31, 1997 have been set forth below.
Balance sheet information as of December 31, 1998 is not presented for the
reasons cited in Note 2 with respect to GBCC's no longer exercising control over
Holdings and its subsidiaries. Transactions with Holdings and its subsidiaries
are included in Note 6.

<TABLE>
<CAPTION>
                                                         SIX MONTHS ENDED   
                                                           JUNE 30, 1998 
                                                         -----------------
<S>                                                      <C>    
Net revenues                                               $114,066,000  
                                                           ------------  
                                                                         
Departmental expenses                                        95,499,000  
General and administrative expenses                           7,115,000  
Depreciation and amortization                                 5,825,000  
                                                           ------------  
                                                                         
 Total operating expenses                                   108,439,000  
                                                           ------------  
                                                                         
Income from operations                                        5,627,000  
                                                           ------------  
                                                                         
Interest, net                                                   899,000  
Gain on disposal of assets                                       28,000  
                                                           ------------  
                                                                         
 Total non-operating income                                     927,000  
                                                           ------------  
                                                                         
Income before taxes and other item                            6,554,000  
Income tax provision                                                  -  
                                                           ------------  
                                                                         
Income before other items                                     6,554,000  
Reorganization and other related costs                       (2,831,000) 
                                                           ------------  
                                                                         
Net income                                                 $  3,723,000  
                                                           ============   
</TABLE> 

                                       49
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE> 
<CAPTION> 
                                               DECEMBER 31,
                                                  1997
                                              ------------
<S>                                           <C>  
Current assets                                $ 28,088,000
Noncurrent assets                              159,640,000
Current liabilities                             25,117,000
Noncurrent liabilities                         221,211,000
</TABLE>

     OTHER UNCONSOLIDATED AFFILIATES -

     Summarized combined financial information with respect to GBCC's
unconsolidated affiliates (which include joint ventures) are set forth below.

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,        
                                    --------------------------------------
                                      1998         1997          1996     
                                    ---------  ------------  -------------
<S>                                 <C>        <C>           <C>          
                                                                          
Net revenues                        $ 12,000   $ 3,114,000   $ 39,314,000 
Expenses                             (31,000)   (2,936,000)   (41,524,000)
Gain on sale of assets                     -    10,356,000              - 
                                    --------   -----------   ------------ 
                                                                          
Net (loss) income                   $(19,000)  $10,534,000   $ (2,210,000)
                                    ========   ===========   ============  
</TABLE>

     Income and losses of GBCC's unconsolidated affiliates have not been
reflected on the accompanying consolidated statements of operations as GBCC's
investments in such affiliates were previously eliminated through the
recognition of prior year losses.

     Current assets of such unconsolidated affiliates totalled $49,000 and
$55,000, respectively, at December 31, 1998 and 1997.  Current liabilities at
December 31, 1998 amounted to $16,000; there were no current liabilities at
December 31, 1997.

     GBCC agreed to contribute up to $3,900,000 as an additional investment in
the partnership which owned the Sheraton Plaza hotel in Orlando, Florida to
refurbish the hotel facility. Such contributions were agreed to in recognition
of GBCC's partner having agreed to make $5,000,000 in principal reductions on
the underlying mortgage note on the facility. GBCC was required to pay
$2,946,000 to retire its share of the underlying indebtedness on the property in
connection with the sale of the hotel in November 1996. During 1997, GBCC
received $750,000 in distributions as part of the liquidation of the
partnership.

     GBCC earned management and project fees from unconsolidated affiliates for
the management and project supervision of certain hotel facilities. During the
years ended December 31, 1998, 1997 and 1996, such fees amounted to $29,000,
$292,000 and $1,167,000, respectively.

     During the fourth quarter of 1996, an unconsolidated partnership in which a
GBCC subsidiary held a 46% interest entered into an agreement for the sale of a
casino/hotel in San Juan, Puerto Rico owned by the partnership and managed by
the GBCC subsidiary. The sale was completed in February 1997 and GBCC received a
fee of $1,475,000 with respect to the termination of its management agreement.

                                       50
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


(10) COMMITMENTS AND CONTINGENCIES

     SUBSIDIARY CHAPTER 11 FILINGS AND RELATED LITIGATION -

     On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code.  Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court.  On January 11, 1999, the Bankruptcy
Court terminated the debtors' exclusive right to file a plan of reorganization.
No plan of reorganization has been formally presented by the debtors or any
other party.

     As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. In March 1999, PCC, GBCC and the holders of the
PRT Funding Notes reached an agreement in principle with HCC for HCC to acquire
the stock of PCC, the parent of PRT Funding, from GBCC for nominal consideration
as part of a debt restructuring (the "Restructuring") of PRT Funding, PCC and
other subsidiaries of PCC. Following the Restructuring, PCC's assets will
consist of its limited partnership interest in a management contract for the
Aurora Casino and a consulting contract for the Tunica Casino. These assets will
serve as collateral for $39,250,000 of 11 7/8% Senior Secured Notes due November
1, 2003 (the "PCC Notes") which PCC will issue to the PRT Funding noteholders as
part of the Restructuring. For the year ended December 31, 1998, these assets
generated pre-tax earnings to PCC of $7,694,000. The revenues and resulting net
earnings generated by these assets will be the sole source of funds for PCC's
payment obligations under the PCC Notes. Cash available from the management
contract and consulting agreement in excess of interest payment requirements
will be used to make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.

     On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the management agreement with NJMI (see Note 6).  The Interim Agreement
was entered into and approved by the Bankruptcy Court on July 7, 1998 and the
motion to reject the management agreement was approved by the Bankruptcy Court
on September 28, 1998.  As a consequence of the September 1998 settlement
agreement described below, GBCC and GBHC may no longer assert claims against
each other with respect to the operation of the management contract and, with
the passage of time, the cancellation thereof.

                                       51
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


     On July 27, 1998, GBHC filed an action in the Bankruptcy Court against
GBCC, certain affiliates of GBCC and Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt as directors of GBCC and former directors of GBHC
(collectively, the "GBCC Parties"), which alleged, among other things,
usurpation of corporate opportunities of GBHC and breach of fiduciary duty with
respect to GBHC in connection with the acquisition of certain land parcels in
Atlantic City, New Jersey. The action sought, among other things, to enjoin the
GBCC Parties from transferring the land parcels to third parties and to require
that the land parcels be conveyed to GBHC. The action also sought to enjoin GBCC
from using the tax NOL's of GBHC.

     On September 2, 1998, the GBCC Parties reached a settlement with GBHC which
was approved by the Bankruptcy Court.  The terms of the settlement agreement
provided, among other things, (i) that the GBCC Parties convey the land parcels
and related mortgage note to GBHC in exchange for a cash payment equal to the
GBCC Parties' cost in such land parcels with an additional $500,000 payment due
upon confirmation of a plan of reorganization by the Bankruptcy Court and (ii)
that GBHC be included in the consolidated federal income tax return of GBCC for
1997 and 1998 enabling GBCC to utilize GBHC's tax NOL's.  The agreement also
provided that on or before December 31, 1998, GBCC would cause Holdings and its
subsidiaries to be deconsolidated from the GBCC federal income tax return by
means of transferring 21% of the stock ownership of Holdings to an
unconsolidated entity.  Such transfer was accomplished effective as of December
31, 1998.  In addition, the settlement agreement also allowed GBHC to offset its
working capital loan from GBCC in the amount of $8,000,000 together with
interest accrued thereon (see Note 6) against a claim asserted by GBHC against
GBCC under the existing tax allocation agreements.

     GBCC licenses the "Sands" name under a license agreement dated as of May
19, 1987, which rights are sublicensed to GBHC. The license agreement has a term
of 99 years and requires a royalty payment of the greater of 1.5% of gross room
charges, as defined in the agreement, payable monthly, or $100,000 per calendar
year. The license agreement may be terminated by either party in the event of a
material breach, bankruptcy, suspension of normal business operations or certain
other actions by the other party. GBCC intends to terminate the license
agreement as a result of the licensor's suspension of normal business operations
evidenced by the destruction of the Sands Hotel and Casino in Las Vegas in 1996.
Pursuant to the terms of the sublicense agreement, termination of the license
agreement results in automatic termination of the sublicense agreement. GBCC
filed a motion with the Bankruptcy Court to allow GBCC's termination of the
license agreement and the resulting termination of the sublicense agreement; the
Bankruptcy Court denied such motion. As a result, GBCC may not be able to
terminate the license agreement, although the Bankruptcy Court may, at some
future time, allow GBCC to do so. If unable to terminate the license agreement,
GBCC may remain liable for future royalty payments. GBCC filed an appeal to the
decision of the Bankruptcy Court on March 10, 1999.

     PLANET HOLLYWOOD LITIGATION -

     Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants").  The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants").  PHII filed 

                                       52
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


with the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.

     In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices.  In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.

     Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants and GBCC will prevail in this litigation; however,
the Hollywood Defendants and GBCC believe that PHII's claims are without merit
and intend to defend their position and pursue their counterclaims vigorously.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.

     OTHER LITIGATION -
 
     On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, GBCC and HCC's former
independent accountants, and certain of its partners alleging negligent advice
and breach of contract with respect to the tax consequences resulting from the
spin-off of GBCC's stock to HCC's shareholders on December 31, 1996.  The
lawsuit is currently in the initial stages of discovery.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

     During the third quarter of 1998, GBCC transferred ownership of an indirect
subsidiary to GBHC as part of the September 2, 1998 settlement agreement (see
Note 10).  In connection with the transfer, certain liabilities of the
subsidiary were assumed by GBHC as follows:

     Land                               $(864,000)
     Other assets                          (1,000)
     Net cash received                    245,000
     Investment in GBHC                    28,000
                                        ---------
 
       Mortgage note assumed            $(592,000)
                                        =========

                                       53
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     As a result of the Chapter 11 filings previously noted, and as more fully
explained in Note 2, GBCC reflected its investment in Holdings under the equity
method of accounting at December 31, 1997. Accordingly, the following non-cash
assets and liabilities were eliminated from GBCC's consolidated balance sheet at
December 31, 1997:

     Accounts receivable, net                           $   7,794,000
     Other current assets                                   6,423,000
     Net property and equipment                           147,716,000
     Other noncurrent assets                               11,924,000
     Long-term debt, including current maturities        (192,932,000)
     Other current liabilities                            (25,103,000)
     Other noncurrent liabilities                         (28,293,000)
                                                        -------------
 
       Net non-cash liabilities                         $ (72,471,000)
                                                        =============

     During the second quarter of 1997, PPI Corporation sold the general
partnership in PML (see Notes 1 and 6) to HCC.  The purchase price included the
assignment of certain receivables from GBCC and the issuance of a note to PPI
Corporation.  In connection with the sale, certain liabilities of PPI
Corporation were assumed by HCC as follows:

     Assignment of PPI Funding Notes            $(7,597,000)
     Assignment of interest receivable             (350,000)
     Note issued                                 (3,800,000)
     Interest reserve on PPI Funding Notes         (277,000)
     Credit to paid-in capital                   13,024,000
                                                -----------
 
       Liabilities assumed by HCC               $ 1,000,000
                                                ===========

     At December 31, 1996, HCC contributed certain receivables from GBCC and its
subsidiaries to GBCC.  Notes receivable amounting to $8,738,000 together with
accrued interest thereon totaling $1,753,000 and other receivables of $4,283,000
with respect to pension obligations assumed during 1995 were contributed to
GBCC.

(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value :

     CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value
     -------------------------                                              
because of the short maturity of these instruments.

     NOTES RECEIVABLE - AFFILIATES - Notes receivable from affiliates are valued
     -----------------------------                                              
at carrying amount.

                                       54
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



     INTEREST PAYABLE - The carrying amount of interest payable approximates 
     ----------------                                                      
fair value because of the short maturity of the obligation; however, interest
payable with respect to the PRT Funding Notes is based on the amount anticipated
to be paid upon settlement of claims against PRT Funding.

     LONG-TERM DEBT - The fair value of GBCC's long-term debt is estimated based
     --------------                                                             
on either the quoted market prices of the underlying debt issue or on the
discounted cash flow of future payments utilizing current rates available to
GBCC for debt of similar remaining maturities.  Borrowings from affiliates are
valued at the carrying amount.

     The estimated carrying amounts and fair values of GBCC's financial
instruments are as follows:

<TABLE>
<CAPTION>
                                      DECEMBER 31, 1998         DECEMBER 31, 1997
                                  ------------------------  ------------------------
                                    CARRYING                  CARRYING
                                     AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                  -----------  -----------  -----------  -----------
<S>                               <C>          <C>          <C>          <C>
Financial Assets
 Cash and cash equivalents        $10,616,000  $10,616,000  $ 6,555,000  $ 6,555,000        
 Notes receivable - affiliates      2,836,000    2,836,000    3,447,000    3,447,000        
                                                                                            
Financial Liabilities                                                                       
 Interest payable                 $ 8,780,000  $ 2,781,000  $ 6,875,000  $ 6,875,000        
 Borrowings from affiliates         6,750,000    6,750,000   12,422,000   12,422,000        
 11 5/8% PRT Funding Notes         85,000,000   42,500,000   85,000,000   64,600,000        
 14 7/8% PPI Funding Notes         35,040,000   35,040,000   30,321,000   30,321,000        
 Other notes payable                        -            -      628,000      580,000         
</TABLE>

(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                 QUARTER
                         -------------------------------------------------------
                            FIRST         SECOND        THIRD         FOURTH
                         ------------  ------------  ------------  -------------
<S>                      <C>           <C>           <C>           <C>
YEAR ENDED
  DECEMBER 31, 1998:
Net revenues             $ 2,482,000   $ 2,149,000   $ 1,556,000   $  2,784,000
                         ===========   ===========   ===========   ============
 
Net income (loss)        $ 2,275,000   $(2,187,000)  $25,227,000   $   (825,000)
                         ===========   ===========   ===========   ============
 
Net income (loss) per
  common share           $       .44   $      (.42)  $      4.86   $       (.16)
                         ===========   ===========   ===========   ============
 
YEAR ENDED
  DECEMBER 31, 1997:
Net revenues             $68,274,000   $68,164,000   $69,777,000   $ 57,476,000
                         ===========   ===========   ===========   ============
 
Net loss                 $(2,423,000)  $(3,052,000)  $(2,275,000)  $(12,814,000)
                         ===========   ===========   ===========   ============
 
Net loss per
  common share           $      (.47)  $      (.59)  $      (.43)  $      (2.47)
                         ===========   ===========   ===========   ============
</TABLE>

                                       55
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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

     GBCC filed a complaint on October 8, 1998 in the District Court of Dallas
County, Texas against Arthur Andersen LLP ("Andersen"), GBCC's former certifying
accountants, and others alleging negligent advice and breach of contract with
respect to the tax consequences resulting from the spin off of its stock held by
Hollywood Casino Corporation ("HCC") to HCC's shareholders on December 31, 1996.

     In view of the pending litigation discussed above, the Audit Committee of
GBCC's Board of Directors voted on October 16, 1998 to terminate Andersen as
GBCC's independent accountants.  There were no disagreements with Andersen of
the type which would require disclosure under Item 304 of Regulation S-K.
Andersen's report on the consolidated financial statements of GBCC for the past
two years included an explanatory paragraph referring to GBCC's disclosure
concerning substantial doubt about its ability to continue as a going concern.
Such uncertainty resulted from the filing by GBCC's most significant operating
subsidiary on January 5, 1998 of a petition for protection under Chapter 11 of
the United States Bankruptcy Code.

     GBCC, with the consideration and approval of its Audit Committee, engaged
the firm of Deloitte & Touche LLP as its new certifying accountants.

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Certain information is set forth below concerning the executive officers
and directors of Greate Bay Casino Corporation (the "Company").

<TABLE>
<CAPTION>
 
               Name                 Age           Position
               ----                 ---           --------               
<S>                                 <C>  <C>
 
John C. Hull......................   60  Chairman of the Board, Chief
                                         Executive Officer and Director
 
Edward T. Pratt III...............   43  President and Chief Operating Officer
 
Edward T. Pratt, Jr...............   75  Vice Chairman of the Board, Treasurer
                                         and Director
 
William D. Pratt..................   70  Executive Vice President, General
                                         Counsel, Secretary and Director
 
Lawrence C. Cole..................   52  Vice President for Management
                                         Information Systems
 
Charles F. LaFrano III............   44  Vice President
 
Jack E. Pratt.....................   71  Director and formerly Chief Executive
                                         Officer of the Company
 
Bernard A. Capaldi................   56  Director
 
Edward D. Muir....................   88  Director
 
Michael J. Chesser................   50  Director
</TABLE>

                                       56
<PAGE>
 
     BUSINESS EXPERIENCE FOR PAST FIVE YEARS

     John C. Hull was elected to the positions shown above on January 2, 1998.
He previously served as Corporate Controller of the Company since November 1994.
Mr. Hull also served from April 1994 until January 1998 as Corporate Controller
for Hollywood Casino Corporation ("HCC") which, prior to December 31,1996, owned
approximately 80% of the outstanding common stock of the Company. In addition,
Mr. Hull also served as a financial consultant to both the Company and HCC from
1990 until April 1994. Mr. Hull also served as Principal Accounting Officer for
GB Holdings, Inc. ("Holdings") and GB Property Funding Corp. from November 1994
until January 1998. On January 5, 1998, these GBCC subsidiaries filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of New Jersey.

     Edward T. Pratt, Jr. has served as Vice Chairman of the Board and a
director and executive officer of the Company for more than five years. He also
serves as Vice Chairman of the Board, President and Treasurer of HCC. Mr. Pratt
also served until January 2, 1998 as Vice Chairman of the Board of Directors of
Holdings and of GB Property Funding Corp. and as a director of Greate Bay Hotel
and Casino, Inc. ("GBHC"). On January 5, 1998, these three GBCC subsidiaries
filed petitions for relief under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of New Jersey.

     William D. Pratt has served as Executive Vice President, Secretary and a
director of the Company for more than five years.  He currently serves as
General Counsel and, prior to May 1995, served as General Counsel of the Company
for more than five years.  He also serves as Executive Vice President, Secretary
and General Counsel of HCC.  Mr. Pratt also served until January 2, 1998 as
Executive Vice President, General Counsel and Secretary of Holdings and of GB
Property Funding Corp. and as a director of GBHC.  On January 5, 1998, these
three GBCC subsidiaries filed petitions for relief under Chapter 11 of the
United States Bankruptcy Code.

     Edward T. Pratt III was elected President and Chief Operating Officer of
the Company in November 1995. From May 1987 until November 1995, he served the
Company as Executive Vice President -- Development and Corporate Affairs. He
also serves as President, Chief Operating Officer and as a director of HCC. Mr.
Pratt served until January 2, 1998 as President, Chief Operating Officer and a
director of Holdings; as Executive Vice President and a director of GB Property
Funding Corp.; and as a director of GBHC. On January 5, 1998, these three GBCC
subsidiaries filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code.

     Lawrence C. Cole has served as Vice President of Management Information
Systems of the Company since December 1987.  Mr. Cole also serves as Chief
Executive Officer and President of Advanced Casino Systems Corporation ("ACSC"),
a subsidiary of the Company which licenses software for automated casino
accounting and control systems.

     Charles F. LaFrano III is a certified public accountant and has served as
Vice President of the Company since September 1988.  He also served as Corporate
Controller (Principal Accounting Officer) of the Company from September 1988
until November 1994.  He also serves as Vice President of Finance for HCC.  Mr.
LaFrano served until January 2, 1998 as Vice President and Assistant Secretary
of Holdings and GB Property Funding Corp.  On January 5, 1998, these GBCC
subsidiaries filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code.

     Jack E. Pratt served as Chairman of the Board and Chief Executive Officer
of the Company for more than five years until January 2, 1998. He is Chairman of
the Board and Chief Executive Officer of HCC. Mr. Pratt served as Chairman of
the Board of Directors and Chief Executive Officer of Holdings and GBHC and as
Chairman of the Board of Directors, President and Chief Executive Officer of GB
Property 

                                       57
<PAGE>
 
Funding Corp. until January 2, 1998. On January 5, 1998, these three GBCC
subsidiaries filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code.

     Bernard A. Capaldi is a certified public accountant and is a principal of
Capaldi, Reynolds & Associates, P.A., C.P.A.'s in New Jersey, and has held such
position since 1965.  He is also the Chairman of the Board of Shore Memorial
Hospital's parent holding company.

     Edward D. Muir is currently retired. He is a former Senior Vice President
of Rauscher Pierce Refsnes of San Antonio, Texas, an investment banking firm,
and was associated with Rauscher Pierce Refsnes in numerous executive capacities
for more than five years. Mr. Muir also served until January 2, 1998 as a
director of GBHC. On January 5, 1998, GBHC filed a petition for relief under
Chapter 11 of the United States Bankruptcy Code.

     Michael J. Chesser was elected to the Board of Directors of the Company on
September 9, 1997. He is currently self employed as a business consultant.
During 1998, Mr. Chesser was a vice president with Raytheon Company.  He served
as President and Chief Operating Officer of Atlantic Energy Corporation from
1994 until 1998 and served as a director for such company from 1996 until 1997.
From 1987 until 1994, Mr. Chesser was Vice President of Baltimore Gas & Electric
Company.

     FAMILY RELATIONSHIPS

     Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt are brothers (the
"Pratt Brothers").  Edward T. Pratt III, President of the Company, is the son of
Edward T. Pratt, Jr.  There is no other family relationship between any of the
directors and any executive officers of the Company or its subsidiaries or
affiliates.

ITEM 11.  EXECUTIVE COMPENSATION

     SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

     The following table provides certain summary information concerning
compensation paid or accrued by the Company, and its subsidiaries (exclusive of
Holdings and its subsidiaries) to or on behalf of the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company determined as of the end of the last fiscal year (hereafter referred
to as the named executive officers) for the fiscal years ended December 31,
1998, 1997 and 1996.  Executive officers of Holdings and its subsidiaries are
not included in the following table as the Company no longer exercises control
over Holdings and no longer includes the operations of Holdings and its
subsidiaries in its consolidated results of operations.  Accordingly, officers
of Holdings do not perform policy-making functions on behalf of the Company.

                                       58
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                                            LONG-TERM
                                                          ANNUAL COMPENSATION              COMPENSATION
                                                -----------------------------------------
                                                                         OTHER ANNUAL        AWARDS/       ALL OTHER
     NAME AND PRINCIPAL POSITION        YEAR     SALARY     BONUS      COMPENSATION (1)      OPTIONS     COMPENSATION (2)
     ---------------------------       ------   ---------  --------  --------------------  ------------  ----------------
<S>                                    <C>      <C>        <C>       <C>                   <C>           <C>
John C. Hull (3)                          1998   $302,485  $      -              $     -              -         $  4,000
 Chief Executive Officer and              1997    105,419         -                    -              -            1,750
 Chairman of the Board of Directors       1996     96,210         -                    -              -              957
 of the Company
 
Jack E. Pratt (3)                         1998    102,683         -                    -              -            7,225
 Formerly Chief Executive Officer         1997    208,526         -               14,000              -           16,960
 of the Company                           1996    259,947         -               14,000              -          139,992
 
 
Edward T. Pratt III(3)                    1998     69,494         -                    -              -            1,500
 President and Chief Operating            1997    192,913         -                    -              -            1,750
 Officer of the Company                   1996    141,588         -                    -              -              990
 
Lawrence C. Cole                          1998    310,312   102,805                    -              -            4,000
 Vice President of Management             1997    283,250    15,098                    -              -            3,500
 Information Systems of the Company       1996    280,201    28,559                    -              -            1,848
 
William D. Pratt (3)
 Executive Vice President, General        1998    107,937         -                    -              -            4,216
 Counsel and Secretary of the             1997    143,927         -               14,000              -            5,775
 Company                                  1996    123,623         -               14,000              -          107,605
</TABLE>

 __________________________

(1)  Represents directors' fees for service as a director to a subsidiary of the
     Company.

(2)  Includes matching contributions by the Company to The Hollywood Casino
     Corporation and Subsidiaries Retirement Savings Plan on behalf of the named
     executive officer. See also "Employee Retirement Savings Plan" below.
     Amounts set forth for Jack E. Pratt and William D. Pratt also include
     pension benefit accruals on their behalf. See also "Employment Contracts"
     below.

(3)  Amounts shown for John C. Hull, Jack E. Pratt, Edward T. Pratt III and
     William D. Pratt represent payments by the Company and its subsidiaries for
     services provided to them. The Pratts concurrently held positions as
     officers of HCC during the three year period ended December 31, 1998 and
     Mr. Hull held positions with HCC during 1997 and 1996. On December 31,
     1996, HCC, owner of approximately 80% of the outstanding common stock of
     the Company, distributed such stock to its shareholders. During 1996, HCC
     reimbursed the Company for services provided by the Pratts to HCC pursuant
     to intercompany allocation agreements ratified by the respective Boards of
     Directors of the Company and HCC. Since January 1, 1997, the Company
     reimburses HCC for services provided to the Company by HCC employees
     pursuant to intercompany allocation agreements ratified by their respective
     Board of Directors.

     OPTION EXERCISES AND HOLDINGS

     The Pratt Hotel Corporation 1990 Incentive Stock Option Plan (the "Plan")
has expired. No options under the Plan were granted or exercised during 1998 and
no unexercised options remain outstanding.

                                       59
<PAGE>
 
     EMPLOYMENT CONTRACTS

     Jack E. Pratt, formerly Chairman of the Board and Chief Executive Officer
of the Company and currently a Director, Edward T. Pratt, Jr., Vice Chairman of
the Board and Treasurer of the Company, and William D. Pratt, Executive Vice
President, Secretary and General Counsel of the Company, are under employment
contracts with HCC and provide services to the Company pursuant to service and
intercompany allocation agreements ratified by the respective Boards of
Directors of the Company and HCC. Their employment contracts were executed
during October 1989 and originally expired on December 31, 1994, but have
subsequently been extended by amendment through December 31, 2001 with respect
to Jack E. Pratt and to December 31, 2000 with respect to Edward T. Pratt, Jr.
and William D. Pratt. Services to the Company will continue to be provided
pursuant to intercompany allocation agreements so long as the Pratt Brothers
remain officers of the Company. The terms of the contracts may be extended again
by mutual agreement of the parties and the extended term, or any further
extension thereof, will be followed immediately by a four-year period as
consultants to HCC. Upon expiration of the consulting term, each of the Pratt
Brothers will be entitled to receive a lifetime pension benefit and his
designated beneficiary is entitled to receive a death benefit, throughout the
term of the employment, consulting and pension benefit periods.

     The terms of the employment contracts provide for an annual base salary in
the first year for Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt of
$350,000, $223,000 and $191,000, respectively, subject to annual review and
increase by the Compensation Committee of the Board of Directors. Compensation
under the consulting and pension benefit provisions of the employment contracts
of each of the Pratt Brothers will be 75% of the average of his three highest
annual salaries during the employment term of the contract.  The death benefit
is derived by multiplying each Pratt Brother's highest annual salary during his
employment term by 50%; such benefit will be paid annually to his designated
beneficiary for a period of ten years after his death.  The estimated annual
pension benefit payable to Jack E. Pratt, Edward T. Pratt, Jr. and William D.
Pratt by HCC is currently $484,000, $244,000 and $221,000, respectively.

     Edward T. Pratt III, President and Chief Operating Officer of the Company,
is under an employment contract with HCC dated as of May 1, 1996 and provides
services to the Company pursuant to intercompany allocation agreements ratified
by the respective Boards of Directors of the Company and HCC. The employment
contract is for a term expiring on April 30, 2000 unless sooner terminated by
either party. The terms of Mr. Pratt's agreement provide for a minimum annual
base salary effective January 1, 1996 of $425,000, subject to annual review and
increase by the Compensation Committee of the Board of Directors of HCC.

     John C. Hull, Chief Executive Officer of the Company, is under an
employment agreement dated as of January 1, 1998 and continuing, unless sooner
terminated by either party, until the earlier of December 31, 1999 or the
completion of debt restructurings by certain of the Company's subsidiaries. The
terms of Mr. Hull's agreement provide for an annual base salary of $300,000 and
incentive bonuses based on the successful completion of the specified debt
restructurings.

     Lawrence C. Cole, Vice President of Management Information Systems of the
Company serves under an employment contract, as amended on November 30, 1998,
with a wholly owned subsidiary of the Company.  The employment agreement
continues through December 31, 2001 unless sooner terminated by one of the
respective parties.  The terms of Mr. Cole's amended contract provides for a
minimum annual base salary of $275,000 subject to annual increases based on
changes in the Consumer Price Index, as defined in the employment contract,
together with incentive bonuses based on operating results. Obligations of the
subsidiary under the employment contract are guaranteed by GBHC.

                                       60
<PAGE>
 
     EMPLOYEE RETIREMENT SAVINGS PLAN

     On January 1, 1989, the Company adopted GBHC's qualified defined
contribution plan for the benefit of all of the Company's employees who satisfy
certain eligibility requirements. GBHC had adopted this plan for the benefit of
its eligible employees in November 1984. Upon adoption by the Company, the
former plan changed its name to The Hollywood Casino Corporation and
Subsidiaries Retirement Savings Plan (the "Savings Plan"). Effective December
31, 1998, employees of GBHC no longer participate in the "Savings Plan," but are
participants in a separate plan with identical coverages. The Savings Plan is
qualified under the requirements of section 401(k) of the Code allowing
participating employees to benefit from the tax deferral opportunities provided
therein. All employees of the Company who have completed one year of service, as
defined, and who have attained the age of 21, are eligible to participate in the
Savings Plan.

     The Savings Plan provides for a matching contribution by the Company based
upon certain criteria, including levels of participation by the Company's
employees.  The Company incurred matching contributions totaling approximately
$737,000 for the year ended December 31, 1998.

     COMPENSATION OF DIRECTORS

     Nonemployee directors of the Company received an annual fee of $25,000 for
service on the Board of Directors and $1,000 for each Board meeting attended
during 1998.  The Board of Directors of the Company held three regularly
scheduled meetings and two special telephonic meetings during the year ended
December 31, 1998.  The Board of Directors of the Company has Audit and
Compensation Committees, but does not have a standing nominating committee.
Nonemployee members of the Audit Committee receive an annual fee of $2,500 for
service on the committee and $500 for each committee meeting attended.  No
additional compensation or fees are paid to directors for attending Compensation
Committee meetings.

     COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Compensation Committee of the Board of Directors of the Company is
comprised of Edward D. Muir, Bernard A. Capaldi and Jack E. Pratt.  Neither Mr.
Muir nor Mr. Capaldi is a former or current officer or employee of the Company
or any of its subsidiaries.  Jack E. Pratt served as an executive officer and
director of the Company until January 2, 1998 and continues to serve as an
executive officer and director of HCC.  He also serves on the Compensation
Committee of HCC.

                                       61
<PAGE>
 
     REPORT OF THE COMPENSATION COMMITTEE

     As members of the Compensation Committee, it is our duty to administer the
Company's various incentive plans, including its incentive stock option plan,
and to review compensation levels of members of management, to evaluate the
performance of management and to consider management succession and related
matters.  The Compensation Committee reviews with the Board in detail all
aspects of compensation for all executive officers.

     The compensation policy of the Company, which is endorsed by the
Compensation Committee, is that the annual compensation of each officer has been
established to reward long-term strategic management and the enhancement of
stockholder value, as well as to attract and retain key executives critical to
the long-term success of the Company. Such compensation relates to and must be
contingent upon the contributions, responsibilities and relative position in the
Company of each individual officer, as well as the relative performance of the
Company. The Compensation Committee has also taken into consideration
competition within the rapidly expanding gaming industry for experienced
personnel as well as other subjective considerations in its deliberations
regarding executive compensation.

     Mr. John C. Hull was elected to the position of Chief Executive Officer of
the Company effective January 2, 1998.  Pursuant to an employment agreement with
the Company dated as of January 1, 1998 (the "Hull Employment Agreement"), the
annual base salary of Mr. Hull was set at $300,000 effective as of January 1,
1998.  There were no adjustments to the annual base salary of Mr. Hull or
bonuses paid by the Company to Mr. Hull during fiscal year 1998 and there have
been no adjustments or bonuses  paid by the Company to date during fiscal year
1999.

     This report and the accompanying stock price performance graph are provided
for general informational purposes only pursuant to regulations under the
Securities Exchange Act of 1934.  No information contained in this report or the
accompanying graph shall be deemed to be filed in whole or in part for purposes
under the Securities Act of 1933 or the Securities Exchange Act of 1934, or
incorporated by reference into any filing made thereunder.


                                   Compensation Committee


                                   Jack E. Pratt
                                   Bernard A. Capaldi
                                   Edward D. Muir

                                       62
<PAGE>
 
                            STOCK PRICE PERFORMANCE

     The graph set forth below compares the stock price performance of the
Company with those of the Dow Jones Equity Market Index and the Dow Jones Index
for the Casino Industry for the previous five years. The Company has not paid
dividends over such period of time; however, the comparative equity market and
industry data assumes reinvestment of dividends. The stock price performance
shown below may not be indicative of future stock price performance. (Table
substituted for graph).


                         Greate Bay Casino Corporation
                            Stock Price Performance
                            (January 1, 1994 = 100)

<TABLE>
<CAPTION>
                                                  Greate Bay       
                         Equity      Casino         Casino         
   Date                  Index       Index        Corporation      
-----------              ------      ------       -----------      
<S>                      <C>         <C>          <C>              
January 1, 1994          100.0        100.0          100.0         
March 31, 1994            96.2         86.7           72.3         
June 30, 1994             96.4         66.3           68.1         
September 30, 1994       101.1         74.4          104.3         
December 30, 1994        100.7         76.8           70.2         
March 31, 1995           110.5         99.3           70.2         
June 30, 1995            121.3        111.1           70.2         
September 29, 1995       131.2        107.0           80.9         
December 29, 1995        138.7        101.8           38.3         
March 29, 1996           146.5        124.2           48.9         
June 28, 1996            152.8        144.6          134.0         
September 30, 1996       157.9        120.2           61.7         
December 31, 1996        170.6        111.1           29.8         
March 31, 1997           174.6         95.5           25.5         
June 30, 1997            204.3        104.9           23.4         
September 30, 1997       221.4        122.1           23.4         
December 31, 1997        228.6         97.7           21.3         
March 31, 1998           259.6        106.4           17.0         
June 30, 1998            267.7         95.0            8.5         
September 30, 1998       240.8         63.8            4.3         
December 31, 1998        294.1         66.9            3.5          
</TABLE>

                                       63
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     Based on filings with the Securities and Exchange Commission, no persons,
other than certain directors of the Company, are known who beneficially owned
more than 5% of the outstanding Common Stock as of the Record Date.

     SECURITY OWNERSHIP OF MANAGEMENT

     The following table presents the number of shares of Common Stock
beneficially owned by each director, nominee for director and executive officer
named under Item 11. "Executive Compensation" and by all current directors and
officers of the Company as a group as of March 25, 1999:

<TABLE>
<CAPTION>
 
                                    Shares of      Percentage of
                                   Common Stock     Outstanding
                                   Beneficially        Common
Beneficial Owner                     Owned (a)         Stock
----------------                  --------------   --------------
<S>                               <C>              <C>
Jack E. Pratt..................      1,051,654(b)       20.3%  
Edward T. Pratt, Jr............        180,469           3.5%  
William D. Pratt...............        204,379(c)        3.9%  
Edward T. Pratt III............        314,698(d)        6.1%  
John C. Hull...................             --            --   
Edward D. Muir.................             --            --   
Bernard A. Capaldi, CPA........             --            --   
Michael J. Chesser.............             --            --   
Lawrence C. Cole...............             --            --   
All directors and officers as                                  
  a group (10 individuals).....      1,751,200          33.8%   
</TABLE>

__________________________

(a)  Except as otherwise described, each individual has the sole power to vote
     and dispose of the Common Stock beneficially owned by him.

(b)  Beneficial ownership is attributable to the following: (i) C.A. Pratt
     Partners, Ltd., a Texas limited partnership of which Jack E. Pratt is the
     General Partner, owns 58,106 shares (1.1%) of the outstanding common stock
     of the Company, (ii) 160,492 shares (3.1%) of the outstanding common stock
     of the Company held by Mr. Pratt as custodian for his minor children and
     (iii) 174,318 shares (3.4%) of the outstanding common stock of the Company
     owned of record by adult children of Mr. Pratt and subject to a proxy
     giving him the right to vote such shares and prohibiting the transfer of
     such shares without his approval.

(c)  Beneficial ownership is attributable to the following: (i) WDP Jr. Family
     Trust, for which Mr. Pratt is the Trustee, owns 27,452 shares (less than
     1%) of the outstanding common stock of the Company and (ii) 54,906 shares
     (1.1%) of the outstanding common stock of the Company owned of record by
     adult children of Mr. Pratt and subject to a proxy giving him the right to
     vote such shares and prohibiting the transfer of such shares without his
     approval.

                                       64
<PAGE>
 
(d)  Beneficial ownership is attributable to 232,188 shares (4.5%) of the
     outstanding common stock of the Company owned of record by siblings of Mr.
     Pratt and subject to a proxy giving him the right to vote such shares and
     prohibiting the transfer of such shares without his approval.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     HOLLYWOOD CASINO CORPORATION.  During 1990, HCC, which was then wholly
owned by the Pratt Family, acquired approximately $38.8 million of unsecured
notes (the "PCPI Notes") issued by PCPI Funding Corp., a subsidiary of the
Company. As part of a refinancing in February 1994 of virtually all of the
Company's casino-related outstanding debt, a newly formed subsidiary of the
Company issued approximately $40.5 million discounted principal amount of new
deferred interest notes (the "PPI Funding Notes") in exchange for the $38.8
million principal amount of PCPI Notes held by HCC. Interest expense accreted
with respect to the PPI Funding Notes for the year ended December 31, 1998
amounted to $4.7 million. The PPI Funding Notes were discounted to yield 14 7/8%
interest per annum and had an original face value of $110.6 million. Subsequent
principal payments and the assignment of a portion of the PPI Funding Notes in
1997, as discussed below, reduced the maturity value to $84.6 million. At
December 31, 1997, an additional $37 million undiscounted face value of the PPI
Funding Notes was forgiven by HCC further reducing the maturity value to $47.6
million.

     Since May 1992, the Company and its subsidiaries have borrowed funds from
HCC for various purposes.  As of December 31, 1998, the outstanding balance on
such borrowings was $6.8 million and, under certain conditions, the Company and
its subsidiaries may obtain additional loans from HCC.  Of the amounts borrowed,
$250,000 was due on April 1, 1998 for which payment has not been made.  Such
borrowing from HCC continues to bear interest at the rate of 14% per annum,
payable semiannually.  The remaining $6.5 million was borrowed from HCC during
1996 on a demand basis with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996.  Payment of interest on borrowings from
HCC is subject to the approval of New Jersey gaming authorities.  Interest
expense on the borrowings from HCC amounted to $942,000 for the year ended
December 31, 1998.  Interest payable to HCC with respect to such borrowings
amounted to $1.8 million at December 31, 1998.

     Hollywood Casino - Aurora, Inc. ("HCA"), a wholly owned subsidiary of HCC,
was organized for the purpose of developing and owning a riverboat gaming
facility in Aurora, Illinois, (the "Aurora Casino") which commenced operations
on June 17, 1993.  Effective as of April 1, 1997, a subsidiary of the Company
sold its general partnership interest in the limited partnership which holds the
management contract on the Aurora Casino to a subsidiary of HCC.  The general
partner receives 99% of the first $84,000 of net income earned by the
partnership each month and 1% of any income earned above such amount.  The
subsidiary of the Company received from HCC a five-year note in the original
amount of $3.8 million,  $7.6 million discounted principal amount of PPI Funding
Notes (see above) and the assignment of certain accrued interest receivable in
exchange for the general partnership interest.  The $3.8 million note is payable
in monthly installments of $83,000, including interest at the rate of 14% per
annum, commencing on May 1, 1997, with additional quarterly variable principal
payments commencing on July 1, 1997 in an amount equal to the general partner's
share of quarterly cash distributions, as defined, from the limited partnership.
The outstanding principal balance of the note receivable was $2.8 million at
December 31, 1998.  Interest earned on the note amounted to $439,000 during the
year ended December 31, 1998.

     HWCC - Tunica, Inc. ("HCT"), a wholly owned subsidiary of HCC, completed
construction of a dockside gaming facility in Tunica County, Mississippi (the
"Tunica Casino").  Pursuant to a ten-year consulting agreement with HCT which
expires on December 31, 2003, a subsidiary of the Company receives monthly
consulting fees of $100,000; such fees amounted to $1.2 million for the year
ended December 31, 1998.

                                       65
<PAGE>
 
     The Company and its subsidiaries share certain general and administrative
costs with HCC pursuant to a services agreement.  Such allocated costs and fees
charged by HCC to the Company amounted to $928,000 during the year ended
December 31, 1998.  A payable in the amount of $170,000 in connection with such
allocated costs and fees was due to HCC at December 31, 1998.

     A subsidiary of the Company provides computer-related, marketing and other
administrative services to HCC and its casino facilities.  The subsidiary has an
agreement with one casino facility which has been renewed through December 31,
1999; such agreement provides for the sale of computer hardware and information
systems equipment and the licensing of software necessary to operate the
facility.  The casino pays prices and fees in amounts and on terms and
conditions that the subsidiary provides to unrelated third parties as well as a
fixed license and consulting fee of $33,600 per month.  The subsidiary is also
reimbursed for its direct costs and expenses incurred under this agreement.  The
GBCC subsidiary also provides similar services and hardware to another HCC-owned
casino facility which it charges for direct costs and expenses.  The GBCC
subsidiary's billings to HCC and its subsidiaries for such products and services
amounted to $1.1 million for the year ended December 31, 1998.  A receivable in
the amount of $122,000 was due the subsidiary at December 31, 1998 with respect
to these services.

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

(a)  The following documents are filed as a part of this report:

     1.   FINANCIAL STATEMENTS

          The financial statements filed as part of this report are listed on
   the Index to Financial Statements on page 26.

     2.   FINANCIAL STATEMENT SCHEDULES

     --   Report of Independent Auditors
     --   Report of Predecessor Independent Public Accountants
     --   Schedule I; Condensed Financial Information of Registrant, Greate Bay
          Casino Corporation (Parent Company):
          --  Balance Sheets
          --  Statements of Operations
          --  Statements of Cash Flows
          --  Note to Parent Company Financial Statements
     --   Schedule II; Valuation and Qualifying Accounts

     All other schedules for which provision is made in the applicable
     accounting regulation of the Securities and Exchange Commission are not
     required under the related instructions or are inapplicable and therefore
     have been omitted.

     3.   EXHIBITS
 
        @3.1   --    Certificate of Incorporation of Pratt Hotel Corporation
                     ("PHC", now known as GBCC) as amended. (Exhibit 3.1)
        #3.2   --    Amendment to Certificate of Incorporation of PHC. (Exhibit
                     3.2)
        @3.3   --    Amended Bylaws of PHC.  (Exhibit 3.2)
        +4.1   --    Form of Indenture among PCPI Funding Corp., Pratt Casino
                     Properties and PHC and First Interstate Bank of Dallas as
                     Trustee (including form of Security). (Exhibit 10.4)
 

                                       66
<PAGE>
 
        +4.2   --    First Supplemental Indenture, dated as of February 27,1989,
                     among PCPI Funding Corp., First Interstate Bank of Texas,
                     N.A., PHC and Pratt Casino Properties. (Exhibit 10.11)
       **4.3   --    Indenture dated as of February 15, 1994 between GB Property
                     Funding Corp. as Issuer, GB Holdings, Inc. and GBHC as
                     Guarantors, and Shawmut Bank Connecticut, N.A. as Trustee.
                     (Exhibit 10.50)
       **4.4   --    Mortgage, Fixture Filing and Security Agreement dated
                     February 17, 1994, by GBHC in favor of Shawmut Bank
                     Connecticut, National Association, as Mortgagee. (Exhibit
                     10.51)
       **4.5   --    Security Agreement dated February 17, 1994 made by GB
                     Property Funding Corp., GBHC, GB Holdings, Inc., Advanced
                     Casino Systems International, Inc. Computerized Management
                     Systems International, Inc. and any Additional Collateral
                     Grantor to Shawmut Bank Connecticut, National Association,
                     as Trustee. (Exhibit 10.52)
       **4.6   --    Collateral Assignment of Leases dated as of February 17,
                     1994, by GBHC, in favor of Shawmut Bank Connecticut,
                     National Association, as Assignee. (Exhibit 10.53)
       **4.7   --    Indenture dated as of February 15, 1994 between PRT Funding
                     Corp. as Issuer, Pratt Casino Corporation as Guarantor and
                     Shawmut Bank, N.A. as Trustee. (Exhibit 10.54)
         9.1   --    Voting Trust Agreement dated as of December 29, 1998 by and
                     among Jill Pratt Laferney, formerly Jill A. Pratt, and John
                     R. Pratt and Jack E. Pratt, Sr.
         9.2   --    Voting Trust Agreement dated as of December 29, 1998 by and
                     among Shawn Denise Bradshaw and Michael Shannan Pratt and
                     William D. Pratt, Sr.
         9.3   --    Voting Trust Agreement dated as of December 29, 1998 by and
                     among Carolyn S. Hickey, Diana Pratt-Wyatt, formerly Diana
                     L. Heisler, and Sharon A. Naftel, formerly Sharon R. Nash,
                     and Edward T. Pratt III.
        10.1   --    Management and Administrative Services Agreement dated
                     October 1, 1998, by and between Hollywood Casino
                     Corporation ("HCC") and GBCC.
     +++10.2   --    Agreement dated as of September 2, 1998 by and among GBHC,
                     GB Holdings, Inc., and GB Property Funding Corp., on the
                     one hand, and GBCC, PHC Acquisition Corp., Lieber Check
                     Cashing, LLC, Jack E. Pratt, William D. Pratt, Edward T.
                     Pratt, Jr. and HCC, on the other. (Exhibit 10.1)
       +10.3   --    Amended License Agreement by and between Hughes Properties,
                     Inc. and PHC dated May 19, 1987. (Exhibit 10.3)
       +10.4   --    Tax Allocation Agreement by and among PHC, PPI Corporation,
                     Greate Bay Hotel Corporation, Pratt Casino Properties,
                     Pacsa No. 2, Inc., Pacsa No. 3, Inc., Pratt Hotel Funding,
                     Inc. and Greate Bay Property Funding Corp., effective as of
                     January 1, 1987. (Exhibit 10.17)
       +10.5   --    Tax Allocation Agreement by and among Pratt Casino
                     Properties, BPHC Acquisition, Inc., PHMI, Greate Bay Casino
                     Corporation, PCPI Funding Corp. and GBHC effective as of
                     January 1, 1987. (Exhibit 10.18)
     ###10.6   --    Sixth Amendment to Employment Agreement dated January 1,
                     1998, between HCC and Edward T. Pratt, Jr. (Exhibit 10.6)
     ###10.7 --      Sixth Amendment to Employment Agreement dated January 1,
                     1998, between HCC and William D. Pratt. (Exhibit 10.7)
      @@10.8   --    Employment Agreement dated May 1, 1996 by and between HCC
                     and Edward T. Pratt III. (Exhibit 10.4)
        10.9   --    Amendment to Employment Agreement dated November 30, 1998,
                     between ACSC and Lawrence C. Cole.
                     

                                       67
<PAGE>
 
       *10.10   --    Management Services Agreement dated as of June 21, 1991,
                      between HCA and Greate Bay Casino Corporation (the
                      "Management Services Agreement"). (Exhibit 10.34)
       *10.11  --     First Amendment to the Management Services Agreement dated
                      as of May 14, 1992. (Exhibit 10.35)
       *10.12  --     Technical Services Agreement dated February 21, 1992,
                      between HCA and PHC (the "Technical Services Agreement").
                      (Exhibit 10.42)
       *10.13  --     First Amendment to the Technical Services Agreement dated
                      May 14, 1992. (Exhibit 10.43)
      **10.14  --     Agreement of Limited Partnership of Pratt Management, L.P.
                      (Exhibit 10.55)
     ***10.15  --     Consulting Agreement dated as of January 1, 1994 between
                      PCC, as the Consultant, and HWCC - Tunica, Inc.
                      (Exhibit 10.8)
     ***10.16  --     Computer Services Agreement dated as of January 1, 1998
                      between Summit Tunica Partnership and Advanced Casino
                      Systems Corporation. (Exhibit 10.11)
     ###10.17  --     Employment Agreement dated as of January 1, 1998 between 
                      GBCC and John C. Hull. (Exhibit 10.18) 
        21.1   --     Subsidiaries of GBCC.
        27.1   --     Financial Data Schedule
      ##99.1   --     Voluntary petition for bankruptcy pursuant to Chapter 11
                      of the Bankruptcy Code for Greate Bay Hotel and Casino,
                      Inc. dated January 5, 1998. (Exhibit 99.2)
      ##99.2   --     Voluntary petition for bankruptcy pursuant to Chapter 11
                      of the Bankruptcy Code for GB Holdings, Inc. dated January
                      5, 1998 (Exhibit 99.3)
      ##99.3   --     Voluntary petition for bankruptcy pursuant to Chapter 11
                      of the Bankruptcy Code for GB Property Funding Corp. dated
                      January 5, 1998 (Exhibit 99.4)
     @@@99.4   -      Petition filed on October 8, 1998 in the District Court of
                      Dallas County, Texas by Hollywood Casino Corporation and
                      Greate Bay Casino Corporation ("Plaintiffs") against
                      Arthur Andersen L.L.P., Richard L. Robbins, Michael E.
                      Gamache, Daniel J. Meehan, and Brent A. Railsback
                      ("Defendants") (Exhibit 99.1)

_______________________

       @  Incorporated by reference from the exhibit shown in parenthesis to
          GBCC's Annual Report on Form 10-K for the fiscal year ended December
          31, 1992.

      @@  Incorporated by reference from the exhibit shown in parenthesis to
          Hollywood Casino Corporation's Annual Report on Form 10-K for the
          fiscal year ended December 31, 1996.

     @@@  Incorporated by reference from the exhibit shown in parenthesis to the
          Form 8-K for GBCC as filed with the SEC on October 22, 1998.

       +  Incorporated by reference from the exhibit shown in parenthesis to
          Form S-1 Registration Statement (Registration No. 33-58732) for
          Hollywood Casino Corporation as filed with the SEC on May 27, 1993.

      ++  Incorporated by reference from the exhibit shown in parenthesis filed
          in GBCC's Annual Report on Form 10-K for the fiscal year ended
          December 31, 1990.

     +++  Incorporated by reference to the exhibit shown in parenthesis filed in
          GBCC's Quarterly Report on Form 10-Q for the quarter ended September
          30, 1998 as filed with the SEC on November 23, 1998.

                                       68
<PAGE>
 
       *  Incorporated by reference from the exhibit shown in parenthesis to
          that Registration Statement on Form 10 filed with the SEC on May 28,
          1992 by PRT Corporation (now known as HCC).

      **  Incorporated by reference from the exhibit shown in parenthesis to
          Form S-1 Registration Statement (Registration No. 33-77502) for
          Hollywood Casino Corporation as filed with the SEC on April 8, 1994.

    ***   Incorporated by reference from the exhibit shown in parenthesis to
          Form S-1 Registration Statement (Registration No. 33-82182) for HWCC -
          Tunica, Inc. as filed with the SEC on September 29, 1994.

      #   Incorporated by reference from the exhibit shown in parenthesis to
          GBCC's Annual Report on Form 10-K for the fiscal year ended December
          31, 1996.

     ##   Incorporated by reference from the exhibit shown in parenthesis to
          Form 8-K for GB Property Funding Corp., GB Holdings, Inc. and Greate
          Bay Hotel and Casino, Inc. as filed with the SEC on January 9, 1998.

    ###   Incorporated by reference from the exhibit shown in parenthesis filed
          in GBCC's Annual Report on Form 10-K for the year ended December 31,
          1997.

(B)  REPORTS ON FORM 8-K.

     On October 22, 1998, the Registrant filed a Form 8-K to report a change in
     certifying accountants. On October 30, 1998 the Registrant filed a Form8-
     K/A to include its former accountants' letter to the Securities and
     Exchange Commission as an exhibit.

                                       69
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Egg
Harbor Township, State of New Jersey on March 30, 1999.

                                     GREATE BAY CASINO CORPORATION
                                 By: /s/ John C. Hull
                                     ------------------------------------
                                             John C. Hull
                                        Chief Executive Officer

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

<TABLE>
<CAPTION>
 
        SIGNATURE                    TITLE                       DATE
        ---------                    -----                       ----          
<S>                         <C>                         <C>
/s/ John C. Hull            Chief Executive Officer         March 30, 1999
--------------------------                              ------------------------
    John C. Hull              and Director
 
/s/ Edward T. Pratt, Jr.    Treasurer, Principal            March 30, 1999
--------------------------                              ------------------------
    Edward T. Pratt, Jr.      Financial and Accounting
                              Officer and Director
 
/s/ Edward T. Pratt III     President and Chief             March 30, 1999
--------------------------                              ------------------------
    Edward T. Pratt III       Operating Officer
 
/s/ William D. Pratt        Executive Vice                  March 30, 1999
--------------------------                              ------------------------
    William D. Pratt          President, General
                              Counsel, Secretary
                              and Director
 
/s/ Jack E. Pratt           Director                        March 30, 1999
--------------------------                              ------------------------
    Jack E. Pratt
 
/s/ Bernard A. Capaldi      Director                        March 30, 1999
--------------------------                              ------------------------
    Bernard A. Capaldi
 
/s/ Edward D. Muir          Director                        March 30, 1999
--------------------------                              ------------------------
    Edward D. Muir
 
/s/ Michael J. Chesser      Director                        March 30, 1999
--------------------------                              ------------------------
    Michael J. Chesser
</TABLE>

                                       70
<PAGE>
 
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

     --   Report of Independent Auditors

     --   Report of Predecessor Independent Public Accountants

     --   Schedule I; Condensed Financial Information of Registrant:
          --   Balance Sheets
          --   Statements of Operations
          --   Statements of Cash Flows
          --   Note to Parent Company Financial Statements

     --   Schedule II; Valuation and Qualifying Accounts
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------

To Greate Bay Casino Corporation:

We have audited the consolidated financial statements of Greate Bay Casino
Corporation and subsidiaries as of and for the year ended December 31, 1998 and
have issued our report thereon dated March 19, 1999 (included elsewhere in this
Form 10-K).  Our audit also includes the financial statement schedules listed in
the index to financial statement schedules.  These financial statement schedules
are the responsibility of the Company's management.  Our responsibility is to
express an opinion based on our audit.  In our opinion, such financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

 



Deloitte & Touche LLP
Dallas, Texas
March 19, 1999
<PAGE>
 
             REPORT OF PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS
              FOR THE TWO YEARS ENDED DECEMBER 31, 1997 AND 1996



     The financial statements of Greate Bay Casino Corporation ("GBCC") for the
two years ended December 31, 1997 and 1996 were examined by Arthur Andersen LLP,
independent public accountants, whose report thereon dated March 23, 1998 was
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.  Arthur Andersen LLP also issued a report dated March 23, 1998 with
respect to the schedules listed in the index to financial statement schedules
for the two years ended December 31, 1997 and 1996.  Such report was also
included in the Company's Annual Report on Form 10-K.

     In October 1998, GBCC filed a complaint against Arthur Andersen LLP and
others alleging negligent advice with respect to certain tax consequences
resulting from the spin-off of GBCC's stock held by Hollywood Casino Corporation
to its shareholders on December 31, 1996.  The Company subsequently engaged
Deloitte & Touche LLP as its new certifying accountants.

     Because of the foregoing litigation, Arthur Andersen LLP believes that it
is no longer independent with respect to GBCC and consequently has informed the
Company that it is unable to reissue its report on the financial statement
schedules for the years ended December 31, 1997 and 1996. As a result, Arthur
Andersen LLP's report for those two years is not included in this Annual Report
on Form 10-K.

     Even if Arthur Andersen LLP were to reissue its report on the financial
statement schedules for the years 1997 and 1996, there can be no assurance that
such report would be identical to the report dated March 23, 1998, or that such
reissued report would not include additional qualifications.  However, GBCC is
not aware of any subsequent events, transactions or other matters that would
affect Arthur Andersen LLP's report.
<PAGE>
 
                                                                      SCHEDULE I
                                                                      PAGE 1

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                GREATE BAY CASINO CORPORATION (PARENT COMPANY)

                                BALANCE SHEETS


                                    ASSETS
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,      
                                                            -----------------------------
                                                                 1998             1997    
                                                            -------------     -----------
<S>                                                         <C>               <C>        
Cash and cash equivalents                                   $   3,984,000   $   1,973,000 
Due from affiliates                                               355,000         325,000 
Other current assets                                               64,000         117,000 
                                                            -------------   -------------  
                                                                                   
                                                            $   4,403,000   $   2,415,000 
                                                            =============   =============

                     LIABILITIES AND SHAREHOLDERS' DEFICIT

Current maturities of long-term debt                        $  33,595,000   $  33,595,000  
Accounts payable and accrued liabilities                          397,000         658,000  
Due to affiliates                                              34,523,000      28,338,000  
                                                            -------------   -------------  
                                                                                           
 Total current liabilities                                     68,515,000      62,591,000  
                                                            -------------   -------------  
                                                                                           
Investment in and advances to affiliates                       54,514,000      82,940,000  
                                                            -------------   -------------  
                                                                                           
Shareholders' deficit:                                                                     
 Common stock, $.10 par value per share,                                                   
  10,000,000 shares authorized, 5,186,627                                                  
  shares issued and outstanding                                   519,000         519,000  
 Additional paid-in capital                                    75,212,000      75,212,000  
 Accumulated deficit                                         (194,357,000)   (218,847,000) 
                                                            -------------   -------------  
                                                                                           
                                                             (118,626,000)   (143,116,000) 
                                                            -------------   -------------  
                                                                                           
                                                            $   4,403,000   $   2,415,000  
                                                            =============   =============   
</TABLE>

          The accompanying notes to consolidated financial statements
                     are an integral part of this schedule.
<PAGE>
 
                                                                      SCHEDULE I
                                                                      PAGE 2

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                GREATE BAY CASINO CORPORATION (PARENT COMPANY)

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                 ------------------------------------------
                                                     1998          1997           1996
                                                 ------------  -------------  -------------
<S>                                              <C>           <C>            <C>
Revenues -
Overhead allocation fees                         $         -   $          -   $    600,000
                                                 -----------   ------------   ------------
 
Expenses -
General and administrative
 expense                                           1,358,000        447,000        415,000
                                                 -----------   ------------   ------------
 
 (Loss) income from operations                    (1,358,000)      (447,000)       185,000
                                                 -----------   ------------   ------------
 
Non-operating income (expense):
 Interest income                                     106,000      3,396,000      2,281,000
 Interest expense                                 (6,485,000)    (6,523,000)    (6,674,000)
 Gain (loss) on sale of assets                             -      1,644,000       (625,000)
                                                 -----------   ------------   ------------
 
  Total non-operating expense, net                (6,379,000)    (1,483,000)    (5,018,000)
                                                 -----------   ------------   ------------
 
Loss before income taxes
 and other items                                  (7,737,000)    (1,930,000)    (4,833,000)
Income tax benefit (provision)                       265,000       (270,000)             -
                                                 -----------   ------------   ------------
 Loss before other items                          (7,472,000)    (2,200,000)    (4,833,000)
Equity in earnings of and gain on elimination
 of investment in GB Holdings, Inc.               21,697,000              -              -
Equity in earnings (losses) of
   consolidated subsidiaries                      10,265,000    (18,364,000)   (30,733,000)
                                                 -----------   ------------   ------------
 
Net income (loss)                                $24,490,000   $(20,564,000)  $(35,566,000)
                                                 ===========   ============   ============
</TABLE>

          The accompanying notes to consolidated financial statements
                    are an integral part of this schedule.
<PAGE>
 
                                                                      SCHEDULE I
                                                                      PAGE 3

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                GREATE BAY CASINO CORPORATION (PARENT COMPANY)

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------
                                                                  1998          1997          1996
                                                              ------------  ------------  ------------
<S>                                                           <C>           <C>           <C>
NET CASH USED IN OPERATING ACTIVITIES                         $(3,234,000)  $(5,921,000)  $(1,577,000)
                                                              -----------   -----------   -----------
 
INVESTING ACTIVITIES:
 Collections on notes receivable                                        -             -     9,361,000
 Proceeds from disposition of assets                                    -             -     2,581,000
 Investments in and advances to unconsolidated affiliates               -             -    (2,946,000)
 Distributions from unconsolidated affiliates                           -       750,000             -
 Distributions from consolidated subsidiaries                   3,543,000             -             -
 Investments in consolidated subsidiaries                               -             -        (3,000)
 Net (advances to) repayments from consolidated affiliates      1,702,000    (2,539,000)   (9,366,000)
                                                              -----------   -----------   -----------
 
 Net cash provided by (used in) investing activities            5,245,000    (1,789,000)     (373,000)
                                                              -----------   -----------   -----------
 
FINANCING ACTIVITIES:
 Net borrowings from affiliates                                         -     7,858,000     6,015,000
 Repayments of long-term debt                                           -      (421,000)   (2,138,000)
                                                              -----------   -----------   -----------
 
  Net cash provided by financing activities                             -     7,437,000     3,877,000
                                                              -----------   -----------   -----------
 
  Net increase (decrease) in cash and cash equivalents          2,011,000      (273,000)    1,927,000
    Cash and cash equivalents at beginning of year              1,973,000     2,246,000       319,000
                                                              -----------   -----------   -----------
 
    Cash and cash equivalents at end of year                  $ 3,984,000   $ 1,973,000   $ 2,246,000
                                                              ===========   ===========   ===========
 
  Cash paid for:
   Interest                                                   $         -   $ 5,596,000   $ 6,476,000
   Income taxes                                                     5,000             -             -
</TABLE>


          The accompanying notes to consolidated financial statements
                    are an integral part of this schedule.
<PAGE>
 
                                                                      SCHEDULE I
                                                                      PAGE 4

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                GREATE BAY CASINO CORPORATION (PARENT COMPANY)

                 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS

(1)  BASIS OF PRESENTATION

     The accompanying condensed parent company financial statements have been
prepared assuming that Greate Bay Casino Corporation ("GBCC") will continue as a
going concern.  On January 5, 1998, GB Holdings, Inc. ("Holdings"), together
with its wholly owned subsidiaries, GB Property Funding Corp. and Greate Bay
Hotel and Casino, Inc. ("GBHC"), filed for Chapter 11 bankruptcy protection.
The filings under Chapter 11 by these indirect subsidiaries of GBCC have created
a default under the indenture for the $85,000,000 Senior Note obligations (the
"PRT Funding Notes") of PRT Funding Corp. ("PRT Funding"), a wholly owned
subsidiary of GBCC.  Accordingly, the outstanding principal amount of the PRT
Funding Notes has accelerated and is currently due and payable.  Pratt Casino
Corporation ("PCC"), a wholly owned subsidiary of GBCC, which is liable as
guarantor under the PRT Funding Notes, does not have sufficient assets to
satisfy the outstanding amounts.

     In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached
an agreement in principle with Hollywood Casino Corporation ("HCC") for HCC to
acquire the stock of PCC, the parent of PRT Funding, from GBCC for nominal
consideration as part of a debt restructuring (the "Restructuring") of PRT
Funding, PCC and other subsidiaries of PCC. Following the Restructuring, PCC's
assets will consist of its limited partnership interest in a management contract
for the Aurora Casino and a consulting contract for the Tunica Casino. These
assets will serve as collateral for $39,250,000 of 11 7/8% Senior Secured Notes
due November 1, 2003 (the "PCC Notes") which PCC will issue to the PRT Funding
noteholders as part of the Restructuring. For the year ended December 31, 1998,
these assets generated pre-tax earnings to PCC of $7,694,000. The revenues and
resulting net earnings generated by these assets will be the sole source of
funds for PCC's payment obligations under the PCC Notes. Cash available from the
management contract and consulting agreement in excess of interest payment
requirements will be used to make mandatory redemptions of the PCC Notes.

     As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding Corp. and GBHC in the Chapter 11
proceedings.

     The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement. There
can be no assurance at this time that the Restructuring will be successfully
completed.


          The accompanying notes to consolidated financial statements
                    are an integral part of this schedule.
<PAGE>
 
                                                                      SCHEDULE I
                                                                      PAGE 5

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                GREATE BAY CASINO CORPORATION (PARENT COMPANY)

                 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS


     After consummation of the Restructuring, GBCC's only significant remaining
operating activity will be the development, installation and maintenance of
casino systems by its wholly owned subsidiary, Advanced Casino Systems
Corporation ("ACSC").  GBCC and its subsidiaries will continue to have debt
outstanding to HCC consisting of (i) demand notes and accrued interest thereon
totaling $8,531,000 at December 31, 1998 and (ii) a 14 7/8% secured promissory
note due 2006 in the amount of $35,040,000 at December 31, 1998.  The current
level of ACSC's operations is not sufficient to provide debt service on the HCC
obligations and, consequently, GBCC will be insolvent after the Restructuring.
GBCC has commenced discussions with HCC to restructure its obligations; however,
there can be no assurance at this time that such discussions will result in a
restructuring of GBCC's obligations with HCC.

     The insolvency of GBCC raises substantial doubt about its ability to
continue as a going concern. The condensed parent company financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

(2)  SCHEDULED PAYMENT OF LONG-TERM DEBT

     All of GBCC's long-term debt, which is due to a wholly-owned subsidiary,
was due during April 1998.


          The accompanying notes to consolidated financial statements
                    are an integral part of this schedule.
<PAGE>
 
                                                                     SCHEDULE II

                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                               AMOUNTS
                                 BALANCE AT   CHARGED TO                                                 BALANCE   
                                  BEGINNING    COSTS AND                                                  AT END   
                                  OF PERIOD    EXPENSES       DEDUCTIONS               OTHER             OF PERIOD 
                                 -----------  -----------  ----------------      -----------------      -----------
<S>                              <C>          <C>          <C>                   <C>                    <C>         
DESCRIPTION                                                                                                    
-----------                                                                                                    
YEAR ENDED DECEMBER 31, 1998:                                                                                  
 Valuation allowance on                                                                                        
   affiliate receivables         $   213,000   $2,306,000  $             -       $     18,458,000 (1)    $20,977,000  
                                 ===========   ==========  ===============       ================        ===========  
                                                                                                                    
YEAR ENDED DECEMBER 31, 1997:                                                                                       
 Allowance for doubtful                                                                                             
  accounts receivable            $15,524,000   $3,195,000  $    (3,764,000) (2)  $    (14,955,000) (4)   $         -  
 Valuation allowance on                                                                                             
  affiliate receivables                    -      213,000                -                      -            213,000  
 Allowance for obligatory                                                                                             
  investments                      4,401,000    1,241,000          (71,000) (3)        (5,571,000) (4)             -  
                                 -----------   ----------  ---------------       ----------------        -----------  
                                                                                                                    
                                 $19,925,000   $4,649,000  $    (3,835,000)      $    (20,526,000)       $   213,000  
                                 ===========   ==========  ===============       ================        ===========  
                                                                                                                    
YEAR ENDED DECEMBER 31, 1996:                                                                                       
 Allowance for doubtful                                                                                             
  accounts receivable            $16,496,000   $2,167,000  $    (3,139,000) (1)  $              -        $15,524,000   
 Allowance for obligatory                                                                                           
  investments                      3,792,000    1,344,000         (735,000) (2)                 -          4,401,000  
                                 -----------   ----------  ---------------       ----------------        -----------  
                                                                                                                    
                                 $20,288,000   $3,511,000  $    (3,874,000)      $              -        $19,925,000  
                                 ===========   ==========  ===============       ================        ===========   
</TABLE>

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

(1)  Represents valuation allowances on notes and associated interest due from
     Greate Bay Hotel and Casino, Inc., a wholly owned subsidiary of GB
     Holdings, Inc. At December 31, 1997, such amounts were reflected as an
     adjustment to GBCC's negative investment in GB Holdings, Inc. During 1998,
     the negative investment was written off and the outstanding receivables
     were reclassified to due from affiliates. The December 31, 1997 adjustment
     to the negative investment is reflected above under the caption "Other".

(2)  Represents net write-offs of uncollectible accounts.

(3)  Represents write-offs of obligatory investments in connection with the
     contribution of certain obligatory investments to the Casino Reinvestment
     Development Authority.

(4)  Represents write-off of allowances resulting from GB Holdings, Inc. and its
     subsidiaries no longer being included on the consolidated financial
     statements of Greate Bay Casino Corporation.

          The accompanying notes to consolidated financial statements
                     are an integral part of this schedule.