<PAGE>



                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                  FORM 10-K

  X      Annual report pursuant to Section 13 or 15(d) of the
-----    Securities Exchange Act of 1934 for the fiscal year ended
         September 30, 1998 or

         Transition report pursuant to Section 13 or 15(d) of the Securities
-----    Exchange Act of 1934

                      COMMISSION FILE NUMBER:  1-9481

                        SANTA FE GAMING CORPORATION
-------------------------------------------------------------------------------
          (Exact name of registrant as specified in its Charter)

             NEVADA                                    88-0304348
--------------------------------         --------------------------------------
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
 incorporation or organization)

   4949 N. RANCHO DR., LAS VEGAS, NEVADA                 89130
-------------------------------------------------------------------------------
  (Address of principal Executive Office)              (Zip Code)

Registrant's telephone number, including area code:  (702) 658-4300

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                   NAME OF EACH EXCHANGE
TITLE OF EACH CLASS:                               ON WHICH REGISTERED:
--------------------                               ---------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE             AMERICAN STOCK EXCHANGE
EXCHANGEABLE REDEEMABLE PREFERRED STOCK            AMERICAN STOCK EXCHANGE

       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 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 number of shares of common stock outstanding as of December 22, 
1998, was 6,195,356. The market value of the common stock held by 
nonaffiliates of the Registrant as of December 22, 1998, was approximately 
$999,521. The market value was computed by reference to the closing sales 
price of $.375 per share of common stock on the American Stock Exchange as of 
December 22, 1998.

                   DOCUMENTS INCORPORATED BY REFERENCE:

PART III HEREOF INCORPORATES BY REFERENCE PORTIONS OF THE PROXY STATEMENT FOR 
THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MARCH 18, 1999 (TO BE FILED 
WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER SEPTEMBER 
30, 1998).

<PAGE>

                SANTA FE GAMING CORPORATION AND SUBSIDIARIES
                 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
                       YEAR ENDED SEPTEMBER 30, 1998

                             TABLE OF CONTENTS

                                 PART I
<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
<C>       <S>                                                                <C>
Item 1.   Business..............................................................3
             General............................................................3
             Hotel and Casino Operations........................................3
             Development Opportunities..........................................7
             Nevada Regulations and Licensing...................................7
Item 2.   Properties...........................................................11
Item 3.   Legal Proceedings....................................................11
Item 4.   Submission of Matters to a Vote of Security Holders..................13

                                 PART II

Item 5.   Market for the Registrant's Common Stock and Related
             Security Holder Matters...........................................13
Item 6.   Selected Financial Data..............................................14
Item 7.   Management's Discussion and Analysis of Financial Condition and
             Results of Operations.............................................15
Item 8.   Financial Statements and Supplementary Data..........................32
Item 9.   Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure..............................................63

                                 PART III

Item 10.  Directors and Executive Officers of the Registrant...................63
Item 11.  Executive Compensation...............................................63
Item 12.  Security Ownership of Certain Beneficial Owners and Management.......63
Item 13.  Certain Relationships and Related Transactions.......................63

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K......63
</TABLE>


<PAGE>




                                  PART I

ITEM 1.  BUSINESS

                                  GENERAL

         Santa Fe Gaming Corporation, formerly known as Sahara Gaming 
Corporation (the "Company" or "Santa Fe Gaming"), a publicly traded Nevada 
corporation, is the successor corporation of two affiliates, Sahara Resorts 
("SR") and Sahara Casino Partners, L.P., which combined in a business 
combination in September 1993. The Company's primary business operations are 
conducted through two wholly owned subsidiary corporations, Santa Fe Hotel 
Inc. ("SFHI") and Pioneer Hotel Inc. ("PHI") together (the "Operating 
Companies"). SFHI owns and operates the Santa Fe Hotel and Casino (the "Santa 
Fe"), located in Las Vegas, Nevada, and PHI owns and operates the Pioneer 
Hotel & Gambling Hall (the "Pioneer") in Laughlin, Nevada. The Company owns 
real estate adjacent to the Santa Fe, and through an indirect wholly-owned 
subsidiary of the Company, Sahara Las Vegas Corp. ("SLVC"), on Las Vegas 
Boulevard South (the "Strip") and in Henderson, Nevada, for possible 
development opportunities.

         The Company through its wholly owned subsidiaries, Hacienda Hotel 
Inc. ("HHI") and Sahara Nevada Corp. ("SNC"), owned and operated the Hacienda 
Resort Hotel and Casino (the "Hacienda") and the Sahara Hotel and Casino (the 
"Sahara"), but sold substantially all of the assets related to those 
hotel-casinos in August 1995 and October 1995, respectively.

         In November 1998, Pioneer Finance Corp. ("PFC"), a special purpose 
subsidiary of Santa Fe Gaming, which issued the 13 1/2% First Mortgage Bonds 
due December 1, 1998 ("13 1/2% Notes") to finance the acquisition of the 
Pioneer in 1988, agreed to file for relief under Chapter 11 of the United 
States Bankruptcy Code and to seek confirmation of a plan or reorganization 
that will permit the issuance of new notes in satisfaction of the 13 1/2% 
Notes in accordance with the terms set forth in the Offering Circular and 
Consent Solicitation dated October 23, 1998, as amended ("Consent 
Solicitation"). See Item 7- "Management's Discussion and Analysis of 
Financial Condition and Results of Operations".

         The principal executive office of the Company is located at 4949 N. 
Rancho Dr., Las Vegas, Nevada 89130 and the telephone number is (702) 
658-4300.


                         HOTEL AND CASINO OPERATIONS

         The Company's primary business operations are in the gaming industry 
and are conducted at the Santa Fe in Las Vegas, Nevada and the Pioneer in 
Laughlin, Nevada.

DESCRIPTION OF THE HOTEL-CASINOS

         The Santa Fe is located in Las Vegas, approximately nine miles 
northwest of downtown Las Vegas, adjacent to US-95 at the off-ramp for Rancho 
Road. The Santa Fe was built in 1991 on a 38-acre site and includes a 440,000 
square foot facility, features a traditional southwestern decor, 200 hotel 
rooms, an 85,000 square foot casino with 1,616 slot and video poker machines 
and a wide range of table games, a 550-seat bingo room, a 180-seat race and 
sports book with 38 large screen televisions, an arcade and a variety of 
dining options, including three specialty restaurants, a 575-seat buffet and 
a 24-hour restaurant. The hotel features 200 rooms in a five-story tower. 
Each room features a mountain- view, is approximately 310 square feet, has


                                     3

<PAGE>

a sitting area and a choice of king or two double beds. The hotel offers its 
guests a pool, spa and patio area. Additionally, the Santa Fe includes a 
Hockey League regulation size ice skating arena and a 60-lane 
state-of-the-art bowling center. Among the Santa Fe's five full-service bars 
is a lounge which features live entertainment nightly and overlooks the ice 
skating arena. The Santa Fe also includes convention and banquet seating for 
500 people. In September 1998, the Santa Fe completed construction of two new 
state-of-the-art marquee signs.

         The Pioneer, built in 1982, featuring a classical western 
architecture style, is located in Laughlin, Nevada, an unincorporated town on 
the Colorado River bordering Arizona. The Pioneer is located on approximately 
12 acres of land, with Colorado River frontage of approximately 770 feet, and 
is situated near the center of Laughlin's Casino Drive. Approximately 6 1/2 
acres of the 12 acres are subject to a 99-year ground lease (the "Pioneer 
Ground Lease") which, by its terms, is scheduled to terminate in December 
2078. One of the three motel buildings together with a portion of both the 
Pioneer's casino building and a second motel building are located on land 
subject to the Pioneer Ground Lease. The leased land lies between and 
separates the remaining two parcels of land that are held in fee.

         The Pioneer is comprised of four buildings. The casino is located in 
the main building, totaling approximately 50,000 square feet of which 
approximately 21,500 square feet house the casino. The Pioneer features 921 
slot machines and provides a range of table games, including blackjack 
("21"), craps, a roulette wheel and a keno game. The first floor includes the 
casino, two bars, snack bar and gift shop, as well as a twenty-four hour 
restaurant, kitchen, smoke shop, special events area, restrooms and storage 
areas. A partial second floor houses a gourmet restaurant, administrative 
offices and banquet rooms. The three motel buildings were built in 1984 of 
frame construction and comprise approximately 66,000, 54,000 and 30,000 
square feet, respectively. A total of 417 motel rooms are housed in the three 
buildings and improvements include a fenced swimming pool and spa. The 
Pioneer property also includes a parking lot with approximately 1,000 parking 
spaces.

REVENUES

         The primary source of revenues to the Company's hotel-casinos is 
gaming, which represented 81%, 79.3% and 78.6% in 1998, 1997 and 1996, 
respectively, of total revenues, excluding gain on sale of assets, in the 
respective fiscal years. The following table sets forth information regarding 
the approximate number of licensed games and gaming devices of the Santa Fe 
and the Pioneer as of September 30, 1998:

<TABLE>
<CAPTION>
                                  Santa Fe              Pioneer           Total
                                  --------              -------           -----
            <S>                   <C>                   <C>               <C>
            Slot Machines          1,616                  921             2,537
            Blackjack ("21")          21                   13                34
            Craps                      2                    2                 4
            Roulette                   3                    1                 4
            Poker and Pan              5                    -                 5
            Race/Sports Book           1                    -                 1
            Keno                       1                    1                 2
            Bingo                      1                    -                 1
            Other                      3                    1                 4
</TABLE>


                                      4

<PAGE>

         The Santa Fe targets primarily (i) mature local Las Vegas gamers who 
desire a comfortable off-Strip gaming venue with favorable slot and video 
poker machine payouts, (ii) local Las Vegas families that seek a variety of 
recreational amenities that are separate from adult gaming activities, (iii) 
out-of-town hockey and bowling leagues that seek a southwest venue to conduct 
tournaments and (iv) out-of-own business and vacation travelers who desire 
off-Strip accommodations as well as friends and relatives of local residents 
who require accommodations. The occupancy rate at the Santa Fe for the last 
three fiscal years was 83.1% in fiscal 1998, 84.6% in fiscal 1997 and 93.0% 
in fiscal 1996.

         The Santa Fe attempts to attract and retain customers by offering 
slot and video poker machine payouts that compare favorably to the 
competition. A highly visible means used by the Santa Fe to accomplish this 
marketing program is to offer what management believes to be the largest 
number of quarter video poker machines with a theoretical payout of 100% or 
better. The Santa Fe periodically sponsors detailed product research of its 
competitors to categorize the number and type of video poker games by payouts 
and monitors changes in game products to assist it in maintaining a 
sustainable competitive advantage over competing properties.

         The Santa Fe uses an electronic players' club, the Desert Fortune 
Club (the"Club"), to capture player information, better identify customers 
and build customer retention and loyalty. The Santa Fe uses this information 
for database marketing and rewards. Club members receive targeted periodic 
mailings, including newsletters detailing activities and specials at the 
Santa Fe, invitations to special events and tournaments, coupons for 
complimentary or discounted dining and cheques redeemable for cash at the 
Santa Fe.

         The Pioneer targets primarily (i) mature, out-of-town customers 
residing in Central Arizona and Southern California, (ii) retirees who reside 
in the Northeast and Midwest United States and Canada, and travel to the 
Southwest United States during the winter months and (iii) local residents 
who reside in Laughlin, Nevada, in Bullhead City, Kingman and Lake Havasu, 
Arizona. The occupancy rate at the Pioneer in each of the last three fiscal 
years was 76.9%, 79.6% and 84.8% respectively, in fiscal years 1998, 1997 and 
1996.

         The Pioneer attempts to attract and retain customers by offering 
slot and video poker machine payouts that compare favorably to the 
competition. A visible means used by the Pioneer to accomplish this marketing 
program is to offer what management believes to be the largest number of 
quarter video poker machines with pay tables that have a theoretical pay out 
percentage of 99.97% or better. The Pioneer periodically sponsors detailed 
product research of its competitors to categorize the number and type of 
video poker games by payouts and monitors changes in game products to assist 
it in maintaining a sustainable competitive advantage over competing 
properties.

         The Pioneer has organized a program it calls the "Round-Up Club" 
established to encourage repeat business from frequent and active slot 
customers. As a member of the Round-Up Club uses a slot machine, points 
accumulate in the member's account that can be redeemed for free gifts, food 
and beverages. Pioneer management also uses the Round-Up Club membership list 
for direct mail marketing.

MANAGEMENT AND PERSONNEL

         At September 30, 1998, the Company employed 24 administrative 
personnel, and the Santa Fe and the Pioneer employed 1,194 and 732 persons, 
respectively.


                                     5


<PAGE>

         SFHI is negotiating with the Teamsters, Operating Engineers, 
Culinary and Bartenders Unions ("Unions") with respect to a collective 
bargaining agreement covering certain employees at the Santa Fe. If 
negotiations result in an agreement between SFHI and the Unions, operating 
expenses may increase. In the event negotiations fail to result in an 
agreement, the Unions may call a strike, which would result in operating 
revenues being adversely affected. In either event, there could be a material 
adverse effect on the results of operations and financial condition of SFHI 
and the Company.

         The Santa Fe continues to be the target of a union boycott in which 
the Unions ask the public not to patronize the properties. Management is 
unable to determine the impact, if any, of the union boycott on the Santa Fe.

COMPETITION

         In Las Vegas, hotels and gambling casinos compete primarily in three 
areas: on or near the Strip, within downtown Las Vegas and in the locals 
market. The Strip and downtown properties predominantly target out of town 
visitors, while local properties generally target residents of the Las Vegas 
Valley (the "Locals Market"). In particular, the Santa Fe targets the 
communities north and northwest of downtown Las Vegas (the "Northwest Las 
Vegas Market"). The Locals Market is highly competitive. The number of 
casinos catering to the Locals Market has increased in the last several 
years. Management believes the Santa Fe competes primarily with Fiesta Hotel 
and Casino and Texas Station due to their proximity, approximately five miles 
southeast of the Santa Fe. Unlike the other competitors in the Northwest Las 
Vegas Market, the Santa Fe, Fiesta Hotel and Casino and Texas Station each 
offers in excess of 1,000 gaming positions, hotel accommodations, extensive 
dining options and various other amenities. Additionally, the Resort at 
Summerlin, an approximately $270.0 million hotel-casino expected to be 
completed in 1999, will be located approximately eight miles southwest of the 
Santa Fe. According to public announcements, the Resort at Summerlin will be 
a luxury destination resort and will target primarily high-end out-of-town 
visitors.

         In addition to competing against the hotel-casinos in Laughlin, the 
Pioneer also competes with the hotel-casinos in Las Vegas and those situated 
on I-15 (the principal highway between Las Vegas and southern California) 
near the California-Nevada state line, as well as a growing number of Native 
American casinos in Laughlin's regional market. The Company believes the 
significant expansion of hotel and casino capacity in Las Vegas in recent 
years and the growth of Native American casinos in Laughlin's central Arizona 
and southern California feeder markets have had a negative impact on Laughlin 
hotel-casinos, including the Pioneer, by drawing visitors away from the 
Laughlin market. This has, in turn, resulted in increased competition among 
Laughlin hotel-casinos, including the Pioneer.

         On August 28, 1998 the California General Assembly, Senate and 
Governor approved legislation authorizing gaming operations on tribal lands 
pursuant to a form of compact. Prior to this date, such gaming operations 
were illegal in California. In addition, on November 3, 1998 California 
voters approved Proposition 5, which permits Native American tribes that 
enter into agreements with the State of California pursuant to the form of 
compact to conduct gaming activities including horse race wagering, gaming 
devices (including slot machines), banked card games and lotteries. 
Proposition 5 has been challenged in court and, as a result, the Company does 
not know when it will become effective. However, Management believes that 
increased competition from Native American gaming will cause a decline in the 
Company's revenues and will have a negative impact on its business. 
Management believes that the development by Native Americans and others of 
casino properties similar to those in Las Vegas in areas close to Nevada, 
particularly California and Arizona, could have a material adverse effect on 
the Pioneer's business and results of operations.

         See "Management's Discussion and Analysis of Financial Condition and 
Results of Operations" for further discussion of competition.


                                     6

<PAGE>

                         DEVELOPMENT OPPORTUNITIES

HENDERSON, NEVADA

         The Company owns, through an indirect wholly owned subsidiary, an 
approximately 39-acre parcel of real property in Henderson, Nevada, located 
in the southeast Las Vegas Valley. The Company is evaluating the potential 
development of a hotel-casino and entertainment complex on this property. The 
Company has completed preliminary engineering and design drawings, obtained 
construction permits and incurred development costs. Any future development 
is subject to, among other things, the Company's ability to obtain necessary 
financing. No assurance can be given that the Company will obtain development 
financing or develop successfully the Henderson property. See Item 2. 
Properties

         Senate Bill 208, or the Neighborhood Casino Act, which the Nevada 
legislature passed in its 1997 session and Nevada's governor signed into law, 
affects the development of the Henderson property as well as other potential 
locations for casinos targeting the Locals Market. Management believes that 
the Neighborhood Casino Act may impact the Company favorably by limiting the 
expansion of competition in the Locals Market. However, in the event the 
Company's issued land use permits for the Henderson property were to expire, 
the Neighborhood Casino act may also restrict the Company's ability to 
construct and operate any hotel-casino it may develop on the Henderson 
property.

LAS VEGAS, NEVADA

          The Company owns, through an indirect wholly owned subsidiary, an 
approximately 27-acre parcel of real property on the Strip, which it may use 
for possible future development. In connection with the acquisition of the 
property, the Company assumed an operating lease under which a water theme 
park operates, which may be terminated, at any time, by the Company; however, 
if it is terminated prior to 2004, the Company has agreed to pay a loan owed 
by the tenant to the prior owner. Any future development of the property is 
subject to, among other things, the Company's ability to obtain necessary 
financing. No assurance can be given that the Company will obtain development 
financing or develop successfully the Strip property. The Strip property is 
exempt from the provisions of Senate Bill 208. See Item 2. Properties.

                      NEVADA REGULATIONS AND LICENSING

         The Company, PHI and SFHI (collectively, the "Santa Fe Group") are 
subject to extensive state and local regulation by the Nevada Gaming 
Commission (the "Commission"), Nevada Gaming Control Board (the "Board") and 
in the case of PHI and SFHI, the Clark County Liquor and Gaming Licensing 
Board and the City of Las Vegas, respectively (collectively the "Nevada 
Gaming Authorities").

         The laws, regulations and supervisory procedures of the Nevada 
Gaming Authorities seek (i) to prevent unsavory or unsuitable persons from 
having any direct or indirect involvement with gaming at any time or in any 
capacity, (ii) to establish and maintain responsible accounting practices and 
procedures, (iii) to maintain effective control over the financial practices 
of licensees, including establishing minimum procedures for internal fiscal 
affairs and the safeguarding of assets and revenues, providing reliable 
record-keeping and making periodic reports to the Nevada Gaming Authorities, 
(iv) to prevent cheating and fraudulent practices and (v) to provide a source 
of state and local revenues through taxation and licensing fees. Changes in 
such laws, regulations and procedures could have an adverse effect on any or 
all of the members of the Santa Fe Group. Management believes the Santa Fe 
Group is in compliance with regulations promulgated by the Nevada Gaming 
Authorities.


                                      7

<PAGE>

         LICENSING AND REGISTRATION. PHI and SFHI hold Nevada State gaming 
licenses to operate the Pioneer and the Santa Fe. The Company has been 
approved by the Nevada Gaming Authorities to own, directly or indirectly, a 
beneficial interest in the Operating Companies.

         The licenses held by members of the Santa Fe Group are not 
transferable. Each issuing agency may at any time revoke, suspend, condition, 
limit or restrict licenses or approvals to own a beneficial interest in an 
Operating Company for any cause deemed reasonable by such agency. Any failure 
to retain a valid license or approval would have a material adverse effect on 
all members of the Santa Fe Group.

         If it is determined that the Operating Companies or, when 
applicable, new members of the Santa Fe Group, have violated the Nevada laws 
or regulations relating to gaming, the Operating Companies or, when 
applicable, new members of the Santa Fe Group, could, under certain 
circumstances, be fined and the licenses of the Operating Companies or, when 
applicable, new members of the Santa Fe Group, could also be limited, 
conditioned, revoked or suspended.  A violation under any of the licenses 
held by the Company, or any of the Operating Companies or, when applicable, 
new members of the Santa Fe Group, may be deemed a violation of all the other 
licenses held by the Company and each of the Operating Companies or, when 
applicable, new members of the Santa Fe Group. If the Commission does 
petition for a supervisor to manage the affected casino and hotel facilities, 
the suspended or former licensees shall not receive any earnings of the 
gaming establishment until approved by the court, and after deductions for 
the costs of the supervisor's operation and expenses and amounts necessary to 
establish a reserve fund to facilitate continued operation in light of any 
pending litigation, disputed claims, taxes, fees and other contingencies 
known to the supervisor which may require payment. The supervisor is 
authorized to offer the gaming establishment for sale if requested by the 
suspended or former licensee, or without such a request after six months 
after the date the license was suspended, revoked or not renewed.

         INDIVIDUAL LICENSING. Stockholders, directors, officers and certain 
key employees of corporate gaming licensees must be licensed by the Nevada 
Gaming Authorities. An application for licensing of an individual may be 
denied for any cause deemed reasonable by the issuing agency. Changes in 
licensed positions must be reported to Nevada Gaming Authorities. In addition 
to its authority to deny an application for an individual license, the Nevada 
Gaming Authorities have jurisdiction to disapprove a change in corporate 
position. If the Nevada Gaming Authorities were to find any such person 
unsuitable for licensing or unsuitable to continue to have a relationship 
with a corporate licensee, such licensee would have to suspend, dismiss and 
sever all relationships with such person. Such corporate licensee would have 
similar obligations with regard to any person who refuses to file appropriate 
applications, who is denied licensing following the filing of an application 
or whose license is revoked. Each gaming employee must obtain a work permit 
which may be revoked upon the occurrence of certain specified events.

         Any individual who is found to have a material relationship or a 
material involvement with a gaming licensee may be investigated to be found 
suitable or to be licensed. The finding of suitability is comparable to 
licensing and requires submission of detailed financial information and a 
full investigation. Key employees, controlling persons or others who exercise 
significant influence upon the management or affairs of a gaming licensee may 
be deemed to have such a relationship or involvement.

         Beneficial owners of more than 10% of the voting securities of a
corporation or partner interests of a partnership registered with the Nevada
Gaming Authorities that is "publicly traded" (a "Registered Entity") must be
found suitable by the Nevada Gaming Authorities, and any person who acquires
more than 5% of the voting securities or partner interests, as the case may be,
of a Registered Entity must report the acquisition to the Nevada Gaming
Authorities in a filing similar to the beneficial ownership filings required by
the Federal


                                     8

<PAGE>

securities laws. Under certain circumstances an institutional investor, as 
such term is defined in the Gaming Control Act and the regulations of the 
Commission and Board (collectively, the "Nevada Gaming Regulations"), that 
acquires more than 10% of the Company's voting securities may apply to the 
Commission for a waiver of such finding of suitability requirement. If the 
stockholder who must be found suitable is a corporation, partnership or 
trust, it must submit detailed business and financial information including a 
list of beneficial owners. Any beneficial owner of equity or debt securities 
of a Registered Entity (whether or not a controlling stockholder) may be 
required to be found suitable if the relevant Nevada Gaming Authorities have 
reason to believe that such ownership would be inconsistent with the declared 
policy of the State of Nevada. If the beneficial owner who must be found 
suitable is a corporation, partnership or trust, it must submit detailed 
business and financial information, including a list of its securities.

         In addition, the Clark County Liquor and Gaming Licensing Board has 
taken the position that it has the authority to approve all persons owning or 
controlling more than 2% of the stock or partner interests of a Registered 
Entity, including a gaming licensee or otherwise, or of any corporation, 
partnership or person controlling such an entity. The applicant is required 
to pay all costs of investigation.

         Any stockholder found unsuitable and who beneficially owns, directly 
or indirectly, any securities or partner interests of a Registered Entity 
beyond such period of time as may be prescribed by the Nevada Gaming 
Authorities may be guilty of a gross misdemeanor. Any person who fails or 
refuses to apply for a finding of suitability or a license within 30 days 
after being ordered to do so may be found unsuitable. A Registered Entity is 
subject to disciplinary action if, after it receives notice that a person is 
unsuitable to be a securityholder or partner, as the case may be, or to have 
any other relationship with it, such Registered Entity (a) pays the 
unsuitable person any dividends or property upon any voting securities or 
partner interests or makes any payments or distributions of any kind 
whatsoever to such person, (b) recognizes the exercise, directly or 
indirectly, of any voting rights in its securities or partner interests by 
the unsuitable person, (c) pays the unsuitable person any remuneration in any 
form for services rendered or otherwise, except in certain and specific 
circumstances or (d) fails to pursue all lawful efforts to require the 
unsuitable person to divest himself of his voting securities, including, if 
necessary, the immediate purchase of the voting securities for cash at fair 
market value.

         Registered Entities must maintain current stock ledgers in the State 
of Nevada that may be examined by the Nevada Gaming Authorities at any time. 
If any securities or partner interests are held in trust by an agent or by a 
nominee, the record holder may be required to disclose the identity of the 
beneficial owner to the Nevada Gaming Authorities. A failure to make such 
disclosure may be grounds for finding the record owner unsuitable. Record 
owners are required to conform to all applicable rules and regulations of the 
Nevada Gaming Authorities. Licensees also are required to render maximum 
assistance in determining the identity of a beneficial owner.

         The Nevada Gaming Authorities have the power to require that 
certificates representing voting securities of a corporate licensee bear a 
legend to the effect that such voting securities or partner interests are 
subject to the Nevada Gaming Regulations. The Nevada Gaming Authorities, 
through the power to regulate licensees, have the power to impose additional 
restrictions on the holders of such voting securities at any time.

         FINANCIAL RESPONSIBILITY. The Company and the Operating Companies 
are required to submit detailed financial and operating reports to the Nevada 
Gaming Authorities. Substantially all loans, leases, sales of securities and 
other financial transactions entered into by the Company or the Operating 
Companies must be reported to and, in some cases, approved by the Nevada 
Gaming Authorities.


                                     9

<PAGE>

         CERTAIN TRANSACTIONS. None of the Santa Fe Group may make a public 
offering of its securities without the approval of the Commission if the 
proceeds therefrom are intended to be used to construct, acquire or finance 
gaming facilities in Nevada, or retire or extend obligations incurred for 
such purposes. Such approval, if given, will not constitute a recommendation 
or approval of the investment merits of the securities offered. Any public 
offering requires the approval of the Commission.

         Changes in control of the Company through merger, consolidation, 
acquisition of assets, management or consulting agreements or any form of 
takeover cannot occur without the prior investigation of the Board and 
approval of the Commission. The Commission may require controlling 
stockholders, partners, officers, directors and other persons who have a 
material relationship or involvement in the transaction to be licensed.

         The Nevada legislature has declared that some corporate acquisitions 
opposed by management, repurchases of voting securities and other corporate 
defense tactics that affect corporate gaming licensees in Nevada, and 
corporations whose securities are publicly traded that are affiliated with 
those operations, may be injurious to stable and productive corporate gaming. 
The Commission has established a regulatory scheme to ameliorate the 
potentially adverse effects of these business practices upon Nevada's gaming 
industry and to further Nevada's policy to (i) assure the financial stability 
of corporate or partnership gaming operators and their affiliates; (ii) 
preserve the beneficial aspects of conducting business in the corporate form; 
and (iii) promote a neutral environment for the orderly governance of 
corporate or partnership affairs. Approvals are, in certain circumstances, 
required from the Commission before the Company can make exceptional 
repurchases of voting securities above the current market price thereof 
(commonly referred to as "greenmail") and before an acquisition opposed by 
management can be consummated. Nevada's gaming regulations also require prior 
approval by the Commission if the Company were to adopt a plan of 
recapitalization proposed by the Company's Board of Directors in opposition 
to a tender offer made directly to the stockholders for the purpose of 
acquiring control of the Company.

         MISCELLANEOUS. Pursuant to recent changes in Nevada law, the Company 
and its Nevada-based affiliates, including subsidiaries, may engage in gaming 
activities outside the State of Nevada without seeking the approval of the 
Authorities provided that such activities are lawful in the jurisdiction 
where they are to be conducted and that certain information regarding the 
foreign operation is provided to the Board on a periodic basis. The Company 
and its Nevada-based affiliates may be disciplined by the Commission if any 
of them violates any laws of the foreign jurisdiction pertaining to the 
foreign gaming operation, fails to conduct the foreign gaming operation in 
accordance with the standards of honesty and integrity required of Nevada 
gaming operations, engages in activities that are harmful to the State of 
Nevada or its ability to collect gaming taxes and fees, or employs a person 
in the foreign operation who had been denied a license or finding of 
suitability in Nevada on the ground of personal unsuitability.

         License fees and taxes, computed in various ways depending on the 
type of gaming involved, are payable to the State of Nevada and to the 
counties and cities in which the Company and the Operating Companies' conduct 
their respective operations. Depending upon the particular fee or tax 
involved, these fees and taxes are payable either monthly, quarterly or 
annually and are based upon: (i) a percentage of the gross gaming revenues 
received by the casino operation; (ii) the number of slot machines operated 
by the casino; or (iii) the number of table games operated by the casino. A 
casino entertainment tax is also paid by the licensee where entertainment is 
furnished in connection with the selling of food or refreshments.

         Finally, the Nevada Gaming Authorities may require that lenders to 
licensees be investigated to determine if they are suitable and, if found 
unsuitable, may require that they dispose of their loans.


                                     10

<PAGE>

ITEM 2.  PROPERTIES

         The Santa Fe is located on a 38-acre site in the northwest section 
of Las Vegas, approximately nine miles from the north end of the Strip. The 
Santa Fe property is subject to a first priority deed of trust securing 9 1/2%
Notes due December 15, 2000 ("9 1/2% Notes") and a second priority deed of 
trust securing 11% First Mortgage Notes due December 15, 2000 ("11% Notes"). 
As of September 30, 1998, $99.4 million principal amount of the 11% Notes 
remain outstanding, and is reported in the consolidated Balance Sheet net of 
unamortized debt discount of $2.9 million and $33.1 million principal amount 
held by an indirect wholly owned subsidiary of the Company. See Item 1. 
Business-- Description of the Hotel-Casinos for more detailed information 
regarding the Santa Fe.

         The Pioneer is located on approximately 12 acres of land, with 
Colorado River frontage of approximately 770 feet, and is situated near the 
center of Laughlin's Casino Drive. Approximately 6 1/2 acres of the 12-acre 
Pioneer site is leased from an unaffiliated third party. The Pioneer property 
is subject to a first priority deed of trust securing 13 1/2% First Mortgage 
Bonds due December 1, 1998 ("13 1/2% Notes"). As of September 30, 1998, $60.0 
million principal amount of the 13 1/2% Notes was outstanding. See Item 1. 
Business-- Description of the Hotel-Casinos for more detailed information 
regarding the Pioneer.

         In November 1993 the Company acquired an approximately 22-acre 
parcel of property across the street from the Santa Fe. This property is 
subject to a first priority deed of trust securing a $1.6 million promissory 
note due in December 1999.

         In March 1994 the Company purchased a 39-acre parcel of real 
property in Henderson, Nevada, located in southeast Las Vegas Valley. This 
property is subject to a first priority deed of trust securing $57.5 million 
principal amount of notes due December 15, 1999 ("SLVC Notes"). See Item 1. 
Business-Development Opportunities for more information regarding the real 
property.

         In October 1995 the Company acquired 27 acres of real property 
located on the Strip. The property is subject to a ground lease, which the 
Company may terminate at any time. The Company has guaranteed payments by the 
tenant of a loan owed to the prior owner of the property ("tenant loan") and 
has agreed to pay the tenant loan in full in certain situations, including in 
the event the lease is terminated for any reason prior to its scheduled 
termination date of 2004. The tenant loan, which is amortized through monthly 
principal and interest payments through December 2004, had an outstanding 
balance of $4.8 million as of September 30, 1998. This property is subject to 
a first priority deed of trust securing the SLVC Notes. See Item 1. 
Business-Development Opportunities for more information regarding the real 
property.

ITEM 3.  LEGAL PROCEEDINGS

POULOS V. CAESAR'S WORLD, INC., ET AL. AND AHERN V. CAESAR'S WORLD, INC., ET AL.

         The Company and its predecessor, Sahara Casino Partners, L.P. are 
defendants in a class action lawsuit originally filed in the United States 
District Court of Florida, Orlando Division, entitled POULOS V. CAESAR'S 
WORLD, INC., ET AL., AHERN V. CAESAR'S WORLD, INC., ET AL. and SCHRIER V. 
CAESAR'S WORLD, INC., ET AL, along with a fourth action against cruise ship 
gaming operators and which have been consolidated in a single action now 
pending in the United States District Court, District of Nevada (the 
"Court"). Also named as defendants in these actions are many of the largest 
gaming companies in the United States and certain gaming equipment 
manufacturers. Each complaint is identical in its material allegations. The 
actions allege that the defendants have engaged in fraudulent and misleading 
conduct by inducing people to play video poker machines and electronic slot 
machines based on false beliefs concerning how the machines operate and the 
extent to which


                                      11
<PAGE>

there is actually an opportunity to win on a given play. The complaints 
allege that the defendants' acts constitute violations of the Racketeer 
Influenced and Corrupt Organizations Act and also give rise to claims for 
common law fraud and unjust enrichment, and seek compensatory, special 
consequential, incidental and punitive damages of several billion dollars.

         In response to the complaints, all of the defendants, including the 
Company, filed motions attacking the pleadings for failure to state a claim, 
seeking to dismiss the complaints for lack of personal jurisdiction and 
venue. As a result of those motions, the Court has required the Plaintiffs in 
the four consolidated cases to file a single consolidated amended complaint. 
Subsequent to Plaintiffs' filing of their consolidated amended complaint, the 
defendants refiled numerous motions attacking the amended complaint upon many 
of the bases as the prior motions. The Court heard the arguments on those 
motions and ultimately denied the motions. Plaintiffs then filed their motion 
to certify a class. Defendants have vigorously opposed the motion and the 
Court has not yet ruled on the motion to certify the class. If the Court 
denies the certification then the case cannot go forward as a class action. 
If the Court certifies a class then the parties will proceed to meet 
discovery.

TREASURE BAY - SECURITIES LITIGATION

         On December 12, 1994 the Company and SFHI filed a lawsuit in the 
Court, naming Treasure Bay officers A. Clay Rankin III, Joe N. Hendrix and 
Bernie Burkholder, and former officer Francis L. Miller as defendants in 
matters involving violations of Section 10(b) and Rule 10b-5 of the 
Securities Exchange Act of 1934, violation of Nevada state securities laws, 
fraud and negligent misrepresentation in connection with the Company's 
investment of $10 million in exchange for a 20% interest in Treasure Bay, and 
the Company's guarantee of $4.5 million of Treasure Bay's indebtedness. The 
defendants have filed answers to the complaint and discovery is continuing.

         On December 15, 1994 Francis L. Miller filed a lawsuit in the 
Mississippi Circuit Court, Second Judicial District, against the Company and 
SFHI, as well as Paul W. Lowden and Suzanne Lowden, alleging, among other 
things, that the Company made certain misrepresentations which induced 
Francis Miller to entrust the management of his investments in Treasure Bay's 
two Mississippi casinos to the Company and SFHI and to sell the Company and 
SFHI a 20% ownership interest in Treasure Bay. The lawsuit was subsequently 
amended to remove Suzanne Lowden as a defendant. The Company and SFHI filed a 
successful motion to transfer this case to the Court.

         The Court dismissed the Francis L. Miller lawsuit as originally 
filed in Mississippi Circuit Court. The Court permitted Mr. Miller to file 
the claims that he asserted in the dismissed action as counterclaims to the 
lawsuit filed by the Company against Messrs. Miller, Rankin, Hendrix and 
Burkholder on December 12, 1994 in the Court. Thus, the two lawsuits were 
combined. The parties to the combined litigation have concluded most of the 
formal discovery involved in this case. A pre-trial order is expected to be 
entered in the case in March, 1999. The case is expected to go to trial in 
the late spring of 1999.

         In addition, the Company is subject to various lawsuits relating to 
routine matters incidental to its business. The Company does not believe that 
the outcome of such litigation, in the aggregate, will have a material 
adverse effect on the Company. See Item 1. Business Hotel-Casino Operations-
Management and Personnel for discussion of several proceedings relating to 
labor matters.


                                      12
<PAGE>

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

         There were no matters submitted to a vote of the Company's security 
holders during the fourth quarter of fiscal 1998.

                                   PART II

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

         The Company's Common Stock is traded on the American Stock Exchange 
(the "AMEX") under the symbol "SGM". The Company's exchangeable Redeemable 
Preferred Stock is also traded on the AMEX under the symbol "SGMp". In 
November 1998 the Company was advised by the AMEX that it does not fully 
satisfy all the guidelines for continued listing of the Company's common and 
preferred stock. Accordingly, there can be no assurance that such stock will 
continue to be listed on the AMEX.

         The closing sales price of the Common Stock on December 22, 1998, as 
reported by the AMEX was $0.375 per share. The tables below set forth the 
high and low closing sales prices by quarter for the fiscal years ended 
September 30, 1998 and 1997 for the Common Stock, as reported by the AMEX.

<TABLE>
<CAPTION>
                                          FIRST    SECOND     THIRD    FOURTH
         FISCAL 1998                     QUARTER   QUARTER   QUARTER   QUARTER
         ---------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>
         High                             $1.00     $2.75     $1.69     $1.31
         Low                              $0.69     $0.69     $1.25     $0.56


<CAPTION>
                                          FIRST    SECOND     THIRD    FOURTH
         FISCAL 1997                     QUARTER   QUARTER   QUARTER   QUARTER
         ---------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>
         High                             $1.75     $1.63     $1.38     $1.00
         Low                              $1.13     $0.69     $0.69     $0.69
</TABLE>

         The Company has never paid cash dividends on its Common Stock, nor 
does it anticipate paying such dividends in the foreseeable future.

         There were approximately 7,700 stockholders as of December 22, 1998. 
The number of stockholders was computed by including an estimate of those 
stockholders whose stock is beneficially held for them by participants in a 
clearing agency as of that date.


                                      13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         The table below sets forth a summary of selected financial data of 
the Company for the years ended September 30 (dollars in thousands, except 
per share amounts):

<TABLE>
<CAPTION>
                                 1998        1997        1996       1995        1994
                               --------    --------    --------   --------    --------
<S>                            <C>         <C>         <C>        <C>         <C>
Total Revenues net(1)          $112,849    $104,989    $148,432   $251,109    $253,718

Net Income (Loss)
 Before Extraordinary Items,
 Net of Taxes (4)              $(62,343)   $(13,713)   $  9,739   $(23,183)   $(15,739)
  Per Common Share(3)          $ (10.06)   $  (2.21)   $   1.57   $  (3.74)   $  (2.54)

Net Income (Loss)(2) (4)       $(63,859)   $(13,133)   $ 16,160   $(23,363)   $(16,961)

  Per Common Share(3)          $ (10.31)   $  (2.12)   $   2.61   $  (3.77)   $  (2.74)

Cash Dividends
  Per Common Share                 --          --          --         --          --

Total Assets                   $192,166    $216,296    $228,656   $366,638    $478,555

Long-Term Debt
less current portion(5)        $213,147    $170,538    $167,687   $198,655    $379,093
Redeemable
  Preferred Stock(6)           $ 21,986    $ 20,469    $ 18,953   $ 17,521    $ 16,202
</TABLE>
--------------------------------------------------------------------------------
(1)      Operating results for fiscal 1998, 1997 and 1996 do not include any
         revenues attributable to the Hacienda and Sahara, which were sold in
         August 1995 and October 1995, respectively. Fiscal 1996 includes a
         $40.8 million gain relating to the sale of substantially all of the
         assets of SNC. Fiscal 1995 includes an $8.9 million gain relating to
         the sale of substantially all the assets of HHI.
(2)      Amounts presented include stock dividends paid or accrued on preferred
         shares.
(3)      Amounts have been restated to reflect a 25% common stock dividend paid
         in February 1994.
(4)      Results for fiscal 1998 include a $44.0 million impairment loss to
         adjust to fair market value the carrying value of the Pioneer fixed and
         intangible assets. (See Item 7 - Management's Discussion and Analysis
         of Financial Condition and Results of Operations).
(5)      Long term debt for fiscal 1998 includes $60 million due with respect to
         the 13 1/2% Notes on December 1, 1998 and not paid. (See Item 7 -
         Management's Discussion and Analysis of Financial Condition and Results
         of Operations)
(6)      The Company declared and issued paid in kind dividends on its
         Exchangeable, Redeemable 8% Preferred Stock during fiscal years 1996
         and 1995. The Company did not declare dividends on its preferred stock
         in fiscal 1998 and 1997. The accrued dividends of approximately $1.5
         million for fiscal 1998 and 1997 have been recorded as an increase to
         the preferred stock account.


                                     14
<PAGE>

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

RESULTS OF OPERATIONS - FISCAL 1998 COMPARED TO FISCAL 1997
CONSOLIDATED

         NET OPERATING REVENUES. Consolidated net operating revenues for the 
year ended September 30, 1998 were $112.8 million, a $7.8 million, or 7.5%, 
increase from $105.0 million for the same period in fiscal 1997. Revenues 
increased by $8.8 million at the Santa Fe and decreased by $100,000 at the 
Pioneer. The prior period's revenues included a $700,000 gain on the sale of 
real property.

         In November 1998, PFC, a special purpose subsidiary of Santa Fe 
Gaming which issued the 13 1/2% Notes to finance the acquisition of the 
Pioneer in 1988, agreed to file for relief under Chapter 11 of the United 
States Bankruptcy Code and to seek confirmation of a plan of reorganization 
that will permit the issuance of new notes in satisfaction of the 13 1/2% 
Notes pursuant to the terms set forth in the Consent Solicitation. Holders of 
approximately 75% of the outstanding 13 1/2% Notes have agreed to forbear from 
exercising rights or remedies as a result of PFC's failure to pay principal 
and interest on the 13 1/2% Notes at the December 1, 1998 maturity and to vote 
to accept a plan of reorganization that provides for treatment of the 13 1/2% 
Notes in the manner described in the Consent Solicitation. Although results 
of operations at the Pioneerhave not been noticeably adversely impacted since 
the commencement of the Consent Solicitation in October 1998, no assurance 
can be given that the filing for relief under Chapter 11 by PFC, and 
potentially by PHI, the Company and other subsidiaries of the Company, will 
not have a material adverse affect on the results of operations and financial 
condition of the Company. See Liquidity and Capital Resources

         OPERATING EXPENSES. Total operating expenses, excluding the 
impairment loss of $44.0 million (see Pioneer discussion below), increased 
$5.1 million, or 5.1%, to $105.0 million for the year ended September 30, 
1998 from $99.9 million in the year ended September 30, 1997. Total operating 
expenses as a percentage of revenue decreased to 93.1% in the year ended 
September 30, 1998 from 95.2% in the year ended September 30, 1997. Operating 
expenses increased by $2.3 million or 4.0% at the Santa Fe and $900,000 or 
2.2% at the Pioneer. Operating expenses of SLVC increased by $2.4 million, 
primarily due to the amortization of debt issue costs associated with the 
issuance of an additional $37.5 million in principal amount of notes (the 
"SLVC Notes") in August and November 1997.

         In September 1998, in accordance with SFAS No. 121, the Company 
determined that an impairment had occurred to the carrying value of its 
assets at the Pioneer. In the quarter ended September 30, 1998, the Company 
recorded a $44.0 million impairment loss to adjust to fair market value the 
carrying value of the Pioneer fixed and intangible assets (see more detailed 
discussion below-Pioneer).

         OPERATING INCOME . Consolidated operating income, excluding the 
impairment loss of $44.0 million discussed above, for the year ended 
September 30, 1998 was $7.8 million, a $2.7 million, or 54.3%, increase from 
$5.1 million for the same period in fiscal 1997. Operating income increased 
by $6.6 million at the Santa Fe and decreased by $1.0 million at the Pioneer 
and $2.2 million at SLVC. The prior period included a $700,000 gain on sale 
of real property by the Company.

         INTEREST EXPENSE. Consolidated interest expense for the year ended 
September 30, 1998 was $25.4 million, a $2.8 million increase compared to 
$22.6 million for the same period in fiscal 1997. Interest expense of SLVC 
increased by $2.1 million in the 1998 period due to the issuance of the 
additional SLVC Notes in August and November 1997.

         NET LOSS. Consolidated loss before income tax for the year ended 
September 30, 1998 was $62.3 million, a $44.8 million increase compared to a 
net loss of $17.5 million in the same period in the prior year. The current 
year reflects the $44.0 million charge to recognize the impairment loss 
discussed above. Loss


                                      15
<PAGE>

before income tax decreased by $5.0 million in the 1998 period at the Santa 
Fe and increased by $500,000 at the Pioneer (excluding the $44.0 million 
charge) and $4.3 million at SLVC. The prior period included a $700,000 gain 
on sale of real property by the Company.

           The Company did not record an income tax benefit in the current 
fiscal year due to the uncertainty of the Company's ability to recognize the 
benefit of the net operating loss. Consolidated net loss applicable to common 
shares was $63.9 million, or $10.31 per common share, in the 1998 period 
compared to $13.1 million, or $2.12 per common share, in the prior year 
period.

         EBITDA. Earnings before interest, taxes, depreciation and 
amortization, rents and corporate charges ("EBITDA") increased $3.9 million, 
or 16.7%, to $27.1 million in the year ended September 30, 1998 from $23.2 
million in the year ended September 30, 1997. EBITDA for fiscal 1998 
represents .99 times rent and interest expense compared to .87 times rent and 
interest expense in the prior year period. The Company incurred rent expense 
of $2.1 million and $4.0 million in the years ended September 30, 1998 and 
1997, respectively. The Company will incur less rent expense in future 
periods, offset, in part, by increased interest expense as a result of a $14 
million note placement by SFHI in April 1998 and the issuance of an 
additional $22.5 million principal amount of Notes by SLVC in November 1997 
and the application of net proceeds therefrom.  EBITDA should not be 
construed as a substitute for operating income or a better indicator of 
liquidity than cash flow from operating, investing and financing activities, 
which are determined in accordance with generally accepted accounting 
principles ("GAAP"), and it is included herein to provide additional 
information with respect to the ability of the Company to meet its future 
debt service, capital expenditure and working capital requirements. Although 
EBITDA is not necessarily a measure of the Company's ability to fund its cash 
needs, management believes that EBITDA is a useful tool for measuring the 
ability of the Company to service its debt. The Company's definition of 
EBITDA may not be the same as that of similarly captioned measures used by 
other companies.

SANTA FE

         NET OPERATING REVENUES. Revenues at the Santa Fe increased $8.8 
million, or 14.1%, to $71.5 million in fiscal 1998 from $62.7 million in 
fiscal 1997. Management believes that fiscal 1998 results were positively 
impacted by the (i) completion of construction, beginning in September 1997, 
on the highway adjacent to the Santa Fe, (ii) installation of new gaming 
equipment in fiscal 1998 and 1997 and (iii) the growth in the number of 
residents in northwest Las Vegas, which offset the competitive pressures 
resulting from expansions at competing facilities during fiscal 1996.

         Casino revenues increased $8.7 million, or 18.1%, to $57.1 million 
in fiscal 1998 from $48.4 million in fiscal 1997. The increase in casino 
revenues was due to growth in slot and video poker machine revenues of $8.6 
million, or 20.5%, to $50.5 million in fiscal 1998 from $41.9 million in 
fiscal 1997 due to an increase in coin-in volume of 11.4% and a slight 
increase in hold percentage. Other gaming revenues, including table game 
revenues, increased $200,000, or 2.5%, to $6.7 million in fiscal 1998 from 
$6.5 million in fiscal 1997 primarily due to increased racebook and bingo 
business, partially offset by a decrease in table game hold percentage. 
Casino promotional allowances increased $700,000, or 12.4%, to $6.2 million 
in fiscal 1998 from $5.5 million in fiscal 1997 due to the increase in 
customer volume.

         Hotel revenues were substantially unchanged at $3.3 million in 
fiscal 1998 and 1997 due to a 2.0% increase in average daily room rate in 
fiscal 1998, offset by a decrease in occupancy rate to 83.1% from 84.6% in 
fiscal 1997. Management believes that the decrease in occupancy rate was 
associated with the room rate increase. Food and beverage revenues increased 
$500,000, or 4.3%, to $12.3  million in fiscal 1998 from


                                      16
<PAGE>

$11.8 million in fiscal 1997 due to an increase in customer volume. Other 
revenues increased $200,000, or 3.9%, to $5.0 million in fiscal 1998 from 
$4.8 million in fiscal 1997 primarily due to an increase in bowling revenue 
and interest income.

         OPERATING EXPENSES. Total operating expenses increased $2.3 million, 
or 4.0%, to $59.3 million in fiscal 1998 from $57.0 million in fiscal 1997. 
Total operating expenses as a percentage of revenue decreased to 82.9% in 
fiscal 1998 from 90.9% in fiscal 1997.

         Casino expenses increased $2.5 million, or 10.3%, to $26.0 million 
in fiscal 1998 from $23.5 million in fiscal 1997 due to the increase in 
casino revenues. Casino expenses as a percentage of casino revenues decreased 
to 45.4% in fiscal 1998 from 48.6% in fiscal 1997 due to the spreading of 
fixed costs over a larger revenue base. Hotel expenses remained unchanged at 
$1.1 million for fiscal 1998 and fiscal 1997. Food and beverage expenses 
decreased $400,000, or 3.7%, to $8.7 million in fiscal 1998 from $9.1 million 
in fiscal 1997 despite the increase in food and beverage revenues due to 
cost-of-sales control measures. As a result, food and beverage expenses as a 
percentage of food and beverage revenues decreased to 71.3% in fiscal 1998 
from 77.2% in fiscal 1997. Other expenses were substantially unchanged at 
$2.2 million in fiscal 1998 compared to $2.1 million in fiscal 1997. Other 
expenses as a percentage of other revenues decreased to 43.4% in fiscal 1998 
from 43.8% in fiscal 1997 due to a decline in other revenues as discussed 
above.

         Selling, general and administrative expenses increased $700,000, or 
8.6%, to $8.8 million in fiscal 1998 from $8.1 million in fiscal 1997 due to 
an increase in advertising costs and data processing and security expenses. 
Selling, general and administrative expenses as a percentage of revenues 
decreased to 12.3% in fiscal 1998 from 12.9% in fiscal 1997. Utilities and 
property expenses decreased $1.4 million, or 17.4%, to $6.5 million in fiscal 
1998 from $7.9 million in fiscal 1997 due to decreased rent expense for 
gaming equipment resulting from the purchase of equipment previously under 
lease. Utilities and property expenses as a percentage of revenues decreased 
to 9.1% in fiscal 1998 from 12.6% in fiscal 1997. Depreciation and 
amortization expenses increased $800,000, or 14.5%, to $6.0 million in fiscal 
1998 from $5.2 million in fiscal 1997 due to the purchase of gaming and other 
equipment previously under lease.

         INTEREST EXPENSE. Interest expense increased $800,000, or 6.0%, to 
$14.1 million in fiscal 1998 from $13.3 million in fiscal 1997 due to the 
additional $14 million principal amount of debt incurred to purchase gaming 
and other equipment previously under lease and for other capital 
improvements. 

         During fiscal 1998, the Company incurred costs and expenses in 
connection with a proposed offering of debt securities. In September 1998, 
the Company postponed proceeding with the proposed offering due to conditions 
in the financial markets.  Accordingly the Company has recorded a $758,000 
charge to earnings for expenses of the proposed offering.

         NET LOSS. As a result of the factors discussed above, net loss 
decreased $5.0 million, or 66.0%, to $2.6 million in fiscal 1998 from $7.6 
million in fiscal 1997.

         EBITDA, AS DEFINED. EBITDA increased $5.7 million, or 38.7%, to 
$20.6 million in fiscal 1998 from $14.9 million in fiscal 1997. EBITDA margin 
increased to 28.8% in fiscal 1998 from 23.7% in fiscal 1997. EBITDA for 
fiscal 1998 represents 1.35 times rent and interest expense compared to .91 
times rent and interest expense in the prior year period. Santa Fe incurred 
rent expense of $1.2 million and $3.0 million in the years ended September 
30, 1998 and 1997, respectively. Santa Fe incurred corporate charges of $1.1 
million and $900,000 in the years ended September 30, 1998 and 1997, 
respectively. Santa Fe will incur less rent expense in future periods, offset 
by increased interest expense as a result of a $14 million note placement in 
April 1998 and the application of proceeds therefrom.

         In the fourth quarter of fiscal 1998 revenues increased $2.7 
million, or 17.8%, to $18.1 million from $15.4 million and EBITDA increased 
$2.1 million, or 65.7%, to $5.3 million from $3.2 million in fiscal 1997. 
EBITDA for the 1998 quarter represents 1.43 times rent and interest expense, 
compared to .77 times rent and interest expense in the prior year quarter. 


                                      17
<PAGE>

PIONEER

         NET OPERATING REVENUES. Revenues at the Pioneer decreased $100,000, 
or 0.4%, to $40.7 million in fiscal 1998 from $40.8 million in fiscal 1997. 
The decrease in revenues at the Pioneer in current years is believed to be 
primarily due to the competitive gaming market environment in and around 
Laughlin, including Indian gaming facilities opened in Arizona and Southern 
California, and new casinos opened in Las Vegas.

         Casino revenues decreased $600,000, or 1.7%, to $34.2 million in 
fiscal 1998 from $34.8 million in fiscal 1997. The decrease in casino 
revenues was primarily due to a decline in other gaming revenues, including 
table game revenues, which decreased $500,000, or 10.5%, to $4.3 million in 
fiscal 1998 from $4.8 million in fiscal 1997. Slot revenues decreased 
$100,000, or .3%, to $29.9 million in fiscal 1998 from $30.0 million in 
fiscal 1997 due to a decrease in coin-in volume of 6.0% offset in part by a 
slight increase in hold percentage. Casino promotional allowances decreased 
$500,000, or 6.9%, to $6.4 million in fiscal 1998 from $6.9 million in fiscal 
1997 due to the decrease in customer volume.

         Hotel revenues decreased $200,000, or 6.7%, to $2.4 million in 
fiscal 1998 due to a 2.7% decrease in occupancy rate to 76.9% from 79.6% due 
to the decline in visitor volume to Laughlin. The average daily room rate was 
substantially unchanged. Food and beverage revenues decreased $200,000, or 
2.1%, to $8.8 million in fiscal 1998 from $9.0 million in fiscal 1997 due to 
the decrease in customer volume and an increase in incentive programs and 
giveaways. Other revenues increased $300,000, or 20.9%, to $1.7 million in 
fiscal 1998 from $1.4 million in fiscal 1997 due to the opening in August 
1998 of the River Rick Smoke Shop, which sells cigarettes at discounted 
prices.

         OPERATING EXPENSES. Total operating expenses increased $44.9 million 
to $85.7 million in fiscal 1998 from $40.7 million in fiscal 1997, primarily 
due to a charge of $44.0 million for loss on asset impairment discussed 
below. Operating expenses increased $900,000, or 2.2%, and operating expenses 
as a percentage of revenue increased to 102.4% in fiscal 1998 from 99.8% in 
fiscal 1997.

         Casino expenses were substantially unchanged at $18.7 million in 
fiscal 1998 and 1997. Casino expenses as a percentage of casino revenues 
increased to 54.6% in fiscal 1998 from 53.6% in fiscal 1997. Hotel expenses 
increased $100,000, or 19.4%, to $800,000 in fiscal 1998 from $700,000 in 
fiscal 1997, primarily due to increases in labor wage rates and costs to 
upgrade the hotel rooms. Hotel expenses as a percentage of hotel revenue 
increased to 33.5% in fiscal 1998 from 26.2% in fiscal 1997. Food and 
beverage expenses increased $100,000, or 1.7%, to $5.3 million in fiscal 1998 
from $5.2 million in fiscal 1997, despite the decrease in food and beverage 
revenues, due to increases in labor wage rates. As a result, food and 
beverage expenses as a percentage of food and beverage revenues increased to 
59.5% in fiscal 1998 from 57.3% in fiscal 1997. Other expenses increased 
$200,000, or 18.5%, to $1.0 million in fiscal 1998 from $800,000 in fiscal 
1997 due to the cost of sales associated with the River Rick Smoke Shop 
discussed above. Other expenses as a percentage of other revenues decreased 
to 60.1% in fiscal 1998 from 61.3% in fiscal 1997.

         Selling, general and administrative expenses increased $300,000, or 
6.4%, to $5.9 million in fiscal 1998 from $5.6 million in fiscal 1997 due to 
increased advertising costs and allocated corporate expenses. The Pioneer 
altered its marketing strategy during fiscal 1998 to include television 
advertising as part of its communication mix in order to reach the regional 
market to encourage new visits. Selling, general and administrative expenses 
as a percentage of revenues increased to 14.5% in fiscal 1998 from 13.6% in 
fiscal 1997. Utilities and property expenses were substantially unchanged at 
$4.4 million in fiscal 1998 compared to $4.3 million in fiscal 1997. 
Utilities and property expenses as a percentage of revenues increased to 
10.8% in fiscal 1998 from 10.5% in fiscal 1997. Depreciation and amortization 
expenses were substantially unchanged at $5.6 million in fiscal 1998 and 1997.


                                      18
<PAGE>

         In September 1998, in accordance with SFAS No. 121, the Company 
determined an impairment loss had occurred to the carrying value of the 
assets of the Pioneer in Laughlin, Nevada. On August 28, 1998, the California 
General Assembly, Senate and Governor approved legislation authorizing gaming 
operations pursuant to a form of compact. Prior to this date, California 
authorities considered gaming devices operated on Indian reservations to be 
illegal. On November 3, 1998, California voters approved Proposition 5, which 
expands the definition of gaming operations considered legal by the form of 
compact. Proposition 5 has been challenged in court and, as a result, the 
Company does not know when it will become effective. However, Management 
believes this change in regulatory policy will further intensify the 
competitive environment in Laughlin, Nevada and adversely affect the outlook 
for longer term operating results for gaming operations in Laughlin, Nevada. 
Management's view of the Laughlin market indicated that the cash flows 
associated with Pioneer operations would not be sufficient to recover the 
carrying value of the Company's investment. Under the requirements of SFAS 
No. 121, an impairment charge of $44.0 million was recognized in the fourth 
quarter of fiscal 1998 to adjust to fair market value the carrying value of 
the Pioneer's fixed and intangible assets.

         INTEREST EXPENSE. Interest expense decreased $600,000, or 6.5%, to 
$8.1 million in fiscal 1998 from $8.7 million in fiscal 1997 due to the 
payment in November 1997 of a $5.0 million note of a wholly-owned subsidiary 
of PHI.

         NET LOSS. As a result of the factors discussed above, net loss 
increased $44.5 million, or 517.2%, to $53.1 million in fiscal 1998 from $8.6 
million in fiscal 1997. Excluding the impairment loss, net loss for fiscal 
1998 was $9.1 million.

         EBITDA, AS DEFINED. EBITDA decreased $1.0 million, or 13.5%, to $6.6 
million in fiscal 1998 from $7.6 million in fiscal 1997. EBITDA margin 
decreased to 16.2% in fiscal 1998 from 18.7% in fiscal 1997. EBITDA for 
fiscal 1998 represents .73 times rent and interest expense compared to .78 
times rent and interest expense in the prior year period. Pioneer incurred 
rent expense of $800,000 and $1.0 million in the years ended September 30, 
1998 and 1997, respectively. Pioneer incurred corporate charges of $1.1 
million and $900,000 in the years ended September 30, 1998 and 1997, 
respectively.

         In the fourth quarter of fiscal 1998, revenues increased $700,000, 
or 8.4%, to $9.9 million from $9.2 million and EBITDA increased $500,000, or 
65.0%, to $1.2 million from $700,000 in fiscal 1997. EBITDA for the 1998 
quarter represents .55 times rent and interest expense compared to .25 times 
rent and interest expense in the prior year quarter.

         In November 1998, PFC, a special purpose subsidiary of Santa Fe 
Gaming which issued the 13 1/2% Notes to finance the acquisition of the 
Pioneer in 1988, agreed to file for relief under Chapter 11 of the United 
States Bankruptcy Code and to seek confirmation of a plan of reorganization 
that will permit the issuance of new notes in satisfaction of the 13 1/2% 
Notes pursuant to the terms set forth in the Consent Solicitation. See 
"Results of Operations - Fiscal 1998 Compared to Fiscal 1997 - Consolidated.

RESULTS OF OPERATIONS - FISCAL 1997 COMPARED TO FISCAL 1996

CONSOLIDATED

         NET OPERATING REVENUES. Consolidated revenues for the year ended 
September 30, 1997 were $105.0 million, a $2.7 million, or 2.5%, decrease 
from $107.7 million for the same period in fiscal 1996, excluding a gain of 
$40.8 million on the sale of assets in fiscal 1996. Revenues increased by 
$1.1 million at the Santa Fe and decreased by $3.6 million at the Pioneer.


                                      19
<PAGE>

         OPERATING EXPENSES. Total operating expenses decreased $7.4 million, 
or 6.9%, to $99.9 million for the year ended September 30, 1997 from $107.3 
million in the year ended September 30, 1996. Total operating expenses as a 
percentage of revenue, excluding a gain of $40.8 million on the sale of 
assets in fiscal 1996, decreased to 95.2% in the year ended September 30, 
1997 from 99.6% in the year ended September 30, 1996. Operating expenses 
decreased by $3.7 million, or 6.1%, at the Santa Fe and $1.9 million, or 
4.5%, at the Pioneer. Operating expense of subsidiaries of the Company, whose 
assets were sold in fiscal years 1996 and 1995, decreased $2.5 million.

         OPERATING INCOME . Consolidated operating income for the year ended 
September 30, 1997 was $5.1 million, a $4.7 million, or 1176.4%, increase 
from $400,000 for the same period in fiscal 1996, excluding the $40.8 million 
gain. Operating income increased by $4.7 million at the Santa Fe and 
decreased by $1.6 million at the Pioneer. The 1997 period included a $700,000 
gain on sale of real property by the Company. The 1996 period included a $1.2 
million intercompany gain on sale of real property by the Santa Fe, which was 
eliminated in consolidation.

         OTHER EXPENSE. Consolidated interest expense for the year ended 
September 30, 1997 was $22.6 million, a $1.8 million decrease compared to 
$24.4 million for the same period in fiscal 1996. In fiscal 1996, the Company 
recorded a provision to reduce the remaining carrying value of its investment 
in Treasure Bay in the amount of approximately $2.8 million.

         NET LOSS. Consolidated loss before income tax and extraordinary item 
for the year ended September 30, 1997 was $17.5 million, a $9.3 million 
decrease compared to a net loss of $26.8 million in the same period in the 
prior year, excluding the $40.8 million gain. Loss before income tax and 
extraordinary item decreased by $4.9 million in the 1997 period at the Santa 
Fe and increased by $400,000 at the Pioneer. The prior period included a 
$700,000 gain on sale of real property by the Company.

         In fiscal 1997 the Company recorded an extraordinary gain of $2.1 
million after tax on the repurchase of $13.1 million principal amount of 11% 
Notes and $3.5 million principal amount of 10 1/4% Subordinated Sinking Fund 
Debentures, due 1998 ("Subdebentures"). In fiscal 1996, the Company recorded 
an extraordinary gain of $7.9 million after tax on the repurchase of $25.6 
million principal amount of 11% Notes and $22.8 million principal amount of 
13 1/2% Notes.

         The Company reported a net loss applicable to common shares of $13.1 
million or $2.12 per common share in fiscal 1997 compared to net income of 
$16.2 million or $2.61 per common share in fiscal 1996. The net loss was 
$10.7 million or $1.73 per common share in fiscal 1996 excluding the $40.8 
million gain on sale of assets.

         EBITDA, AS DEFINED. EBITDA increased $4.7 million, or 25.5%, to 
$23.2 million in the year ended September 30, 1997 from $18.5 million in the 
year ended September 30, 1996, excluding the $40.8 million gain. EBITDA for 
the 1997 period represents .87 times rent and interest expense compared to 
 .72 times rent and interest expense in the prior year period.

SANTA FE

         NET OPERATING REVENUES. Net operating revenues increased $1.0 
million, or 1.7%, to $62.7 million in fiscal 1997 from $61.7 million in 
fiscal 1996. Management believes that fiscal 1997 results were positively 
impacted by the installation of new gaming equipment in fiscal 1996 and the 
growth in the Locals Market, which offset the competitive pressures resulting 
from the expansions at competing facilities during fiscal 1996.


                                      20
<PAGE>

         Casino revenues increased $2.8 million, or 6.1%, to $48.4 million in 
fiscal 1997 from $45.6 million in fiscal 1996. The increase in casino 
revenues was due to growth in slot and video poker machine revenues of $3.1 
million, or 8.0%, to $41.9 million in fiscal 1997 from $38.8 million in 
fiscal 1996 due to an increase in coin-in volume of 2.8% and a slight 
increase in hold percentage. Other gaming revenues, including table game 
revenues, decreased $300,000, or 5.1%, to $6.5 million in fiscal 1997 from 
$6.8 million in fiscal1996 primarily due to a decrease in keno and poker 
business. Casino promotional allowance was substantially unchanged at $5.5 
million. 

         Hotel revenues were substantially unchanged at $3.3 million in 
fiscal 1997 compared to $3.2 million in fiscal 1996 due to a 14.3% increase 
in average daily room rate, offset by a decrease in occupancy rate to 84.6% 
in fiscal 1997 from 93.0% in fiscal 1996. Management believes that the 
decrease in occupancy rate was associated with the room rate increase. Food 
and beverage revenues decreased $900,000, or 6.9%, to $11.8 million in fiscal 
1997 from $12.6 million in fiscal 1996 due to a change in marketing strategy 
which relied less on discount priced food and resulted in decreased volume. 
Other revenues decreased $900,000, or 16.8%, to $4.8 million in fiscal 1997 
from $5.7 million in fiscal 1996 primarily due to a $1.2 million gain on the 
sale of land in fiscal 1996.

         OPERATING EXPENSES. Total operating expenses decreased $3.7 million, 
or 6.1%, to $57.0 million in fiscal 1997 from $60.7 million in fiscal 1996. 
Total operating expenses as a percentage of revenue decreased to 90.9% in 
fiscal 1997 from 98.5% in fiscal 1996.

         Casino expenses increased $1.1 million, or 5.2%, to $23.5 million in 
fiscal 1997 from $22.4 million in fiscal 1996 due to the increase in casino 
revenues. Casino expenses as a percentage of casino revenues were 
substantially unchanged at 48.6% in fiscal 1997 compared to 49.0% in fiscal 
1996. Hotel expenses decreased $100,000, or 12.7%, to $1.1 million in fiscal 
1997 from $1.2 million in fiscal 1996 due to reduced occupancy. Hotel 
expenses as a percentage of revenues decreased to 33.3% in fiscal 1997 from 
39.1% in fiscal 1996 due to reduced occupancy. Food and beverage expenses 
decreased $1.8 million, or 16.4%, to $9.1 million in fiscal 1997 from $10.9 
million in fiscal 1996 due to a decrease in volume and cost of sales control 
measures. As a result, food and beverage expenses as a percentage of food and 
beverage revenues decreased to 77.2% in fiscal 1997 from 86.0% in fiscal 
1996. Other expenses were substantially unchanged at $2.1 million in fiscal 
1997 compared to $2.2 million in fiscal 1996. Other expenses as a percentage 
of other revenues increased to 43.8% in fiscal 1997 from 38.4% in fiscal 1996 
due to a decline in other revenues as discussed above.

         Selling, general and administrative expenses decreased $900,000, or 
10.4%, to $8.1 million in fiscal 1997 from $9.0 million in fiscal 1996 even 
though revenues increased due to a decrease in general advertising and 
marketing costs. Consequently, selling, general and administrative expenses 
as a percentage of revenues decreased to 12.9% in fiscal 1997 from 14.7% in 
fiscal 1996. Utilities and property expenses increased $1.0 million, or 
14.1%, to $7.9 million in fiscal 1997 from $6.9 million in fiscal 1996 due to 
increased rent expense for gaming equipment resulting from sale/leaseback 
transactions partially offset by a related loss on the transactions in fiscal 
1996. Utilities and property expenses as a percentage of revenues increased 
to 12.6% in fiscal 1997 from 11.2% in fiscal 1996. Depreciation and 
amortization expenses decreased $2.9 million, or 35.0%, to $5.2 million in 
fiscal 1997 from $8.1 million in fiscal 1996 due to the sale of gaming 
equipment in fiscal 1996.


                                      21
<PAGE>


         OTHER INCOME (EXPENSE). Interest expense decreased $200,000, or 
1.5%, to $13.3 million in fiscal 1997 from $13.5 million in fiscal 1996 due 
to the repurchase and retirement of $5.6 million principal amount of 11% 
Notes in fiscal 1996. In fiscal 1996 the Company recorded a provision to 
reduce the remaining carrying value of its investment in Treasure Bay in the 
amount of approximately $2.8 million and an extraordinary charge of $600,000 
due to the repurchase and retirement of 11% Notes referred to above.

         NET LOSS. As a result of the factors discussed above, net loss 
decreased $5.9 million, or 43.6%, to $7.6 million in fiscal 1997 from $13.5 
million in fiscal 1996. 

         EBITDA, AS DEFINED. EBITDA increased $4.7 million, or 46.1%, to $14.9 
million in fiscal 1997 from $10.2 million in fiscal 1996. EBITDA margin 
increased to 23.7% in fiscal 1997 from 16.5% in fiscal 1996. EBITDA for 
fiscal 1997 represents .91 times rent and interest expense compared to .73 
times rent and interest expense in prior year period.

PIONEER

         NET OPERATING REVENUES. Revenues at the Pioneer decreased 8.1%, or $3.6
million, to $40.8 million from $44.4 million in fiscal 1996. The decrease in
fiscal 1997 revenues is believed to be primarily due to the competitive gaming
market environment in and around Laughlin, including Indian gaming facilities
opened in Arizona and Southern California, and new casinos opened in Las Vegas.

         Casino revenues decreased $3.9 million, or 9.9%, to $34.8 million in
fiscal 1997 from $38.7 million in fiscal 1996. The decrease in casino revenues
was primarily due to slot revenues, which decreased $3.0 million, or 9.0%, to
$30.0 million in fiscal 1997 from $33.0 million in fiscal 1996 due to a decrease
in coin- in volume of 13.6%, partially offset by a slight increase in hold
percentage. Other casino revenues, including table game revenues, decreased
$900,000, or 15.2%, to $4.8 million in fiscal 1997 from $5.7 million in fiscal
1996. Casino promotional allowances remained substantially unchanged at $6.9
million.

         Hotel revenues decreased $600,000, or 19.5%, to $2.5 million in fiscal
1997 due to a 5.2% decrease in occupancy rate to 79.6% from 84.8% and a 13.1%
decrease in the average daily room rate. As visitor volume in Laughlin
decreased, room rates were reduced to attract customers. Food and beverage
revenues increased $1.0 million, or 12.2%, to $9.0 million in fiscal 1997 from
$8.0 million in fiscal 1996 as a result of a volume-oriented marketing program.
Other revenues remained substantially unchanged at $1.4 million.

         OPERATING EXPENSES.  Total operating expenses decreased $2.0 million to
$40.7 million in fiscal 1997 from $42.7 million in fiscal 1996.

         Casino expenses had a volume-related decrease of $1.6 million, or 8.2%,
to $18.7 million in 1997 from $20.3 million in 1996. Casino expenses as a
percentage of casino revenues increased to 53.6% in fiscal 1997 from 52.6% in
fiscal 1996 due to the decline in casino revenues. Hotel expenses increased
$200,000, or 35.0%, to $700,000 in fiscal 1997 from $500,000 in fiscal 1996.
Hotel expenses as a percentage of hotel revenue increased to 26.2% in fiscal
1997 from 15.6% in fiscal 1996 due to the decline in hotel revenues. Food and
beverage expenses decreased $100,000, or 2.1%, to $5.2 million in fiscal 1997
from $5.3 million in fiscal 1996, despite the increase in food and beverage
revenues, due to improved cost control measures. As a result, food and beverage
expenses as a percentage of food and beverage revenues decreased to 57.3% in
fiscal 1997 from 65.7% in fiscal 1996. Other expenses remained substantially
unchanged at $800,000 in fiscal 1997 and $900,000 in fiscal 1996. Other expenses
as a percentage of other revenues decreased to 61.3% in fiscal 1997 compared to
61.8% in fiscal 1996.


                                   22
<PAGE>


         Selling, general and administrative expenses increased $300,000, or
5.2%, to $5.6 million in fiscal 1997 from $5.3 million in fiscal 1996 due to
increased advertising and promotional costs. Selling, general and administrative
expenses as a percentage of revenues increased to 13.6% in fiscal 1997 from
11.9% in fiscal 1996. Utilities and property expenses decreased $200,000, or
5.9%, to $4.3 million in fiscal 1997 compared to $4.5 million in fiscal 1996.
Utilities and property expenses as a percentage of revenues increased to 10.5%
in fiscal 1997 from 10.2% in fiscal 1996. Depreciation and amortization expenses
decreased $300,000, or 5.0%, to $5.6 million in fiscal 1997 from $5.9 million in
fiscal 1996, due to the sale of certain equipment in the prior year.

         OTHER INCOME (EXPENSE). Interest expense decreased $700,000, or 7.2%,
to $8.7 million in fiscal 1997 from $9.4 million in fiscal 1996 due to the
repurchase and retirement of $22.75 million principal amount of 13 1/2% Notes in
fiscal 1996, partially offset by interest incurred on a $5 million first
mortgage loan. In fiscal 1996 the Company recorded an extraordinary gain of $3.1
million after tax due to the repurchase and retirement of 13 1/2% Notes referred
to above.

         NET LOSS. As a result of the factors discussed above, net loss
increased $5.6 million, or 185.2%, to $8.6 million in fiscal 1997 from $3.0
million in fiscal 1996.

         EBITDA, AS DEFINED.  EBITDA decreased $1.7 million, or 18.2%, to
$7.6 million in fiscal 1997 from $9.3 million in fiscal 1996.  EBITDA margin
decreased to 18.7% in fiscal 1997 from 21.0% in fiscal 1996.  EBITDA for the
1997 twelve month period represents .84 times rent and interest expense,
compared to .92 times rent and interest expense in the prior year period.

LIQUIDITY AND CAPITAL RESOURCES; TRENDS AND FACTORS RELEVANT TO FUTURE
OPERATIONS

         LIQUIDITY. As of September 30, 1998, the Company held cash and 
short-term investments of $22.7 million compared to $15.1 million at 
September 30, 1997. Management believes that, based on operations for the 
year ended September 30, 1998, the Company will have sufficient resources, 
including real property held by SLVC, to meet its operating and debt service 
requirements (excluding the 13 1/2% Notes which matured on December 1, 1998 
but were not paid) through the twelve month period ending September 30, 1999, 
although no assurance can be given to that effect.

         The Company had $60 million of principal and approximately $2.7 
million and $4.1 million accrued interest due on the 13 1/2% Notes as of 
September 30, 1998 and December 1, 1998, respectively, which is presented as 
Debt Not Paid At Maturity in the consolidated Balance Sheet contained herein. 
In November 1998 PFC received and accepted consents from holders of 
approximately 75%, or $45.8 million principal amount, of the outstanding 13 
1/2% Notes pursuant to which (i) PFC agreed to file for relief under Chapter 
11 of the United States Bankruptcy Code and to submit for confirmation a plan 
of reorganization that provides for issuance of new notes in satisfaction of 
the 13 1/2% Notes pursuant to the terms set forth in the Consent 
Solicitation, and (ii) the consenting holders agreed (a) to forbear until 
December 2000 from exercising rights or remedies arising as a result of the 
failure by PFC to pay principal and interest on the 13 1/2% Notes at the 
December 1, 1998 maturity date, or the failure by PHI to pay principal and 
interest on the intercompany mirror note from PHI to PFC at the December 1, 
1998 maturity date and (b) to vote to accept a plan of reorganization in a 
Chapter 11 bankruptcy case that provides for treatment of the 13 1/2% Notes 
substantially as described in the Consent Solicitation. No assurance can be 
given that the plan of reorganization PFC intends to submit for confirmation 
will be confirmed. (See - more detailed discussion - Liquidity Capital 
Resources-Pioneer, below)


                                   23
<PAGE>


         It is possible that three or more holders of the 13 1/2% Notes could
file an involuntary petition under the Bankruptcy Code with respect to PFC prior
to PFC filing for relief under Chapter 11. If PFC were to become a debtor in a
case under the Bankruptcy Code (whether a case were commenced voluntarily or
involuntarily), it is possible that PHI and the Company would file for relief
under Chapter 11 of the Bankruptcy Code. The commencement of a voluntary case
under the Bankruptcy Code by the Company or certain circumstances related to an
involuntary case under the Bankruptcy Code with respect to the Company will
cause the automatic acceleration of outstanding indebtedness of subsidiaries of
the Company, SFHI and SLVC, all of which indebtedness is guaranteed by the
Company. If acceleration were to occur, the Company would expect to negotiate
with the creditors of SFHI and SLVC regarding a rescission of the acceleration.
However, if the creditors holding the indebtedness were not to rescind the
acceleration, it is likely that SFHI and SLVC would file for relief under
Chapter 11 of the Bankruptcy Code.

         Excluding the 13 1/2% Notes, the Company has approximately $1.8 million
in current maturities of long term debt due to third parties during the
twelve-month period ending September 30, 1999, comprised primarily of payments
under other notes payable and capital leases. The scheduled maturities
applicable to third party debt under notes payable and capital leases at SFHI
and PHI during the twelve month period ending September 30, 1999 are $1.5
million and $6,000, respectively.

         The Company had $153.1 million in long-term debt, net of current
maturities, debt discount and debt obligations owned, but not retired by the
Company, and excluding the 13 1/2% Notes discussed above, as of September 30,
1998. Approximately $59.1 million and $118.2 million mature in December 1999
and December 2000, respectively, comprised of $57.5 million principal amount of
SLVC Notes due December 1999 issued by SLVC, $99.4 million principal amount of
11% Notes due December 2000 issued by SFHI, of which $33.1 million is held by
SLVC, $14.0 million of 9 1/2 % Notes due December 2000 issued by SFHI and a $4.8
million note due December 2000 (the "Sierra Note"). The Company amended the
terms of the Sierra Note in October 1998 to among other items, (i) extend the
maturity from December 1998 to December 2000, (ii) require interest only
payments until maturity and (iii) add certain mandatory prepayment requirements.

         Although management has in the past and is currently exploring
refinancing or debt modifications alternatives, as well as possible dispositions
or financing of certain assets, in order to satisfy the current maturities of
long-term debt obligations in 1999 and 2000, and intends to cause PFC to file
for relief under Chapter 11 of the United States Bankruptcy Code in order to
address the nonpayment at maturity of the 13 1/2% Notes, no assurance can be
given that the Company will be able to refinance or modify some or all of its
indebtedness or dispose of, or obtain financing with respect to any assets. Any
such refinancing or modification would be subject to the Company's future
operations and the prevailing market conditions at the time of such proposed
transaction and may require the approval of the Nevada Gaming Authorities for
such financings or asset sales. If the Company is ultimately unable to refinance
or modify any such debt prior to maturity, and/or obtain sufficient proceeds
from asset dispositions or financings to repay such debt, events of default
would occur which would lead to cross-defaults in other material agreements of
the Company including, without limitation, agreements relating to substantially
all of the outstanding long-term debt of the Company and its subsidiaries.

         Debt agreements restrict the distribution of cash from certain of the
Company's subsidiaries to the Company. Cash flows from SFHI, PHI and SLVC are
not currently, and are not expected in the foreseeable future to be, available
for distribution to the Company. In addition, debt agreements limit additional
indebtedness of such subsidiaries. Therefore, the Company and its subsidiaries
other than SLVC, PHI and SFHI, (collectively "Corporate") must rely on existing
cash and available resources, including the 22-acre 


                                     24
<PAGE>


parcel of real property, or cause subsidiaries to dispose of or refinance 
assets, to provide liquidity to fund Corporate cash requirements, including 
without limitations obligations that may arise as a result of the Company's 
guarantee of subsidiary debt. See more detailed discussion of Liquidity and 
Capital Resources SFHI, SLVC, PHI and Corporate, below.

         CASH FLOW FROM OPERATIONS. The Company's cash provided by operations
was $300,000 for the year ended September 30, 1998 as compared to cash used in
operations of $8.3 million for the prior year period. The increase in cash used
in operations was primarily due to improved cash flow from the Santa Fe offset
by increased interest expense at SLVC. The Company's principal uses of cash from
operations are for rents for real property and gaming equipment, corporate
expenses, interest payments on indebtedness and capital expenditures. Management
believes that cash flow from operations in the prior period was adversely
impacted by restricted access to the Santa Fe due to road construction that was
ongoing from April 1996 through February 1998 and increased competition in the
Las Vegas Locals Market.

         CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities
was $12.7 million during the year ended September 1998, as compared to cash
provided by investing activities of $1.4 million during the year ended September
1997. The current period use represents the acquisition of gaming equipment at
the Santa Fe and Pioneer and the acquisition of new pylon signs at the Santa Fe.
In addition, investing activities include costs incurred to develop the 39-acre
parcel in Henderson, Nevada owned by SLVC.

         The Company is evaluating the potential development of a 
hotel-casino and entertainment complex on this property. The Company has 
completed preliminary engineering and architectural drawings for the project. 
Any future development is subject to, among other things, the Company's 
ability to obtain necessary financing. No assurance can be given that the 
Company will obtain development financing or develop successfully the 
Henderson property.

         CASH FLOW FROM FINANCING ACTIVITIES. Cash provided by financing
activities was $19.9 million in the 1998 twelve month period compared to $4.6
million during the same period in 1997. This represents primarily the net
proceeds resulting from the issuance by SLVC of the additional $22.5 million
principal amount of SLVC Notes and the issuance by SFHI of $14 million principal
amount of 9 1/2% Notes . Additionally, in April 1998 the Company sold to a third
party promissory notes issued by SFHI with an aggregate principal amount of
approximately $10 million for approximately $9 million in cash.

SFHI - At September 30, 1998, approximately $15.0 million of the Company's
current assets, including approximately $11.8 million of cash and short term
investments, was held by SFHI.

         Results of operations at the Santa Fe for the year ended September 30,
1998 generated EBITDA, as defined. of $20.6 million, approximately 1.35 times
rent and interest expense, compared to $14.9 million of EBITDA in 1997, or
approximately .91 times rent and interest expense. In the fiscal 1998 period,
the Santa Fe reported approximately $1.2 million in rent expense compared to
$3.0 million in the fiscal 1997 period. In the fiscal 1998 period, the Santa Fe
reported approximately $1.1 million in corporate charges compared to $900,000 in
the fiscal 1997 period. SFHI will incur less rent expense in future periods,
offset by increased interest expense as a result of $14 million note placement
in April 1998 and application of the proceeds therefrom. Management believes
that Santa Fe's EBITDA in prior periods was adversely impacted as a result


                                   25
<PAGE>


of increased competition in its market area and restricted access to the
property due to road construction. The completion of the road construction near
the Santa Fe in September 1997 alleviated the access restriction to the Santa
Fe, which management believes resulted in increased customer traffic reflected
in the increased revenues.

         SFHI's principal uses of cash from operations are for operating lease
payments, corporate charges, interest payments on indebtedness and capital
expenditures to maintain the facility. SFHI's lease payments in future periods
will be decreased, offset in part by increased interest expense, as a result of
the issuance of the 9 1/2 % Notes in April 1998 and the use of net proceeds
therefrom, to purchase gaming equipment previously leased and two new pylon
signs. Capital expenditures to maintain the facility in fiscal 1999 are expected
to be approximately the same that was expended in fiscal 1998, excluding the
purchase of gaming equipment and two new pylon signs in fiscal 1998.

         SFHI is exploring alternatives to improve liquidity, including, but not
limited to, possible refinancings or modification of the 9 1/2 % Notes and 11%
Notes. The Company has no arrangements for any refinancings, dispositions or
other financings. Management believes that, based on operations for the twelve
month period ended September 30, 1998, SFHI will have sufficient cash resources
to meet its operating and debt service requirements through the twelve month
period ending September 30, 1999, although no assurance can be given to that
effect.

SLVC - At September 30, 1998, approximately $1.0 million of the Company's cash
and short-term investments was held by SLVC. In December 1998, SLVC utilized
cash and short-term investments together with interest income on $33.1 million
principal amount of 11% Notes held by SLVC, and a cash contribution by Corporate
of approximately $325,000, to make the interest payment due December 20, 1998 on
the SLVC Notes.

         SLVC's principal use of cash is to satisfy principal and interest
obligations on the SLVC Notes. SLVC owns a 27-acre parcel of real estate on Las
Vegas Boulevard South which is subject to a lease with a water theme park
operator. SLVC generates minimal cash from the lease agreement after payment of
property costs. SLVC receives interest income on $33.1 million principal amount
of 11% Notes which are held as collateral for the SLVC Notes. Based on cash
received from interest payments on the $33.1 million of 11% Notes, there will be
a deficit of approximately $1.3 million in cash available to satisfy the SLVC
Note interest payment due in June 1999.

         SLVC also owns a 39-acre parcel of real property in Henderson, Nevada
and is evaluating the development of a casino entertainment complex on the site.
Corporate has completed preliminary engineering and architectural drawings and
received certain construction related permits. Due to restrictions in the SLVC
Notes, any future development costs are the responsibility of Corporate and any
future development is subject to, among other things, the Company's ability to
obtain necessary financing. No assurance can be given that the Company will
obtain development financing or develop successfully the Henderson property.

         Additional potential required uses of cash by SLVC include the
redemption of $7.0 million principal amount of SLVC Notes or, alternatively, the
purchase of $7.0 million principal amount of 11% Notes, if SFHI cash flow (as
defined in the agreement relating to the SLVC Notes), before a maximum $2.4
million in lease obligations at the Santa Fe, is less than $13.5 million for any
four quarter period.

         Management believes that SLVC has available resources, consisting
primarily of the real property referred to above that may be sold and interest
income on the 11% Notes held as collateral, to meet the June 1999 interest
payment obligation on the SLVC Notes and other operating requirements through
September 30, 1999, although no assurance can be given to that effect. SLVC is
exploring alternatives to improve liquidity 


                                      26
<PAGE>


and to address the June 1999 interest payment and December 1999 maturity of 
the SLVC Notes, including but not limited to the sale of either the 27-acre 
parcel on Las Vegas Boulevard South or the Henderson property and refinancing 
or modification of the SLVC Notes. The Company has no arrangements for any 
refinancings, modifications, dispositions or other financings, the purpose of 
which would be to satisfy the principal and interest obligations on the SLVC 
Notes, and no assurance can be given that SLVC will successfully make such 
arrangements. To the extent that SLVC is unable to generate sufficient cash 
to meet its debt service requirements, Corporate may, to the extent of 
available funds, make capital contributions or make advances to SLVC. No 
assurance can be given that Corporate would have available resources to make 
contributions or advances. (See Liquidity - Corporate)

PHI - At September 30, 1998 approximately $11.0 million of the Company's current
assets, including approximately $9.4 million of cash and short term investments,
was held by PHI. A wholly-owned subsidiary of PHI held $6.5 million of the cash
and short-term investments held by the Pioneer at September 30, 1998. In
December 1998 the wholly-owned subsidiary of PHI distributed $6.5 million to the
Pioneer and the Company repurchased approximately $5.0 million principal amount
of 13 1/2% Notes, plus accrued interest, pursuant to the Consent Solicitation.

         Results of operations at the Pioneer for the year ended September 30,
1998 generated EBITDA, as defined of $6.6 million, approximately .73 times rent
and interest expense, compared to $7.6 million of EBITDA in 1997, or
approximately .78 times rent and interest expense. Pioneer reported rent expense
of approximately $800,000 in the fiscal 1998 compared to $1.0 million in fiscal
1997. Pioneer reported corporate charges of $1.1 million in fiscal 1998 compared
to $900,000 fiscal 1997.

         PHI's principal uses of cash are for operating lease payments, 
corporate expenses, interest payments on indebtedness and capital 
expenditures to maintain the facility. Capital expenditures to maintain the 
facility in fiscal 1999 are expected to be approximately the same as was 
expended in fiscal 1998 of approximately $2.7 million, excluding 
approximately $1.9 million to purchase gaming equipment in the 1998 period.

         Management believes that, based on operations for the period ended
September 30, 1998, PHI will have sufficient cash and available resources to
meet its operating requirements through the twelve months ending September 30,
1999, although no assurance can be given to that effect.

         PFC had $60 million of principal and approximately $2.7 million and 
$4.1 million accrued interest due on the 13 1/2% Notes as of September 30, 
1998 and December 1, 1998, respectively, which is presented as Debt Not Paid 
At Maturity in the consolidated Balance Sheet contained elsewhere herein. In 
November 1998 PFC received and accepted consents from holders of 
approximately 75% or $45.8 million principal amount of the outstanding 13 
1/2% Notes pursuant to which (i) PFC agreed to file for relief under Chapter 
11 of the United States Bankruptcy Code and to submit for confirmation a plan 
of reorganization that provides for issuance of new notes in satisfaction of 
the 13 1/2% Notes pursuant to the terms set forth in the Consent 
Solicitation, and (ii) the consenting holders agreed (a) to forbear until 
December 2000 from exercising rights or remedies arising as a result of the 
failure by PFC to pay principal and interest on the 13 1/2% Notes at the 
December 1, 1998 maturity date, or the failure by PHI to pay principal and 
interest on the intercompany mirror note from PHI to PFC at the December 1, 
1998 maturity date and (b) to vote to accept a plan of reorganization in a 
Chapter 11 bankruptcy case that provides for treatment of the 13 1/2% Notes 
substantially as set forth in the Consent Solicitation.


                                   27

<PAGE>


         Pursuant to the Consent Solicitation, in December 1998 PFC purchased on
a pro-rata basis from all consenting holders, an aggregate $5.0 million
principal amount of 13 1/2% Notes, plus accrued interest. PFC also expects to
repurchase from non-consenting holders their pro-rata amount of 13 1/2% Notes
(approximately $1.5 million), plus accrued interest through December 1,1998,
upon confirmation of the plan of reorganization contemplated by the Consent
Solicitation that PFC intends to submit for confirmation in the Chapter 11 case.
In addition, the Company provided collateral for its previously unsecured
guarantee of the 13 1/2% Notes, through the pledge of stock of its subsidiaries
SFHI, SR, HHI., SNC. and Santa Fe Coffee Company, (collectively the "Pledged
Companies"), and by the grant of liens on certain of its other assets.

         Although results of operations of the Pioneer have not been 
noticeably adversely impacted since the commencement of the Consent 
Solicitation in October 1998, no assurance can be given that the filing for 
relief under Chapter 11 by PFC, and potentially by PHI, the Company and other 
subsidiaries of the Company, will not have a material adverse affect on the 
operations and financial condition of the Pioneer. Management does not 
believe the filing for relief or the contemplated plan of reorganization will 
materially effect operating results at the Pioneer. However, no assurance can 
be given that the anticipated bankruptcy case will not adversely affect the 
Pioneer, the Company or its other subsidiaries, including PHI.

         Pursuant to the plan of reorganization, PFC will issue a principal
amount of 13 1/2% First Mortgage Notes due 2006 (together with the PIK Notes, as
defined below, the "New Notes") equal to the principal amount of all outstanding
13 1/2% Notes plus accrued interest as of December 1, 1998. The New Notes will
bear interest at a rate equal to 13 1/2% per annum. Interest on the New Notes
will be payable semiannually, on June 1 and December 1 of each year and will
accrue from the date following the Issue Date. The New Notes will mature on
December 1, 2006. PFC will have the right to pay in kind up to 50% of the
interest payable on each interest payment date through the fourth interest
payment date following issuance through the issuance of additional New Notes
with a principal amount equal to 50% of the interest payable on such Interest
Payment Date (the "PIK Notes"). The terms of the PIK Notes will be identical to
those of the New Notes, including without limitation that interest on the PIK
Notes will be payable 50% in cash and 50% through the fourth interest payment
date following issuance through the issuance of additional PIK Notes. PFC
expects to satisfy 50% of each interest payment obligation through the fourth
interest payment date following issuance through the issuance of PIK Notes, as a
result of which there would be $65.2 million principal amount of New Notes
outstanding at maturity, assuming no repurchase and retirement of New Notes. The
New Notes will be redeemable at 100% of the principal amount plus accrued
interest thereon, and unpaid to the date of purchase by PFC at any time. Upon
the occurrence of certain events, PFC will be required to redeem all outstanding
New Notes or make an offer to repurchase all or a portion of the outstanding New
Notes, in each case at 100% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of purchase. Moreover,
one of the provisions of the New Notes will require that, on or before the later
of December 31, 1999 and the date that is six months from the date a plan of
reorganization is confirmed, (a) PFC must complete an offer to repurchase $7.5
million principal amount of New Notes or purchase in the open market or
otherwise and retire at least $7.5 million principal amount of New Notes, and
(b) SLVC must grant liens (subject to prior liens securing not more than $35
million of debt) for the benefit of the holders of the New Notes on
substantially all of its assets. If such requirements are not satisfied by the
specified date, an event of default will occur under the New Notes. The Company
will guaranty the payment of principal of, and premium, if any, and interest on,
the New Notes, and the guaranty will be secured by a pledge of the common stock
of its Pledged Companies and by liens on certain of its other assets.

         The plan of reorganization will be subject to the approval of the
bankruptcy court, and potentially the approval of other creditors. No assurance
can be given that the plan of reorganization to be submitted by PFC will be
confirmed. Giving effect to the issuance of New Notes as of the beginning of the
period and assuming 


                                       28
<PAGE>


that PFC elects to pay 50% of the interest payment obligations through the 
fourth interest payment date following issuance of New Notes through the 
issuance of PIK Notes, the ratio of EBITDA to cash interest expense less rent 
for real property would have been 1.52-to-one for the twelve months ended 
September 30, 1998. Upon commencement of the requirement that all interest be 
paid in cash in on the fifth interest payment date, the ratio of EBITDA to 
cash interest expense on the New Notes is expected to be less than one-to-one 
(assuming no offers to repurchase New Notes have been made). Therefore, it is 
expected that PFC would not be able to make the cash interest payment on the 
fifth interest payment date, which would be an event of default under the 
indenture under which the New Notes will be issued.

         The payments made to repurchase the 13 1/2% Notes in December 1998 and
the grant of security interest pursuant to the Consent Solicitation may be
avoidable as a preference and could be subject to recovery by a trustee in
bankruptcy, an official creditors' committee, other representatives of creditors
of PFC or PHI, or PFC or PHI as debtors in possession under the Bankruptcy Code
within one year of the payments. If the payments were successfully challenged as
preferences, holders would be required to return the funds received, together
with interest thereon in a rate determined by the court, or would be precluded
from receiving any distribution on account of such holders' 13 1/2% Notes.

CORPORATE - Approximately $1.8 million of the Company's current assets at
September 30, 1998, including approximately $400,000 of cash and short-term
investments, was held by Corporate.

         Corporate consists primarily of non-operating entities which do not
generate cash flow from operations. Corporate's principal uses of cash are for
debt service, administrative and professional expenses and costs associated with
the evaluation and development of proposed projects. Additional potential uses
of cash by Corporate include obligations that may arise as a result of the
Company's guarantee of subsidiary debt, including the 13 1/2% Notes not paid at
maturity, and the guarantee of the tenant loan if the Company terminates the
lease subject to the parcel on Las Vegas Boulevard South owned by SLVC.

         The Company has guaranteed the debt of its subsidiaries, PHI, SLVC and
SFHI, including $60 million principal amount of 13 1/2% Notes that matured
December 1, 1998. Furthermore, in the event that cash at SLVC, SFHI or PHI is
insufficient to meet liquidity requirements, Corporate may make contributions,
or, to the extent permitted by financing arrangements, loans to SLVC, SFHI or
PHI to prevent an event of default under debt instruments to which SLVC, SFHI or
PHI is a party and which loans have been guaranteed by Corporate. In order to
generate necessary liquidity, the Company may cause its subsidiaries to dispose
of, pledge or refinance certain assets to generate sufficient liquidity to meet
the cash requirements. No assurance can be given that Corporate would have
available resources to make such contributions or loans. (See SFHI, PHI and
SLVC.)

         The Company's preferred stock provides that dividends accrue on a
semi-annual basis, to the extent not declared. The Company is a party to
financing arrangements that restrict the Company's ability to exchange the
preferred stock to subordinated notes commencing in September 1998 and to
declare and pay dividends or make distributions with respect to the Company's
capital stock, which currently prohibit the payment of cash dividends on the
preferred stock. The Company accrued the semi-annual preferred stock dividends
due in fiscal year 1998 and 1997. To the extent dividends in an amount equal to
dividend payments for one dividend period have accrued and remain unpaid for two
years, the preferred stockholders have the right to elect two members to the
Board of Directors at the next annual meeting of shareholders. Because of
accrued and unpaid dividend, preferred stockholders, voting as a class, will be
entitled to elect two directors, in addition to the six directors to be elected
by the common stockholders, at the annual meeting to be held in Spring 1999. In
September 1998 the dividend rate increased to 11.0% from 8.0% and will increase
by 50 basis points each semi-annual period thereafter, up to a maximum of 16%.


                                        29
<PAGE>


         Management believes that Corporate has sufficient working capital and
available resources, including the 22-acre parcel of property adjacent to the
Santa Fe site, to meet its operating and debt service requirements through the
twelve month period ending September 30, 1999, excluding obligations which may
arise from the Company's guarantee of the debt of its subsidiaries, although no
assurance can be given to that effect.

RELATED PARTIES

         In November 1993 Mr. Lowden, Chairman of the Board, Chief Executive 
Officer and 57% stockholder of the Company, and Bank of America entered into 
a personal loan agreement, secured by a pledge of substantially all the 
common shares of the Company owned by Mr. Lowden.   Mr. Lowden advised the 
Company he repaid the entire loan balance in July 1998.

         From 1991 through 1993 LICO, a company wholly-owned by Mr. Lowden,
borrowed an aggregate of $476,000 from a subsidiary of the Company, pursuant to
an unsecured demand loan which bore interest at 2% over the prime rate. The
outstanding balance of the loan including accrued interest was $700,000 as of
December 31, 1997. In January 1998, the amount outstanding under the loan was
satisfied in full through the offset of amounts due Mr. Lowden under
compensation arrangements.

COMPUTERIZED OPERATIONS AND THE YEAR 2000

         INTRODUCTION. In an effort to adequately address and prepare for the
impact and to prevent potential disruption of business operations at the
Company's properties, the Company's Management Information Systems ("MIS")
department has been working to identify areas of risk related to the Company's
current technology's potential inability to process properly the change from the
year 1999 to 2000. 

         STATE OF READINESS. Since 1997, the MIS department, which oversees 
and has responsibility for the operation of the Company's technology systems, 
has been charged with assessing, evaluating and monitoring the actions the 
Company will need to take to become year 2000 compliant. The MIS department 
has made an assessment of most of the information technology ("IT") and 
non-IT systems of both the Santa Fe and the Pioneer. Examples of IT systems 
include the hotel-reservation system, billing system, inventory and 
purchasing system, property management system and point of sale system (cash 
registers). Examples of non-IT systems include slot machines, video poker 
machines, elevators to guest rooms and executive offices, the telephone 
system, the in-room movie program and the bingo system. Generally, the 
Company's non-IT systems appear to be Year 2000 compliant, i.e., they have 
the ability to process properly the change from the year 1999 to 2000. Most 
of the Company's IT systems need upgrading and/or replacing to become Year 
2000 compliant. The Company is currently in the process of upgrading and/or 
replacing such IT systems and expects to complete the process by September 
30, 1999. There is a small number of both IT and non- IT applications for 
which the Company has not completed assessment for potential Year 2000 
problems. An example is the accounting program for guest telephone calls at 
the Santa Fe. The MIS department is currently actively working with the 
vendors of each application to make an assessment as to their Year 2000 
compliance, and, if necessary, any corrective action it should take with 
respect to such applications. The Company does not expect that the year 2000 
issue will pose significant operational problems for either the IT or non-IT 
assets. 

         The Company from time to time exchanges electronic information with 
suppliers and other third parties. As of the date of this report, the Company 
does not have any information concerning the Year 2000 compliance of its 
suppliers or other third parties, although the Company has distributed 
written questionnaires to its significant suppliers to determine the extent 
to which the Company's interface systems are vulnerable to such persons' 
failure to remediate their own year 2000 issues. There can be no assurance 
that such suppliers or third parties will not suffer a year 2000 business 
disruption. Such failures could have a material adverse effect on the 
Company's financial condition and results of operation. 


                                  30
<PAGE>


         COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company estimates that it 
will spend approximately $300,000 on system upgrades and/or replacements. The 
Company believes that such amount, as well as remaining costs to address the 
Year 2000 issue, will not have a material effect on the liquidity or 
financial condition of the Company. The Company intends to fund from 
operations the costs of becoming year 2000 compliant. 

         RISKS PRESENTED BY THE YEAR 2000 ISSUE. To date, the Company has not 
identified any IT systems that present a material risk of not being year 2000 
ready or for which a suitable alternative cannot be implemented. However, as 
the Company's assessment of the year 2000 issue continues, it is possible 
that the Company may identify IT assets that do present a risk of year 
2000-related disruption. In addition, if any suppliers or third parties who 
provide goods or services that are critical to the Company's activities fail 
to address their year 2000 issues appropriately, there could be a material 
adverse effect on the Company's financial condition and results of 
operations. Finally, the Company cannot assure that it will complete 
successfully its assessment and corrective actions in a timely manner. The 
failure to be year 2000 compliant in a timely manner could have a material 
adverse effect on the Company's financial condition and results of operations.

         CONTINGENCY PLANS. Because the Company has not fully completed its
assessment of the risks from year 2000 failures, the Company has not developed
year 2000 specific contingency plans. The Company will develop such plans if it
identifies a business function at risk.

EFFECTS OF INFLATION

         The Company has been generally successful in recovering costs
associated with inflation through price adjustments in its hotels. Any such
increases in costs associated with casino operations and maintenance of
properties may not be completely recovered by the Company.

PRIVATE SECURITIES LITIGATION REFORM ACT

         Certain statements in this Annual Report on Form 10-K which are not
historical facts are forward looking statements, such as statements relating to
future operating results, existing and expected competition, financing and
refinancing sources and availability and plans for future development or
expansion activities and capital expenditures. Such forward looking statements
involve a number of risks and uncertainties that may significantly affect the
Company's liquidity and results in the future and, accordingly, actual results
may differ materially from those expressed in any forward looking statements.
Such risks and uncertainties include, but are not limited to, those related to
effects of competition, leverage and debt service, financing and refinancing
efforts, general economic conditions, changes in gaming laws or regulations
(including the legalization of gaming in various jurisdictions) and risks
related to development and construction activities.


                                    31
<PAGE>




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                          INDEX
                           TO CONSOLIDATED FINANCIAL STATEMENTS
                            AND FINANCIAL STATEMENT SCHEDULES

                    For the Years Ended September 30, 1998, 1997 and 1996

<TABLE>

                                                                                    Page
                                                                                    ----
<S>                                                                                 <C>
Independent Auditors' Report.........................................................33

Consolidated Balance Sheets as of
         September 30, 1998 and 1997................................................ 34

Consolidated Statements of Operations for the Years Ended
         September 30, 1998, 1997 and 1996...........................................35

Consolidated Statements of Stockholders' Equity for the
         Years Ended September 30, 1998, 1997 and 1996...............................36

Consolidated Statements of Cash Flows for the Years
         Ended September 30, 1998, 1997 and 1996.....................................37

Notes to Consolidated Financial Statements...........................................38

</TABLE>

Financial Statement Schedules are omitted because of the absence of conditions
under which they are required or because the information is included in the
financial statements or the notes thereto.


                                   32

<PAGE>




                        INDEPENDENT AUDITORS' REPORT

TO THE STOCKHOLDERS OF SANTA FE GAMING CORPORATION:

         We have audited the accompanying consolidated balance sheets of 
Santa Fe Gaming Corporation and subsidiaries (the"Company") as of September 
30, 1998 and 1997, and the related consolidated statements of operations, 
stockholders' equity (deficiency), and cash flows for each of the three years 
in the period ended September 30, 1998. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.

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

         In our opinion, such consolidated financial statements present 
fairly, in all material respects, the financial position of Santa Fe Gaming 
Corporation and Subsidiaries as of September 30, 1998 and 1997, and the 
results of their operations and their cash flows for each of the three years 
in the period ended September 30, 1998 in conformity with generally accepted 
accounting principles.

         The accompanying financial statements have been prepared assuming 
that the Company will continue as a going concern. As discussed in Notes 9 
and 23 to the financial statements, the Company did not pay the $60 million 
principal amount of 13-1/2% First Mortgage Notes ("13-1/2% Notes") of Pioneer 
Finance Corp. ("PFC"), which were due December 1, 1998, which debt is secured 
by the Pioneer Hotel, Inc. ("Pioneer") and guaranteed by Santa Fe Gaming. The 
Company's inability to meet the repayment terms of the 13-1/2% Notes, its net 
losses, and its stockholders' deficiency raise substantial doubt about its 
ability to continue as a going concern. Management's plans regarding these 
matters are also described in Notes 9 and 23, which include utilizing the 
support of holders of approximately 75% of the outstanding 13-1/2% Notes to 
forbear exercising their rights or remedies as a result of the failure to pay 
the 13-1/2% Notes and vote to accept a plan of reorganization under Chapter 
11 of the United States Bankruptcy Code. The financial statements do not 
include any adjustments that might result from the outcome of this 
uncertainty.

DELOITTE & TOUCHE LLP
Las Vegas, Nevada
December 23, 1998


                                     33

<PAGE>

                SANTA FE GAMING CORPORATION AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
               FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
             ASSETS                                                 1998             1997
----------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>
Current assets:
  Cash and short-term investments                              $  22,650,882    $  15,146,217
  Accounts receivable, net                                         1,617,762          910,867
  Inventories                                                      1,339,796        1,248,199
  Prepaid expenses & other                                         3,243,415        3,546,812
                                                              --------------   ---------------
Total current assets                                              28,851,855       20,852,095
                                                              --------------   ---------------
Property and equipment:
  Land held for development                                       38,194,065       38,194,065
  Land used in operations                                         29,343,886       29,343,886
  Buildings and improvements                                      90,665,531       90,368,461
  Machinery and equipment                                         39,219,898       35,607,418
  Accumulated depreciation                                       (48,574,230)     (51,157,969)
                                                              --------------   ---------------
Property and equipment, net                                      148,849,150      142,355,861

Goodwill, net                                                              0       44,641,391

Other assets                                                      14,465,409        8,446,931
                                                              --------------   ---------------
Total assets                                                   $ 192,166,414    $ 216,296,278
                                                              ==============   ===============

LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------------------

Current liabilities:
  Current portion of long-term debt                            $   1,785,716    $   6,644,979
  Accounts payable                                                 3,864,000        5,117,059
  Interest payable                                                 4,497,420        6,612,750
  Accrued and other liabilities                                    7,656,644        6,525,215
                                                              --------------   ---------------
                                                                  17,803,780       24,900,003
  Current debt not paid at maturity                               62,700,000                0
                                                              --------------   ---------------
Total current liabilities                                         80,503,780       24,900,003

Long-term debt - less current portion                            153,146,836      170,537,838

Commitments

Stockholders' equity (deficiency):
  Common stock, $.01 par value; authorized-100,000,000
    shares; issued and outstanding-6,195,356 shares                   61,954           61,954
  Preferred stock, exchangeable, redeemable 8% cumulative,
    stated at $2.14 liquidation value, authorized-10,000,000
    shares; issued and outstanding-8,856,651 shares               21,985,750       20,469,492
  Additional paid-in capital                                      51,513,504       51,513,504
  Accumulated deficit                                           (114,957,636)     (51,098,739)
                                                              --------------   ---------------
      Total                                                      (41,396,428)      20,946,211

  Less treasury stock - 4,875 shares, at cost                        (87,774)         (87,774)
                                                              --------------   ---------------
Total stockholders' equity (deficiency)                          (41,484,202)      20,858,437
                                                              --------------   ---------------

Total liabilities and stockholders' equity (deficiency)        $ 192,166,414    $ 216,296,278
                                                              ==============   ===============
</TABLE>

See the accompanying Notes to Consolidated Financial Statements.

                                       34


<PAGE>
                SANTA FE GAMING CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                      1998             1997             1996
                                                -------------    -------------    -------------
<S>                                             <C>              <C>              <C>
Revenues:
  Casino                                        $  91,383,488    $  83,217,092    $  84,595,109
  Hotel                                             5,699,479        5,817,273        6,460,613
  Food and beverage                                21,102,213       20,785,262       20,739,903
  Other                                             7,286,665        6,864,737        8,367,249
  Gain on sale of assets                                    0          725,179       40,753,738
                                                -------------    -------------    -------------
Gross revenues                                    125,471,845      117,409,543      160,916,612

  Less casino promotional allowances              (12,622,591)     (12,420,872)     (12,484,339)
                                                -------------    -------------    -------------
Net operating revenues                            112,849,254      104,988,671      148,432,273
                                                -------------    -------------    -------------

Operating expenses:
  Casino                                           44,635,725       42,196,846       43,474,270
  Hotel                                             1,890,842        1,756,065        1,806,907
  Food and beverage                                14,002,750       14,250,879       16,160,601
  Other                                             3,161,547        2,938,658        3,452,922
  Selling, general and administrative              12,561,344       11,820,409       13,512,309
  Corporate expenses                                3,443,950        2,935,848        2,823,304
  Utilities and property expenses                  11,616,199       12,868,831       11,982,079
  Depreciation and amortization                    13,723,996       11,157,480       14,069,415
  Loss on asset impairment                         44,025,709                0                0
                                                -------------    -------------    -------------
Total operating expenses                          149,062,062       99,925,016      107,281,807
                                                -------------    -------------    -------------
Operating income (loss)                           (36,212,808)       5,063,655       41,150,466

Interest expense                                   25,371,590       22,607,548       24,422,302
Other expenses                                        758,241                0        2,752,405
                                                -------------    -------------    -------------
Income (loss) before income tax expense
  (benefit) and extraordinary item                (62,342,639)     (17,543,893)      13,975,759

Federal income tax expense (benefit)                        0       (3,830,601)       4,236,523
                                                -------------    -------------    -------------
Income (loss) before extraordinary item           (62,342,639)     (13,713,292)       9,739,236

Extraordinary item-gain on early
  extinguishment of debt, net of tax
  provision of $1,129,000 in 1997 and
  $4,229,000 in 1996                                        0        2,096,238        7,854,707
                                                -------------    -------------    -------------
Net income (loss)                                 (62,342,639)     (11,617,054)      17,593,943

Dividends paid or accrued on preferred shares       1,516,258        1,516,259        1,434,291
                                                -------------    -------------    -------------
Net income (loss) applicable to common shares   $ (63,858,897)   $ (13,133,313)   $  16,159,652
                                                =============    =============    =============

Average common shares outstanding                   6,195,356        6,195,356        6,195,356
                                                =============    =============    =============

Income (loss) per common share:
  before extraordinary item                     $      (10.06)   $       (2.21)   $        1.57
  extraordinary item                                     0.00             0.34             1.27
  dividends on preferred shares                         (0.25)           (0.25)           (0.23)
                                                -------------    -------------    -------------
Income (loss) per common share                  $      (10.31)   $       (2.12)   $        2.61
                                                =============    =============    =============
</TABLE>

See the accompanying Notes to Consolidated Financial Statements.

                                     35

<PAGE>


                     SANTA FE GAMING CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>

                                                                  Additional
                                   Common         Preferred         Paid-in        Accumulated       Treasury
                                   Stock            Stock           Capital          Deficit           Stock            Total
                                   ------         ---------       ----------       -----------       --------
<S>                            <C>              <C>              <C>              <C>              <C>              <C>
Balances, October 1, 1995      $      61,954    $  17,521,385    $  51,513,504    $ (54,125,078)   $     (87,774)   $  14,883,991

Net income                                                                           17,593,943                        17,593,943
Preferred stock dividends                           1,431,848                        (1,434,291)                           (2,443)
                               -------------    -------------    -------------    -------------    -------------    -------------
Balances, September 30, 1996          61,954       18,953,233       51,513,504      (37,965,426)         (87,774)      32,475,491

Net loss                                                                            (11,617,054)                      (11,617,054)
Preferred stock dividends                           1,516,259                        (1,516,259)                                0
                               -------------    -------------    -------------    -------------    -------------    -------------
Balances,September 30, 1997           61,954       20,469,492       51,513,504      (51,098,739)         (87,774)      20,858,437

Net loss                                                                            (62,342,639)                      (62,342,639)
Preferred stock dividends                           1,516,258                        (1,516,258)                                0
                               -------------    -------------    -------------    -------------    -------------    -------------
Balances,September 30, 1998    $      61,954    $  21,985,750    $  51,513,504    $(114,957,636)   $     (87,774)   $ (41,484,202)
                               =============    =============    =============    =============    =============    =============

</TABLE>

See the accompanying Notes to Consolidated Financial Statements.


                                            36

<PAGE>


                          SANTA FE GAMING CORPORATION AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>

                                                                 1998             1997             1996
                                                                 ----             ----             ----
<S>                                                         <C>              <C>              <C>
Cash flows from operating activities:
Net income (loss)                                           $ (62,342,639)   $ (11,617,054)   $  17,593,943
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
     Depreciation and amortization                             13,723,996       11,157,480       14,069,415
     Gain on sale of assets                                             0         (725,179)     (40,753,738)
     Gain on early extinguishment of debt, net                          0       (2,096,238)      (7,854,707)
     Loss on impairment of assets                              44,025,709
     Provision to reduce carrying value of
       investments in minority-owned subsidiary                                                   2,752,405
     Debt discount amortization                                 1,532,759        1,703,368        1,765,887
     Decrease (increase) in accounts receivable, net             (706,895)         618,856        4,659,386
     Decrease (increase) in accounts receivable, officer                0          636,113          (91,071)
     Decrease (increase) in inventories                           (91,597)         (30,079)         558,307
     Decrease  in prepaid expenses & other                        303,397          231,702        1,009,110
     Decrease (increase) in deferred income taxes                       0       (3,830,601)       4,136,523
     Decrease (increase) in other assets                        2,778,522       (1,105,769)       2,877,546
     Decrease in accounts payable                                (888,041)        (640,102)      (1,267,819)
     Increase (decrease) in interest payable                      584,670         (529,475)      (2,374,551)
     Increase (decrease) in accrued and other liabilities       1,372,066       (2,115,775)      (6,589,101)
                                                            -------------    -------------    -------------
Net cash provided by (used in) operating activities               291,947       (8,342,753)      (9,508,465)
                                                            -------------    -------------    -------------
Cash flows from investing activities:
     Proceeds from sale of subsidiary assets                                                    128,508,377
     Proceeds from sale leaseback of equipment                                                    5,000,000
     Proceeds from sale of land held for development                             3,150,000
     Capital expenditures                                      (5,700,499)      (1,566,035)      (4,571,140)
     Development costs                                         (6,958,828)        (202,919)        (663,357)
                                                            -------------    -------------    -------------
Net cash provided by (used in) investing activities           (12,659,327)       1,381,046      128,273,880
                                                            -------------    -------------    -------------
Cash flows from financing activities:
     Cash proceeds of long-term debt                           81,439,996       21,675,658       20,000,000
     Cash paid on long-term debt                              (58,065,611)     (15,709,115)    (163,948,828)
     Debt issue cost                                           (3,502,340)      (1,356,443)         (68,695)
                                                            -------------    -------------    -------------
Net cash provided by (used in) financing activities            19,872,045        4,610,100     (144,017,523)
                                                            -------------    -------------    -------------
Increase (decrease) in cash and short-term investments          7,504,665       (2,351,607)     (25,252,108)

Cash and short-term investments,
  beginning of year                                            15,146,217       17,497,824       42,749,932
                                                            -------------    -------------    -------------
Cash and short-term investments,
  end of year                                               $  22,650,882    $  15,146,217    $  17,497,824
                                                            =============    =============    =============

</TABLE>

See the accompanying Notes to Consolidated Financial Statements.


                                                   37


<PAGE>




                SANTA FE GAMING CORPORATION AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

1.  BASIS OF PRESENTATION AND GENERAL INFORMATION

         Santa Fe Gaming Corporation, formerly known as Sahara Gaming 
Corporation, (the "Company" or "Santa Fe Gaming"), a publicly traded Nevada 
corporation, is the successor corporation of two affiliates, Sahara Resorts 
("SR") and Sahara Casino Partners, L.P., which combined in a business 
combination in September, 1993. The Company's primary business operations are 
conducted through two wholly owned subsidiary corporations, Santa Fe Hotel 
Inc. ("SFHI") and Pioneer Hotel Inc. ("PHI") (the "Operating Companies"). 
SFHI owns and operates the Santa Fe Hotel and Casino (the "Santa Fe"), 
located in Las Vegas, Nevada, and PHI owns and operates the Pioneer Hotel & 
Gambling Hall (the "Pioneer") in Laughlin, Nevada. The Company owns real 
estate adjacent to the Santa Fe, and through an indirect wholly-owned 
subsidiary of the Company, Sahara Las Vegas Corp. ("SLVC"), on Las Vegas 
Boulevard South (the "Strip") and in Henderson, Nevada, for possible 
development opportunities.

         The Company through its wholly owned subsidiaries, Hacienda Hotel 
Inc. ("HHI") and Sahara Nevada Corp. ("SNC"), owned and operated the Hacienda 
Resort Hotel and Casino (the "Hacienda") and the Sahara Hotel and Casino (the 
"Sahara"), but sold substantially all of the assets related to those 
hotel-casinos in August 1995 and October 1995, respectively.

         In November 1998, Pioneer Finance Corp. ("PFC"), a special purpose 
subsidiary of Santa Fe Gaming, which issued the 13 1/2% First Mortgage Bonds 
due December 1, 1998 ("13 1/2% Notes") to finance the acquisition of the 
Pioneer in 1988, agreed to file for relief under Chapter 11 of the United 
States Bankruptcy Code and to seek confirmation of a plan or reorganization 
of a plan of reorganization that will permit the issuance of new notes in 
satisfaction of the 13 1/2% Notes in accordance with the terms set forth in 
the Offering Circular and Consent Solicitation dated October 23, 1998, as 
amended ("Consent Solicitation"). See Notes 3, 9, 10 and 23

         The accompanying financial statements have been prepared on a going 
concern basis, which contemplates the realization of assets and the 
satisfaction of liabilities in the normal course of business. As shown in the 
financial statements, current liabilities exceed current assets in the 
accompanying balance sheet by $51,651,925, which is primarily attributable to 
$60 million of 13 1/2 % Notes, which were due December 1, 1998. Furthermore, 
at September 30, 1998, there is a stockholders' deficiency of $41,484,202. 
The Company's inability to meet the repayment terms of the 13-1/2% Notes, its 
net losses, and its stockholders' deficiency raise substantial doubt about 
its ability to continue as a going concern. Management's plans regarding these 
matters are also described in Notes 9 and 23, which include utilizing the 
support of holders of approximately 75% of the outstanding 13-1/2% Notes to 
forbear exercising their rights or remedies as a result of the failure to pay 
the 13-1/2% Notes and vote to accept a plan of reorganization under Chapter 
11 of the United States Bankruptcy Code. The financial statements do not 
include any adjustments that might result from the outcome of this 
uncertainty.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The accompanying consolidated financial statements include the 
accounts of Santa Fe Gaming and its wholly owned subsidiaries. Amounts 
representing the Company's investment in less than majority-owned companies 
in which a significant equity ownership interest is held are accounted for on 
the equity method. All material inter-company accounts and transactions have 
been eliminated in consolidation.


                                     38

<PAGE>

Cash and Short-Term Investments

         Investments which mature within 90 days from the date of purchase 
are treated as cash equivalents and are included in cash and short-term 
investments.

Inventories

         Food, beverage, gift shop and other inventories are stated at 
first-in, first-out cost, not in excess of market.

Property and Equipment

         Property and equipment are stated at cost less accumulated 
depreciation. Costs of maintenance and repairs of property and equipment are 
expensed as incurred. Costs of major improvements are capitalized and 
depreciated pursuant to the standard described below. Gains or losses on the 
disposal of property and equipment are recognized in the year of sale. In 
sale/ leaseback transactions of property and equipment, gains are deferred 
and recognized over the lease term and losses are recognized in the year of 
sale.

         The Company periodically assesses the recoverability of property, 
plant and equipment and evaluates such assets for impairment whenever events 
or changes in circumstances indicate that the carrying amount of an asset may 
not be recoverable. Asset impairment is determined to exist if estimated 
future cash flows, undiscounted and without interest charges, are less than 
the carrying amount in accordance with Statement of Financial Accounting 
Standards ("SFAS") 121, Impairment of Long-Lived Assets ("SFAS 121").

         Depreciation and amortization are computed by the straight-line 
method over the shorter of the estimated useful lives or lease terms. The 
length of depreciation and amortization periods are for buildings and 
improvements 7 to 40 years and for machinery and equipment 3 to 15 years.

Goodwill

         The excess cost over the net assets of an acquired company is 
amortized using the straight line method over a 40 year period. Management 
periodically evaluates the realizability of goodwill and evaluates such asset 
for impairment whenever events or changes in circumstances indicate that the 
carrying amount of the asset may not be recoverable. Asset impairment is 
determined to exist if estimated future cash flows, undiscounted and without 
interest charges, are less than the carrying amount in accordance with SFAS 
121, Impairment of Long-Lived Assets.

Pre-Opening Expenses and Capitalized Interest

         All pre-opening expenses directly related to development of gaming 
operations are capitalized as incurred and included in Other Assets and 
expensed within the first year of operations. Interest costs are capitalized 
on funds disbursed during the development phase of projects and expensed 
pursuant to depreciation and amortization methods over the asset's estimated 
useful life.


                                     39

<PAGE>

Federal Income Taxes

         Deferred income taxes are provided on temporary differences between 
pretax financial statement income and taxable income resulting primarily from 
different methods of depreciation and amortization. The Company accounts for 
Income Taxes in accordance with SFAS No. 109, Accounting for Income Taxes. 
("SFAS 109")

Revenue Recognition

         Casino revenue is recorded as gaming wins less losses. Revenues 
include the retail amount of room, food, beverage and other services provided 
gratuitously to customers. Such amounts are then deducted as promotional 
allowances. The estimated cost of providing these promotional services has 
been reported in the accompanying consolidated financial statements as an 
expense of each department granting complimentary services. The table below 
summarizes the departments' costs of such services (dollars in thousands):

<TABLE>
<CAPTION>
                                                 1998                1997              1996
                                               -------             -------           -------
         <S>                                   <C>                 <C>               <C>
         Food and Beverage                     $11,357             $11,051           $12,114
         Hotel                                     931                 972             1,128
         Other                                     162                 181               216
                                               -------             -------           -------
                  Total                        $12,450             $12,204           $13,458
                                               =======             =======           =======
</TABLE>

Indirect Expenses

         Certain indirect expenses of operating departments such as utilities 
and property expense and depreciation and amortization are shown separately 
in the accompanying consolidated statements of operations and are not 
allocated to departmental operating costs and expenses.

Earnings Per Share

         During the quarter ended December 31, 1997, the Company adopted SFAS 
No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires the 
presentation of basic net income (loss) per share and diluted net income 
(loss) per share. Basic per share amounts are computed by dividing net income 
(loss) by average shares outstanding during the period. Diluted per share 
amounts are computed by dividing net income (loss) by average shares 
outstanding plus the dilutive net income (loss) by average shares outstanding 
plus the dilutive effect of common share equivalents. The effect of options 
outstanding was not included in diluted calculations during the quarter ended 
September 30, 1998 since the Company incurred a net loss during the 
three-month and twelve-month periods ended September 30, 1998.

Estimates and Assumptions

         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. Significant estimates used by the Company include estimated 
useful lives for depreciable and amortizable assets, certain other estimated 
liabilities and valuation reserves and estimated cash flows in assessing the 
recoverability of long-lived assets. Actual results may differ from estimates.


                                     40

<PAGE>

Reclassification

         Certain reclassifications have been made in the 1997 and 1996 
consolidated financial statements in order to conform to the presentation 
used in 1998.

Recently Issued Accounting Standards

         The Financial Accounting Standards Board ("FASB") issued SFAS No. 
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective 
for fiscal years beginning after December 15, 1997. This statement requires 
companies to classify items of other comprehensive income by their nature in 
a financial statement and display the accumulated balance of other 
comprehensive income separately from retained earnings and additional paid-in 
capital in the equity section of a Balance Sheet. Management does not believe 
that SFAS No. 130 will have a material impact on the Company's financial 
statements.

         The FASB issued SFAS No. 131, "Disclosure about Segments of an 
Enterprise and Related Information" ("SFAS No. 131"), which is effective for 
fiscal years beginning after December 15, 1997. This statement redefines how 
operating segments are determined and requires qualitative disclosure of 
certain financial and descriptive information about a company's operating 
segments. The Company will adopt SFAS No. 131 in the year ending September 
30, 1999. Management has not yet completed its analysis of which operating 
segments it will report on to comply with SFAS No. 131.

         The FASB recently issued SFAS No. 133 ("SFAS 133"), Accounting for 
Derivative Instruments and Hedging Activities, which is effective for 
financial statements for all fiscal quarters of all fiscal years beginning 
after June 15, 1999. SFAS 133 establishes accounting and reporting standards 
for derivative instruments, including certain derivative instruments embedded 
in other contracts and for hedging activities. It requires that an entity 
recognize all derivatives as either assets or liabilities in the statement of 
financial position and measure those instruments at fair value. Management 
has not determined what effect, if any, adoption of SFAS 133 will have on the 
Company's future operations or financial condition.

         The American Institute of Certified Public Accountants' Accounting 
Standards Executive Committee issued Statement of Position ("SOP") 98-5 
"Reporting on the Costs of Start-up Activities." This standard provides 
guidance on the financial reporting for start-up costs and organization 
costs. This standard requires costs of start-up activities and organization 
costs to be expensed as incurred. Management believes that this SOP could 
have a material impact on the consolidated financial statements depending on 
the status of the Company's current and future expansion projects at the time 
of adoption of this standard. This standard is effective for fiscal years 
beginning after December 15, 1998.

Fair Value of Financial Instruments

         The Company estimates the fair value of its long term debt and 
preferred stock to be $198.3 million and $3.3 million, respectively, at 
September 30, 1998 based upon available market prices. The Company estimates 
that all other financial instruments have a fair value which approximates 
their recorded value.

3.  CASH AND SHORT-TERM INVESTMENTS

         At September 30, 1998, approximately $11.8 million of the Company's
consolidated cash and short term investments was held by SFHI and was subject to
certain restrictions and limitations on its use, including restrictions on its
availability for distribution to the Company, by the terms of an indenture
pursuant to which


                                     41

<PAGE>

$115 million principal amount of 11% First Mortgage Notes due December 2000 
("11% Notes") of SFHI was issued. As of September 30, 1998, SFHI did not meet 
the conditions precedent to making a distribution to the Company. See Note 10

         At September 30, 1998, approximately $9.4 million of the Company's 
consolidated cash and short-term investments was held by PHI and was subject 
to certain restrictions, including restrictions on its availability for 
distribution to the Company, by the terms of an indenture pursuant to which 
the 13 1/2% First Mortgage Notes due December 1998 ("13 1/2% Notes") of Pioneer 
Finance Corp. ("PFC") were issued, the proceeds of which were loaned to PHI. 
As of September 30, 1998, PHI did not meet the conditions precedent to making 
a distribution to the Company. PFC did not pay the 13 1/2% Notes at maturity. 
See Notes 9, 10 and 23

         At September 30, 1998, approximately $1.0 million of the Company's 
consolidated cash and short-term investments was held by SLVC and was subject 
to certain restrictions and limitations on its use by the terms of $57.5 
million principal amount of notes due December 1999 ("SLVC Notes"). As of 
September 30, 1998, SLVC did not meet the conditions precedent to making a 
distribution to the Company. See Note 10

4.  ACCOUNTS RECEIVABLE, NET

         Accounts receivable at September 30, 1998 and 1997 consisted of the 
following:

<TABLE>
<CAPTION>
                                                   1998         1997
                                                ----------   ----------
         <S>                                    <C>          <C>
         Casino and hotel                       $2,891,652   $2,467,672
         Other                                     563,957      449,963
                                                ----------   ----------
                                                 3,455,609    2,917,635
         Less allowance for doubtful accounts    1,837,847    2,006,768
                                                ----------   ----------
                  Total                         $1,617,762   $  910,867
                                                ==========   ==========
</TABLE>

         Changes in the allowance for doubtful accounts for the years ended 
September 30, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                           1998           1997           1996
                                       -----------    -----------    -----------
         <S>                           <C>            <C>            <C>
         Balance, beginning of year    $ 2,006,768    $ 2,196,847    $ 2,317,702
         Provision                          40,673         94,738        397,413
         Accounts written-off             (209,594)      (284,817)      (518,268)
                                       -----------    -----------   ------------
         Balance, end of year          $ 1,837,847    $ 2,006,768    $ 2,196,847
                                       ===========    ===========    ===========
</TABLE>

5.  LAND HELD FOR DEVELOPMENT

         In March 1994 the Company purchased for approximately $15.1 million 
a 39-acre parcel of land located in Henderson, Nevada, for future 
development of a proposed casino hotel complex. At September 30, 1998 the 
cost to acquire the property is included in land held for development in the 
consolidated Balance Sheet. See Note 8

         In October 1995 in connection with the sale of the Sahara, the Company
acquired a 27-acre parcel on Las Vegas Boulevard South which was valued at
approximately $21.5 million. The Company assumed an operating lease under which
a water theme park operates on the 27-acre parcel. The lease may be terminated


                                     42

<PAGE>

by the Company at any time after December 1996. The Company has guaranteed 
payments by the tenant of a loan to the prior owner of the property ("tenant 
loan") and has agreed to pay the loan in full in certain situations, 
including in the event the lease is terminated for any reason prior to 2004. 
The tenant loan, which is amortized through monthly principal and interest 
payments through December 2004, had an outstanding balance of $4.8 million as 
of September 30, 1998. Under the terms of the lease, as amended, the 
water-theme park remits a base rent of approximately $16,000 monthly plus an 
annual rent payment based on gross receipts.

         In November 1993, the Company acquired for approximately $1.6 
million, a 22-acre parcel of property located adjacent to the Santa Fe. In 
November 1997, the Company entered into an agreement to sell the 22-acre 
parcel of land for approximately $3.6 million. The agreement was subject to 
certain contingencies which did not occur and the agreement to sell 
terminated.

6.  PROPERTY AND EQUIPMENT, NET

         In March 1998 the Company acquired, for approximately $10.7 million, 
gaming equipment and furniture and fixtures previously under lease at the 
Santa Fe. In June 1998 the Santa Fe acquired additional gaming equipment for 
$1.2 million. In September 1998 Santa Fe completed construction of two new 
pylon signs at a total cost of approximately $1.8 million. The Company funded 
the acquisitions and construction with proceeds from a $14 million note 
placement in April 1998. See Notes 10 and 11

         In December 1997 the Company acquired, for approximately $1.2 
million, gaming equipment previously under lease at the Pioneer.  In January 
1998 the Pioneer acquired, for approximately $500,000, additional gaming 
machines with available working capital.  See Note 11

7.  GOODWILL, NET

         Goodwill of $56.5 million was recorded by the Company on December 1, 
1988 as a result of the allocation of the purchase price of the Pioneer. 
Goodwill is net of accumulated amortization of $11.9 million at September 30, 
1997. Amortization expense was $1.4 million in the fiscal years 1998, 1997 
and 1996.

         In 1998, in accordance with SFAS No. 121, the Company determined an 
impairment loss had occurred to the carrying value of the assets of the 
Pioneer. In the quarter ended September 30, 1998 the Company recorded an 
impairment loss to adjust to fair market value the carrying value of the 
Pioneer's fixed and intangible assets. Consequently, the remaining value of 
goodwill of $43.2 million was written off at September 30, 1998. See Note 18

8.  Other Assets

         As of September 30, 1998 and 1997, in addition to costs to acquire 
the 39-acre parcel of real property in Henderson, Nevada the Company has 
recorded approximately $9.3 million and $3.5 million in preliminary 
engineering and design fees, construction related permits and development 
costs.

         In February 1996 the Company, through a wholly-owned subsidiary, 
acquired a 50% equity interest for $175,000 in a restaurant/tavern operation 
in northwest Las Vegas, Santa Fe Mining Company, L.L.C. ("Santa Fe Mining"). 
The restaurant/tavern opened on July 1, 1996. The Company and its partner 
each contributed $175,000 and have guaranteed a $950,000 loan incurred to 
finance construction and equipment. In addition, Santa Fe Mining entered into 
a three year fully amortizing note at 11 1/2% per annum for approximately 
$100,000 to finance the acquisition of slot equipment.


                                     43

<PAGE>

9.  DEBT NOT PAID AT MATURITY

         The 13 1/2% Notes were issued by PFC, the proceeds from which were 
loaned to PHI to acquire the Pioneer and are secured by an assignment of a 
first priority deed of trust on the Pioneer and are guaranteed by the 
Company. Interest was payable semi-annually on June 1 and December 1 at a 
rate of 13 1/2% per annum and the principal amount was due December 1, 1998. 
PFC did not pay the principal and accrued interest on the 13 1/2% Notes at 
maturity. The Company had $60 million of principal and approximately $2.7 
million accrued interest due on the 13 1/2% Notes as of September 30, 1998, 
which is presented as Debt Not Paid At Maturity in the consolidated Balance 
Sheet contained herein. See Notes 3, 10 and 23





                                     44


<PAGE>

10.  LONG-TERM DEBT

         Long-term debt is presented net of unamortized debt discounts and 
debt obligations owned, but not retired, by the Company. The Company is 
subject to various financing agreements containing covenants and 
restrictions, of which, management believes it is in compliance with the 
exception of the 13 1/2% Notes. (See Note 9 and 23) Long-term debt at 
September 30, 1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                            1998           1997
                                       ------------   ------------
<S>                                    <C>            <C>
11% First Mortgage Notes, Net
 ("11% Notes") due 2000                $ 63,383,205   $ 62,092,196

9.5% Senior Secured Notes,
 ("9.5% Notes") due 2000                 14,000,000            -0-

11% Equipment Notes,
("Equipment Notes") due 2001              9,939,996            -0-

Note Purchase Agreement
("SLVC Notes") due December 15, 1999     57,500,000     35,000,000

Note payable to Sierra Construct-
  tion Corp. ("Sierra Note"), due
2000; interest at prime plus 2%           4,879,875      5,297,126

12% First Mortgage Note ("Land
Note") due 1999                           1,559,000      1,559,000

10 1/4% Subordinated Sinking
  Fund Debentures ("Sub
  Debentures") due 1998                         -0-      5,233,806

12 1/4% First Mortgage Note,
("12 1/4% Note") due 1998                       -0-      5,000,000


13 1/2% First Mortgage Notes,
 ("13 1/2% Notes") due 1998              60,000,000     60,000,000

Other notes payable, collater-
  alized primarily by equipment           3,418,696      2,575,724

Obligations under capital leases            251,780        424,965
                                       ------------   ------------
         Subtotal                       214,932,552    177,182,817
Less current portion                      1,785,716      6,644,979
Less Debt Not Paid at Maturity
(See Notes 9 and 23)                     60,000,000            -0-
                                       ------------   ------------
         Total long-term debt          $153,146,836   $170,537,838
                                       ============   ============
</TABLE>

                                   45

<PAGE>

         In addition to the $60 million principal amount of 13 1/2% Notes 
that matured on December 1, 1998, the scheduled maturities of long-term debt 
(excluding capital leases) for the year ending September 30 are as follows:

<TABLE>
               <S>                    <C>
               1999                   $  1,652,954
               2000                     60,051,526
               2001                     92,423,760
               2002                         92,238
               2003                        103,223
               Thereafter                  357,071
                                      ------------
                       Total          $154,680,772
                                      ============

</TABLE>

11% NOTES:

         On December 29, 1993, SFHI consummated a public offering (the 
"Offering") of 11,500 units, with each unit consisting of $10,000 principal 
of the 11% Notes and one warrant to acquire, for no additional consideration, 
an additional $1,000 principal amount of the 11% Notes upon exercise no later 
than December 15, 1996. The 11% Notes are secured by, among other things, a 
second priority deed of trust on the Santa Fe and are guaranteed by the 
Company. Interest is payable semi-annually on June 15 and December 15, at the 
rate of 11% per annum. The 11% Notes mature on December 15, 2000. Assuming 
all warrants were exercised on December 15, 1996, the total principal amount 
of 11% Notes to be paid at maturity would have been $126.5 million and the 
effective rate of interest per annum would have been 12.46%. SFHI is subject 
to certain covenants under the indenture in which the 11% Notes were issued 
including, among other things, restrictions on the incurrence of additional 
debt and making any loan or any distribution or dividends to any affiliate of 
the Company. See Note 3

          In August 1995, in accordance with the indenture governing the 11% 
Notes, SFHI completed an offer to repurchase for cash $21.5 million principal 
amount of 11% Notes at a price of $1,010 per $1,000 principal amount, plus 
accrued interest (the "Repurchase Offer"), representing that principal amount 
that could be purchased with funds remaining in the Parkville collateral 
account dedicated to use in the development of a proposed dockside riverboat 
casino and received upon liquidation of the Parkville assets. The repurchase 
offer was required to be made because the proposed casino in Parkville, 
Missouri that SFHI intended to develop was not operating by June 30, 1995. As 
a result of the commencement of the Repurchase Offer discussed above, 
warrants to acquire $11.5 million principal amount 11% Notes were exercised 
resulting in $126.5 million principal amount of 11% Notes outstanding. Upon 
completion of the Repurchase Offer, $105 million principal amount of 11% 
Notes was outstanding.

         In January 1996 and August 1997, the Company completed the 
repurchase of an aggregate of $38.7 million principal amount of 11% Notes. 
The Company financed the repurchases with the net proceeds of private 
placements of an aggregate of $35 million principal amount of SLVC Notes 
issued by SLVC. The Company retired $5.6 million principal amount of the 11% 
Notes purchased and pledged the balance of $33.1 million principal amount 
held by the Company as collateral for the SLVC Notes. The Company recorded 
extraordinary gains of approximately $4.9 million after tax related to the 
debt repurchase in the quarter ended March 31, 1996 and of approximately $1.7 
million after tax related to the debt repurchase in the quarter ended 
September 30, 1997.


                                     46

<PAGE>

         In March 1998, holders of a majority of the 11% Notes consented to 
three proposals to amend the indenture under which the 11% Notes were issued 
and, as a result, all three proposals became effective. Pursuant to the 
amendments, SFHI was permitted to (a) incur $14 million of senior secured 
indebtedness; (b) grant a security interest in certain gaming equipment to 
secure two promissory notes in the aggregate principal amount of 
approximately $10 million to obtain an extension of the maturity of the two 
promissory notes from May 1998 until April 2001 and a reduction in the 
interest rate to 11%, and (c) lease 3 acres for development of a non-gaming 
hotel.

         As of September 30, 1998, $99.4 million principal amount of the 11% 
Notes was outstanding. The 11% Notes are reported in the consolidated Balance 
Sheet net of unamortized debt discount of $2.9 million and of the $33.1 
million principal amount held by SLVC and pledged as collateral for the SLVC 
Notes. The 11% Notes are callable at 103.115 through December 15, 1999 and at 
par thereafter until maturity.

9 1/2% NOTES:

         In April 1998, SFHI consummated the issuance of $14 million 
principal amount of 9 1/2% Notes, secured by a first priority deed of trust on 
the Santa Fe contemplated by the consent solicitation relating to its 11% 
Notes. The 9 1/2% Notes require quarterly interest only payments, and mature 
on December 15, 2000. SFHI used approximately $10.7 million of proceeds to 
purchase gaming and other equipment under lease and approximately $1.2 
million of the proceeds to fund in part the purchase of additional gaming 
equipment.

EQUIPMENT NOTES:

         In April 1998, SFHI modified the terms of two $5 million promissory 
notes due an affiliate, aggregating approximately $10 million ("Equipment 
Notes") in connection with a sale by the Affiliate of the Equipment Notes to 
a third party. The terms were modified to (i) reduce the interest rate to 11% 
and to extend the maturity date from May 1998 to April 2001 and (ii) grant a 
security interest in certain gaming and other equipment. In April 1998, the 
Company consummated the sale of the Equipment Notes for cash proceeds of 
approximately $9 million. In December 1998, SFHI amended the terms of one of 
the Equipment Notes to reduce the principal amount to $4.5 million and to 
provide for amortization payments of principal and interest until maturity. 
See Note 23

SLVC NOTES:

         The SLVC Notes were initially issued in January 1996 in an aggregate 
principal amount of $20 million. The SLVC Notes are secured by, among other 
things, the 27-acre parcel of real property on the Las Vegas Strip, 39-acre 
parcel of real property in Henderson, Nevada and $33.1 million principal 
amount of 11% Notes, and are guaranteed by the Company. Interest is payable 
semi-annually on June 20 and December 20 and the principal amount is due 
December 1999. The SLVC Notes are callable at certain premiums through June 
15, 1999 and at par thereafter until maturity. Upon the earlier of the 
repayment of the SLVC Notes or maturity, SLVC is required to pay $2.1 million 
in fees associated with the SLVC Notes.

         In November 1997 the Company entered into an amended and restated 
agreement with respect to the SLVC Notes pursuant to which an additional 
$22.5 million principal amount of SLVC Notes were issued to increase the 
outstanding principal balance to $57.5 million. SLVC issued two tranches of 
promissory notes, $37 million principal amount with an interest rate of 9.75% 
and $20.5 million with an interest rate of 13.25%. Certain other provisions 
of the loan agreement were amended, including the elimination of any sinking 
fund principal payments prior to maturity in December 1999.


                                     47

<PAGE>

         In August 1997 the SLVC and the holders of the SLVC Notes amended 
the terms of the SLVC Notes to, among other things, (i) provide for the 
issuance of an additional $15 million of SLVC Notes to increase the 
outstanding principal amount to $35.0 million from the original issuance of 
$20 million in January 1996, and (ii) revise a covenant requiring redemption 
of $7.0 million principal amount of SLVC Notes (or alternatively the 
redemption of 11% Notes), in the event cash flow (before a maximum of $2.4 
million in lease payments) at the Santa Fe is less than $13.5 million for any 
four-quarter period commencing with the four-quarter period ending December 
31, 1997. Such obligation, if it arises, will be reduced on a 
dollar-for-dollar basis to the extent that, during the period in which SLVC 
is so required to repurchase SLVC Notes, the Company acquires 11% Notes and 
pledges such acquired 11% Notes as additional collateral for the SLVC Notes 
or contributes the acquired 11% Notes to SFHI and causes the contributed SFHI 
Notes to be canceled.

         The proceeds from the SLVC Notes were used as follows: (i) In 
January 1996, approximately $17.5 million was used to repurchase $25.6 
million principal amount of 11% Notes, of which $5.6 million was retired and 
$20.0 million is held as collateral for the SLVC Notes (ii) In August 1997, 
approximately $10.5 million was used to repurchase $13.1 million principal 
amount of 11% Notes, which is held as collateral for the SLVC Notes, $2.5 
million was deposited in a cash collateral account for use for future 
principal and interest payments on the SLVC Notes and the remaining balance 
was used to pay for certain expenses and to make distributions to the 
Company, and (iii) In November 1997, $20 million was used by SLVC to acquire 
the 39-acre parcel of land in Henderson, Nevada from an affiliate for cash.

SIERRA NOTE:

         The Sierra Note issued in December 1993 for $6.6 million bears 
interest at 2% above the prime rate (10 1/4% at September 30, 1998) and 
originally was payable in monthly installments of principal and interest of 
$80,099 commencing December 1993 until maturity in December 1998. In October 
1998, the Company amended the terms of the Sierra Note to extend the maturity 
date to December 2000, provide for certain mandatory prepayment requirements 
and to require interest only payments until the maturity date. See Note 23

LAND NOTE:

         In December 1996, the Company borrowed approximately $1.6 million 
pursuant to a first mortgage note secured by the 22-acre parcel. The note 
requires monthly interest only payments at a 12% per annum interest rate for 
a three-year term. The Company utilized proceeds from the note to satisfy an 
existing first mortgage note of $850,000 and expenses of the transactions, 
resulting in net proceeds of approximately $650,000.

SUBDEBENTURES:

         The Subdebentures had an outstanding principal balance of $5.5 
million less unamortized discount of $300,000 on September 30, 1997. The 
Company utilized proceeds from the sale of Equipment Notes in April 1998 to 
retire the Subdebentures upon maturity in June 1998.

12 1/4% NOTE:

         In May 1997, the Company borrowed $5.0 million at a rate of 12 1/4% 
interest, payable monthly for a twelve month term, pursuant to the first 
mortgage note secured by the 39-acre parcel of land located in Henderson, 
Nevada (the "12 1/4% Note").  In November 1997, the Company repaid the 12 1/4% 
Note with proceeds of the SLVC Note placement.


                                     48

<PAGE>

11.  LEASES

         All non-cancelable leases have been classified as capital or 
operating leases. At September 30, 1998, the Company had leases for personal 
and real property which expire in various years to 2078. Under most leasing 
arrangements, the Company pays the taxes, insurance and the operating 
expenses related to the leased property.

         At September 30, 1998 and 1997, equipment leased under capital 
leases are recorded in the consolidated Balance Sheet as follows:

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30
                                                   -----------------------
                                                      1998         1997
                                                   ----------   ----------
         <S>                                       <C>          <C>
         Equipment                                 $1,011,422   $  995,570
         Less accumulated amortization                424,946      284,394
                                                   ----------   ----------
               Total                               $  586,476   $  711,176
                                                   ==========   ==========
</TABLE>

         Amortization of assets leased under capital leases is included in 
depreciation and amortization expense in the consolidated Statements of 
Operations.

         Future minimum lease payments as of September 30, 1998 are as 
follows:

<TABLE>
<CAPTION>
                                                           CAPITAL            OPERATING
                                                         -----------         -----------
         <S>                                             <C>                 <C>
         1999                                            $   148,469         $   741,954
         2000                                                112,214             741,179
         2001                                                 12,153             723,595
         2002                                                  1,851             716,539
         2003                                                    -0-             716,539
         Thereafter                                              -0-          53,919,556
                                                         -----------         -----------
                                                         $   274,687         $57,559,362
                                                                             ===========
               Less amount representing interest              22,907
                                                         -----------
               Present value of minimuml ease payments   $   251,780
                                                         ===========
</TABLE>

         Included in future minimum operating lease payments are rental costs 
associated with the real property under the lease at the Pioneer. 
Approximately 6 1/2 acres of the Pioneer property are subject to a 99 year 
ground lease, expiring in December 2078. Under the ground lease the Company 
is subject to an annual rental obligation of $700,000 per year, adjusted 
annually based on the Consumer Price Index. Additionally, beginning January 
1, 2004 and every ten years thereafter, the annual rent will be adjusted to 
an amount equal to 10% of the fair market value of the land subject to the 
ground lease, on an unimproved basis.

         In December 1997, the Pioneer purchased the gaming equipment 
previously subject to lease for approximately $1.2 million, as a result of 
which monthly rental expense for gaming equipment decreased by approximately 
$44,000.

         In March 1998, Santa Fe purchased gaming and other equipment 
previously subject to lease for approximately $10.7 million, as a result of 
which monthly rental expenses decreased approximately $300,000.


                                     49
<PAGE>

12.  STOCKHOLDERS' EQUITY (DEFICIENCY)

         The Company has outstanding redeemable exchangeable cumulative 
preferred stock. Prior to fiscal 1997, the Company satisfied the semi-annual 
dividend payments on its preferred stock through the issuance of paid in kind 
dividends. Commencing in fiscal 1997, dividends paid on the preferred stock, 
to the extent declared, must be paid in cash. No dividends were declared on 
the preferred stock in fiscal 1997 and 1998. Pursuant to the terms of the 
Certificate of Designation with respect to the preferred stock, dividends 
that are not declared are cumulative and accrue. The dividend rate per annum 
was equal to 8% of $2.14 for each share of preferred stock until September 
30, 1998, at which date the dividend rate increased to 11%. The dividend will 
continue to increase by an additional 50 basis points on each succeeding 
dividend payment date up to a maximum of 16% per annum. The accrued stock 
dividends have been recorded as an increase to the preferred stock account. 
The Company is a party to financing arrangements that restrict the Company's 
ability to declare and pay dividends or make distributions with respect to 
the Company's capital stock, which currently prohibit the payment of cash 
dividends on the preferred stock. As of September 30, 1998, the aggregate 
liquidation preference of the Preferred Stock was $21.9 million or $2.49 per 
share.

         At the election of the Company, the Preferred Stock is redeemable, 
in whole or in part, at any time and from time to time at a redemption price 
equal to the per share liquidation preference of $2.14 plus (i) an amount 
equal to all accrued but unpaid dividends, whether or not declared, plus (ii) 
under certain circumstances relating to asset dispositions and mergers, an 
additional amount determined in accordance with the Certificate of 
Designation of the Preferred Stock (the "Liquidation Preference"). 
Additionally, at the election of the Company, if any shares of Preferred 
Stock have not been redeemed on or prior to the tenth dividend payment date 
from the issuance of the Preferred Stock, September 30, 1998, such shares may 
be exchanged from time to time for Junior Subordinated Notes of the Company. 
The principal amount of the Junior Subordinated Notes, if issued, will be 
equal to the Liquidation Preference of the Preferred Stock for which such 
notes are exchanged. The Junior Subordinated Notes would mature on September 
30, 2008, and would bear interest at an annual rate of 11%, payable 
semi-annually. The Company is a party to financing agreements that prohibit 
the Company from exercising an option to exchange the Preferred Stock into 
Junior Subordinated Notes.

         The Company has accrued, but not paid, dividends payable on the 
Preferred Stock since September 30, 1996. Pursuant to the Certificate of 
Designation, because at least one full dividend payment has been accrued but 
not paid for two years, the holders of the Preferred Stock will be entitled, 
as a separate class, to elect two directors to the Company's board of 
directors at the next annual meeting of stockholders scheduled to be held in 
early 1999. The two directors to be elected by Preferred Stockholders will be 
in addition to the six directors to be elected by the holders of the 
Company's Common Stock. The Preferred Stockholders' right to elect two 
directors will continue until all dividend arrearages have been paid.

13.  STOCK OPTION PLAN

         The Company has a Key Employee Stock Option Plan (the "Stock Option 
Plan") providing for the grant of up to 619,535 shares of its common stock to 
key employees. The Stock Option Plan provides for both incentive stock 
options and non-qualified stock options. In October 1995, the Company 
canceled all outstanding options and issued 153,000 options at an exercise 
price of $3.00 per share. In 1996, options to acquire 6,250 were canceled. In 
February 1997, the Company canceled all outstanding options and issued 
146,750 options at an exercise price of $1.50. In 1997, options to acquire 
10,000 were canceled. During fiscal year ended September 30, 1998, 447,785 
options were granted. As of September 30, 1998, there were 584,535 options 
outstanding under the Stock Option Plan. No options were exercised during 
fiscal years 1998, 1997 and 1996. The outstanding options have an expiration 
date of February 2007.


                                      50
<PAGE>

         In December 1995, the Company adopted the 1995 Non-Employee Director 
Stock Option Plan (the "Non-Employee Director Plan") which provides for the 
grant of up to 100,000 shares of its common stock to the directors. Directors 
are automatically granted an option to purchase 12,500 shares of the common 
stock at an exercise price equal to the market value of such shares on the 
date of such election to the board. As of September 30, 1998, there were 
25,000 options outstanding under this plan. The outstanding options have an 
expiration date of February 2007.

          SFHI, SLVC and PHI (collectively, the "Subsidiaries"), have adopted 
subsidiary stock option plans (the "Subsidiary Plans"). The Subsidiary Plans 
provide for the grant of options by each of the Subsidiaries with respect to 
an aggregate of up to 10% of the outstanding shares of such Subsidiary's 
Common Stock to employees, non-employee directors, consultants or affiliates 
of the Company or the Subsidiaries. The purpose of the Subsidiary Plans is to 
enable the Subsidiaries, the Company and any subsidiaries of the Company or 
Subsidiaries to attract, retain and motivate their employees, non-employee 
directors, consultants and affiliates by providing for or increasing the 
proprietary interest of such persons in the Subsidiaries. Certain of the 
agreements under which the Company's long-term debt is issued provide that if 
the Company ceases to own, directly or indirectly, 100% of the outstanding 
capital stock of specified Subsidiaries, an event of default will occur or an 
offer to repurchase the debt must be made. As a result, the Subsidiary Plans 
may not be exercised if the exercise would result in a default, or require an 
offer to repurchase the outstanding debt, under any agreement with respect to 
long-term debt of the Company or any of its Subsidiaries. As of December 21, 
1998, no options had been granted under any Subsidiary Plans.

Accounting for stock-based compensation:

         In October 1995, the FASB issued SFAS No. 123,"Accounting for 
Stock-Based Compensation" ("SFAS 123"), which is effective for fiscal years 
beginning after December 15, 1995. Although SFAS 123 encourages an entity to 
measure compensation by applying the fair value method of accounting for 
employee stock-based compensation arrangements, it permits an entity to 
continue to account for employee stock-based compensation arrangements under 
the provisions of Accounting Principles Board Opinion 25 ("APB 25").

         The Company has elected to continue to account for stock-based 
compensation in accordance with APB 25. Under APB 25, generally only stock 
options that have intrinsic value at the date of grant are considered 
compensatory. Intrinsic value represents the excess, if any, of the market 
price of the stock at the grant date over the exercise price of the option. 
Under SFAS 123, all stock option grants are considered compensatory. 
Compensation cost is measured at the date of grant based on the estimated 
fair value of the options determined using an option pricing model. The model 
takes into account the stock price at the grant date, the exercise price, the 
expected life of the option, the volatility of the stock, expected dividends 
on the stock and the risk-free interest rate over the expected life of the 
option.

         The following table discloses the Company's pro forma net income and 
net income per share for 1998 and 1997 assuming compensation cost for 
employee stock options had been determined using the fair value-based method 
prescribed by SFAS 123. The table also discloses the weighted average 
assumptions used in estimating the fair value of each option grant on the 
date of grant using the Black-Scholes option pricing model, and the estimated 
weighted average fair value of the options granted. The model assumes no 
expected future dividend payments on Santa Fe Gaming's Common Stock for the 
options granted in both 1998 and 1997 (dollars in thousands, except per share 
data).


                                      51
<PAGE>
<TABLE>
<CAPTION>
                                                  1998           1997
                                            ----------     ----------
<S>                                         <C>            <C>
  Net income (loss):
         As reported                        $(63,859)      $(13,133)
         Pro forma                          $(64,067)      $(13,169)

  Net income (loss) per share:
         As reported                        $ (10.31)      $  (2.12)
         Pro forma                          $ (10.34)      $  (2.13)

  Weighted average assumptions:
         Expected stock price volatility       100.0%          85.0%
         Risk-free interest rate                 5.4%           6.0%
         Expected option lives (in years)        4.0            4.0
         Estimated fair value of options    $    .72       $    .98
</TABLE>

14.  FEDERAL INCOME TAXES

         The Company accounts for income taxes under SFAS 109. In accordance 
with SFAS 109, deferred income taxes reflect the net effects of (a) temporary 
differences between the carrying amounts of assets and liabilities for 
financial reporting purposes and the amounts used for income tax purposes, 
and (b) operating loss and tax credit carryforwards. Deferred income taxes of 
$11.0 million were recorded as of October 1, 1993 as a result of the purchase 
accounting associated with the Company's investment in a publicly traded 
partnership. The Company has recognized approximately $29.3 million in 
federal income tax benefit for financial reporting purposes based on book 
losses.

         The expense (benefit) for income taxes attributable to pre-tax 
income consisted of:

<TABLE>
<CAPTION>
         YEAR ENDED SEPTEMBER 30         1998          1997          1996
         -----------------------       -------       -------       -------
         (DOLLARS IN THOUSANDS)
<S>                                    <C>           <C>           <C>
         Current                       $   -0-       $   -0-       $   114
         Deferred                          -0-        (2,702)        8,352
                                       -------       -------       -------
         Total expense (benefit)       $   -0-       $(2,702)      $ 8,466
                                       =======       =======       =======
</TABLE>

         The expense (benefit) for income taxes attributable to pre-tax 
income differs from the amount computed at the federal income tax statutory 
rate as a result of the following:

<TABLE>
<CAPTION>
         YEAR ENDED SEPTEMBER 30         1998          1997          1996
         -----------------------       --------      -------       -------
         (DOLLARS IN THOUSANDS)
<S>                                    <C>           <C>           <C>
         Amount at statutory rate      $(21,820)     $(3,946)      $9,121
         Goodwill                        14,732          487          487
         Valuation Allowance              6,418          -0-          -0-
         Lobbying costs/Political
          contributions                      82          -0-           12
         Deferred tax credits               -0-          -0-         (699)
         Other                              588          757         (455)
                                       --------      -------       ------
                                       $    -0-      $(2,702)      $8,466
                                       ========      =======       ======
</TABLE>


                                      52
<PAGE>

The components of the deferred tax asset (liability) consisted of the following:

<TABLE>
<CAPTION>
         AT SEPTEMBER 30                                  1998        1997
         -----------------------------                 --------    --------
         (DOLLARS IN THOUSANDS)
<S>                                                    <C>         <C>
         DEFERRED TAX LIABILITIES
         Prepaid expenses                              $    947    $    961
         Fixed asset cost, depreciation
          and amortization, net                          12,132      11,672
         Capitalized interest                               -0-         953
         Original issue discount                             34          34
         Other                                            2,142       2,142
                                                       --------    --------
         Gross deferred tax liabilities                $ 15,255    $ 15,762
                                                       --------    --------
                                                       --------    --------

         DEFERRED TAX ASSETS
         Net operating loss carryforward               $ 19,550    $ 13,675
         Reserves for accounts and
          contracts receivable                              564         575
         Other                                              335         325
         Deferred payroll                                   443         407
         Tax credits                                        780         780
                                                       --------    --------
         Gross deferred tax assets                     $ 21,672    $ 15,762
                                                       ========    ========
         Net deferred tax asset (liability)
          before valuation allowance                   $  6,417    $    -0-
         Valuation Allowance                             (6,417)        -0-
                                                       --------    --------
         Net deferred tax asset (liability)            $    -0-    $    -0-
                                                       ========    ========
</TABLE>

         At September 30, 1998 the Company has a net operating loss 
carryforward for regular income tax purposes of approximately $57.5 million, 
which will fully expire by the year 2018. The Company recorded a valuation 
allowance to reduce the carrying value of the net deferred tax assets due to 
the uncertainty surrounding the utilization of the net operating losses.

15.  BENEFIT PLANS

         The Company has a savings plan (the "Plan") qualified under Section 
401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers 
substantially all of the Company's employees. The Company's matching 
contributions paid in 1998, 1997 and 1996 were $105,000, $96,000 and 
$106,000, respectively.

         The Company contributed to multi-employer pension plans under 
various union agreements to which SNC and HHI were a party. Contributions, 
based on wages paid to covered employees, were approximately $100,000 for the 
year ended September 30, 1996. The Company's share of any unfunded liability 
related to multi-employer plans, if any, is not determinable.

16.  RELATED PARTIES

         In November 1993, Mr. Lowden, Chairman of the Board, Chief Executive 
Officer and 57% stockholder of the Company, and Bank of America entered into 
a personal loan agreement, secured by a pledge of substantially all the 
common shares of the Company owned by Mr. Lowden.   Mr. Lowden advised the 
Company he repaid the entire loan balance in July 1998.


                                      53
<PAGE>

         From 1991 through 1993, LICO, a company wholly-owned by Mr. Lowden, 
borrowed an aggregate of $476,000 from a subsidiary of the Company, pursuant 
to an unsecured demand loan which bore interest at 2% over the prime rate. In 
1998, the amount outstanding under the loan including accrued interest was 
satisfied in full through the offset of amounts due Mr. Lowden under 
compensation arrangements.

17.  GAIN ON SALE OF ASSETS

             On October 2, 1995, the Company sold substantially all of the 
assets of the Sahara for $128 million in cash and exchanged 22 acres of land, 
a portion of which was utilized by the Sahara as a parking lot, for 27 acres 
of land just south of the Sahara on Las Vegas Boulevard. The Company recorded 
a pre-tax gain of $40.8 million in fiscal year 1996. The gain represents the 
sale price offset by the carrying value of the assets sold, estimated cost 
and expenses of the transaction, and net of the extinguishment of debt charge 
discussed below. In connection with the sale of the Sahara, the Company made 
a tender offer to purchase for cash all outstanding 12 1/8% First Mortgage 
Notes due August 1996 ("12 1/8% Notes") secured by a first deed of trust on 
the Sahara, at a price of $1,047 per $1,000 principal amount, plus accrued 
interest. The Company recorded an approximate $6.0 million charge for 
extinguishment of debt against the gain on the sale of the Sahara in the 
quarter ended December 31, 1995.

         In November 1996, the Company sold an option to acquire a 40-acre 
parcel located approximately eight miles south of the former Hacienda on Las 
Vegas Boulevard South for $2.8 million. Pursuant to the option agreement, the 
option holder exercised the option in February, 1997 to purchase the property 
for $350,000 in additional net proceeds to the Company. The Company reported 
a $730,000 gain on the sale in fiscal 1997.

18.  LOSS ON ASSET IMPAIRMENT

         In September 1998, in accordance with SFAS No. 121, the Company 
determined an impairment loss had occurred to the carrying value of the 
assets of the Pioneer in Laughlin, Nevada. On August 28, 1998, the California 
General Assembly, Senate and Governor approved legislation authorizing gaming 
operations pursuant to a form of compact. Prior to this date, California 
authorities considered gaming devices operated on Indian reservations to be 
illegal. On November 3, 1998, California voters approved Proposition 5, which 
expands the definition of gaming operations considered legal by the form of 
compact. Proposition 5 has been challenged in court and, as a result the 
Company does not know when it will become effective. However, Management 
believes this change in regulatory policy will further intensify the 
competitive environment in Laughlin, Nevada and adversely affect the outlook 
for longer term operating results for gaming operations in Laughlin, Nevada. 
Management's view of the Laughlin market indicated that the cash flows 
associated with Pioneer operations would not be sufficient to recover the 
carrying value of the Company's investment. Under the requirements of SFAS 
No. 121, an impairment charge of $44.0 million was recognized in the fourth 
quarter of fiscal 1998 to adjust to fair market value the carrying value of 
the Pioneer's fixed and intangible assets.

19.  OTHER EXPENSE

         During fiscal 1998, the Company incurred costs and expenses in 
connection  with a proposed offering of debt securities. In September 1998, 
the Company postponed proceeding with the proposed offering due to conditions 
in the financial markets. Accordingly the Company has recorded a $758,000 
charge to earnings for expenses of the proposed offering.

                                      54
<PAGE>

         In April 1994, SFHI purchased from Treasure Bay Gaming & Resorts 
Inc. ("Treasure Bay") for $10.0 million approximately 20% of Treasure Bay's 
common stock and 33 1/3% of Treasure Bay's preferred stock. The Company also 
unconditionally guaranteed the payment of $4.5 million of the indebtedness of 
Treasure Bay incurred to finance working capital in connection with the 
opening of Treasure Bay's casinos in Biloxi, Mississippi in April 1994 and in 
Tunica, Mississippi in May 1994, which indebtedness the Company acquired in 
December 1994. In connection with its stock purchase, SFHI entered into an 
agreement with Treasure Bay to manage both properties. However, in December 
1994, Treasure Bay notified the Company that Treasure Bay was assuming 
management control of Treasure Bay's properties and alleged that the Company 
was in default under the management agreement and had mismanaged the Treasure 
Bay properties. On January 10, 1995, Treasure Bay and its operating 
subsidiary, Treasure Bay Corp., filed for Chapter 11 relief in the United 
States Bankruptcy Court for the Southern District of Mississippi. On October 
7, 1996, the U.S. Bankruptcy Court for the Southern District of Mississippi 
denied confirmation of Treasure Bay management's confirmation plan. 
Subsequent to the denial of Treasure Bay's confirmation plan, the entire 
bankruptcy case was transferred to U.S. Bankruptcy Court of New Orleans, 
Louisiana. In July 1997, the U.S. Bankruptcy Court of New Orleans entered an 
order for confirmation of the Plan of Reorganization proposed by the 
debtor-in-possession of Treasure Bay. Santa Fe Gaming recorded a $12.6 
million writedown in fiscal 1994 and, based on factors relative to the 
bankruptcy proceedings, the Company recorded a $2.8 million pre-tax charge 
against income in the fourth quarter of fiscal 1996, in connection with its 
investment in Treasure Bay, its guarantee related to the working capital loan 
and its management contract.

20.  EXTRAORDINARY ITEMS

         The Company recorded an extraordinary gain of approximately $3.0 
million after tax in fiscal 1996 related to repurchases of 13 1/2% Notes in 
the quarter ended March 31, 1996. In January 1996 the Company completed the 
repurchase of an aggregate of $12.5 million principal amount of 13 1/2% Notes 
plus accrued interest. In addition, in March 1996 the Company completed the 
repurchase of $10.2 million principal amount of 13 1/2% Notes and accrued 
interest thereon. The 13 1/2% Notes acquired were submitted to the trustee for 
cancellation in satisfaction of the December 1997 sinking fund obligation.

         In January 1996 and August 1997, the Company completed the 
repurchase of an aggregate of $38.7 million principal amount of 11% Notes. 
The Company financed the repurchases with the net proceeds of private 
placements of an aggregate of $35 million principal amount of SLVC Notes 
issued by SLVC. The Company retired $5.6 million principal amount of the 11% 
Notes purchased and pledged the balance of $33.1 million principal amount 
held by the Company as collateral for the SLVC Notes. The Company recorded 
extraordinary gains of approximately $4.9 million after tax related to the 
debt repurchase in the quarter ended March 31, 1996 and of approximately $1.7 
million after tax related to the debt repurchase in the quarter ended 
September 30, 1997.

         In April 1997, the Company acquired $3.5 million principal amount of 
Subdebentures. The Company submitted $2.3 million in Subdebentures to the 
trustee for cancellation in satisfaction of the sinking fund payment due in 
June 1997. In addition, the Company submitted $1.2 million for cancellation 
in reduction of the balance due at maturity in June 1998. The Company 
recorded a $400,000 extraordinary gain net of amortization of debt discount 
and original issue cost and federal income tax of $300,000 on the purchase 
which is reported in the quarter ended June 30, 1997.


                                      55
<PAGE>

21.  CONTINGENCIES

Litigation:

         The Company and its predecessor, Sahara Casino Partners, L.P. are 
defendants in a class action lawsuit originally filed in the United States 
District Court of Florida, Orlando Division, entitled POULOS V. CAESAR'S 
WORLD, INC., ET AL., AHERN V. CAESAR'S WORLD, INC., ET AL. and SCHRIER V. 
CAESAR'S WORLD, INC., ET AL, along with a fourth action against cruise ship 
gaming operators and which have been consolidated in a single action now 
pending in the United States District Court, District of Nevada (the 
"Court"). Also named as defendants in these actions are many, of the largest 
gaming companies in the United States and certain gaming equipment 
manufacturers. Each complaint is identical in its material allegations. The 
actions allege that the defendants have engaged in fraudulent and misleading 
conduct by inducing people to play video poker machines and electronic slot 
machines based on false beliefs concerning how the machines operate and the 
extent to which there is actually an opportunity to win on a given play. The 
complaints allege that the defendants' acts constitute violations of the 
Racketeer Influenced and Corrupt Organizations Act and also give rise to 
claims for common law fraud and unjust enrichment, and seek compensatory, 
special consequential, incidental and punitive damages of several billion 
dollars.

         In response to the complaints, all of the defendants, including the 
Company, filed motions attacking the pleadings for failure to state a claim, 
seeking to dismiss the complaints for lack of personal jurisdiction and 
venue. As a result of those motions, the Court has required the Plaintiffs in 
the four consolidated cases to file a single consolidated amended complaint. 
Subsequent to Plaintiffs' filing of their consolidated amended complaint, the 
defendants refiled numerous motions attacking the amended complaint upon many 
of the bases as the prior motions. The Court heard the arguments on those 
motions and ultimately denied the motions. Plaintiffs then filed their motion 
to certify a class. Defendants have vigorously opposed the motion and the 
Court has not yet ruled on the motion to certify the class. If the Court 
denies the certification then the case cannot go forward as a class action. 
If the Court certifies a class then the parties will proceed to meet 
discovery.

         On December 12, 1994 the Company and SFHI filed a lawsuit in the 
Court, naming Treasure Bay officers A. Clay Rankin III, Joe N. Hendrix and 
Bernie Burkholder, and former officer Francis L. Miller as defendants in 
matters involving violations of Section 10(b) and Rule 10b-5 of the 
Securities Exchange Act, violation of Nevada state securities laws, fraud and 
negligent misrepresentation in connection with the Company's investment of 
$10 million in exchange for a 20% interest in Treasure Bay, and the Company's 
guarantee of $4.5 million of Treasure Bay's indebtedness. The defendants have 
filed answers to the complaint and discovery is continuing.

         On December 15, 1994 Francis L. Miller filed a lawsuit in the 
Mississippi Circuit Court, Second Judicial District, against the Company and 
SFHI, as well as Paul W. Lowden and Suzanne Lowden, alleging, among other 
things, that the Company made certain misrepresentations which induced 
Francis Miller to entrust the management of his investments in Treasure Bay's 
two Mississippi casinos to the Company and SFHI and to sell the Company and 
SFHI a 20% ownership interest in Treasure Bay. The lawsuit was subsequently 
amended to remove Suzanne Lowden as a defendant. The Company and SFHI filed a 
successful motion to transfer this case to the Court.

         The Court dismissed the Francis L. Miller lawsuit as originally 
filed in Mississippi Circuit Court. The Court permitted Mr. Miller to file 
the claims that he asserted in the dismissed action as counterclaims to the 
lawsuit filed by the Company against Mr. Miller et al. on December 12, 1994 
in the Court. The effect of this court initiated action was to combine the 
two lawsuits. The parties to the combined litigation have concluded most of 
the formal discovery involved in this case. A pre-trial order is expected to 
be entered in the case in March, 1999. The case is expected to go to trial in 
the late spring of 1999.


                                      56
<PAGE>

         In addition, the Company is subject to various lawsuits relating to 
routine matters incidental to its business. The Company does not believe that 
the outcome of such litigation, in the aggregate, will have a material 
adverse effect on the Company.

Other:

         On September 30, 1997, the United States Tax Court issued an adverse 
ruling applicable to hotels and casinos which provide meals to employees. The 
IRS has interpreted the Tax Court ruling to mean that nonqualifying employees 
are required to recognize income based on the fair value of meals in excess 
of the amount paid by the employee. Accordingly, employers may be liable for 
withholding and payroll taxes associated with the fair value of the meals 
provided to employees in excess of the amount paid by the employee. At this 
time, it is uncertain whether or not the Company will be liable for 
withholding and payroll taxes and penalties for failure to withhold related 
to the income excluded from nonqualifying employee wages for the meals it has 
provided.

         In February 1998, the Company amended its agreement with the owner 
of a recreational vehicle park, which purchased the rights and obligations 
under contracts with members of Camperland, a recreational vehicle park 
previously owned and operated by the Company. In accordance with the 
amendment, the Company (i) reconveyed a first deed of trust on 14 acres of 
vacant land owned by the existing park, which secured performance by the 
existing park's operators in connection with the assumption of the Camperland 
contracts, and (ii) was relieved of its obligation, in certain situations, to 
make payment of $750,000 under certain circumstances and of all performance 
obligations with regard to the Camperland contract.

22.  SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION

         Supplemental statement of cash flows information is presented below:

<TABLE>
<CAPTION>
                                                                 (AMOUNTS IN THOUSANDS)
                                                                1998      1997      1996
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
         Operating activities:
         Cash paid during the year for interest, net of
          amounts capitalized of $108, $204 and $0
          for 1998, 1997 and 1996, respectively               $23,355   $22,587   $25,676
                                                              =======   =======   =======

         Cash paid during the year for income taxes:          $   -0-   $   100   $   -0-
                                                              =======   =======   =======

         Investing and financing activities:
          Capital lease obligations incurred in
          connection with the acquisition of
          machinery and equipment                             $    22   $   208   $   161
                                                              =======   =======   =======

         Long-term debt incurred in connection with
          the acquisition of machinery and equipment          $11,160   $ 1,071   $    76
                                                              =======   =======   =======

         Preferred stock dividends at liquidation value:
         Accrued                                              $ 1,516   $ 1,516   $   -0-
                                                              =======   =======   =======
         Paid in kind                                         $   -0-   $   -0-   $ 1,432
                                                              =======   =======   =======
</TABLE>


                                      57
<PAGE>

23. SUBSEQUENT EVENTS

13 1/2% NOTES

         The 13 1/2% Notes were issued by PFC, the proceeds from which were 
loaned to PHI to acquire the Pioneer and are secured by an assignment of a 
first priority deed of trust on the Pioneer and are guaranteed by the 
Company. Interest is payable semi-annually on June 1 and December 1 at a rate 
of 13 1/2% per annum and the principal amount was due December 1, 1998. PFC 
did not pay the principal and accrued interest on the 13 1/2% Notes at 
maturity. The Company had $60 million of principal and approximately $2.7 
million and $4.1 million accrued interest due on the 13 1/2% Notes as of 
September 30, 1998 and December 1, 1998, respectively, which is presented as 
Debt Not Paid At Maturity in the consolidated Balance Sheet contained 
elsewhere herein.

         In November 1998, the Company received and accepted consents from 
holders of approximately 75% or $45.8 million principal amount of the 
outstanding 13 1/2% Notes pursuant to which (i) PFC agreed to file for relief 
under Chapter 11 of the United States Bankruptcy Code and to submit for 
confirmation a plan of reorganization that provides for issuance of new notes 
in satisfaction of the 13 1/2% Notes pursuant to the terms set forth in the 
Consent Solicitation, and (ii) the consenting holders agreed (a) to forbear 
until December 2000 from exercising rights or remedies arising as a result of 
the failure by PFC to pay principal and interest on the 13 1/2% Notes at the 
December 1, 1998 maturity date, or the failure by PHI to pay principal and 
interest on the intercompany mirror note from PHI to PFC at the December 1, 
1998 maturity date and (b) to vote to accept a plan of reorganization in a 
Chapter 11 bankruptcy case that provides for treatment of the 13 1/2% Notes 
substantially as set forth in the Consent Solicitation. However, pursuant to 
the indenture under which the 13 1/2% Notes were issued, holders of the 13 
1/2% Notes who did not furnish consents in the consent solicitation may take 
action individually against PFC for payment of the 13 1/2% Notes.

         Pursuant to the Consent Solicitation, in December 1998 PFC purchased 
on a pro-rata basis from all consenting holders, an aggregate $5.0 million 
principal amount of 13 1/2% Notes, plus accrued interest. PFC also expects to 
repurchase from non-consenting holders their pro-rata amount of 13 1/2% Notes 
(approximately $1.5 million) plus accrued interest thru December 1, 1998, 
upon confirmation of the plan of reorganization contemplated by the Consent 
Solicitation that PFC intends to submit for confirmation in the Chapter 11 
case. In addition, the Company provided collateral for its previously 
unsecured guarantee of the 13 1/2% Notes, through the pledge of stock of its 
subsidiaries SFHI, SR, HHI, SNC and Santa Fe Coffee Company, (collectively 
the "Pledged Companies"), and by the grant of liens on certain of its other 
assets.

         Although results of operations of the Pioneer have not been 
noticeably adversely impacted since the commencement of the Consent 
Solicitation in October 1998, no assurance can be given that the filing for 
relief under Chapter 11 by PFC, and potentially by PHI, the Company and other 
subsidiaries of the Company, will not have a material adverse affect on the 
operations and financial condition of the Pioneer. Management does not 
believe the filing for relief or the contemplated plan of reorganization will 
materially effect operating results at the Pioneer. However, no assurance can 
be given that the anticipated bankruptcy case will not adversely affect the 
Pioneer, the Company or its other subsidiaries, including PHI.

         Pursuant to the plan of reorganization, PFC will issue a principal
amount of 13 1/2% First Mortgage Notes due 2006 (together with the PIK Notes, as
defined below, the "New Notes") equal to the principal amount of all outstanding
13 1/2% Notes plus accrued interest as of December 1, 1998. The New Notes will
bear interest at a rate equal to 13 1/2% per annum. Interest on the New Notes
will be payable semiannually, on June 1 and December 1 of each year and will
accrue from the date following the Issue Date. The New Notes will mature on
December 1, 2006. PFC will have the right to pay in kind up to 50% of the
interest payable on each interest payment date through the fourth interest
payment date following issuance through the issuance of additional New Notes
with a principal amount equal to 50% of the interest payable on such Interest
Payment Date (the "PIK Notes"). The terms of the PIK Notes will be identical to
those of the New Notes, including without limitation that interest on the PIK
Notes will be payable 50% in cash and 50% through the fourth interest payment
date following issuance through the issuance of additional PIK Notes. PFC
expects to satisfy


                                      58
<PAGE>

50% of each interest payment obligation through the fourth interest payment 
date following issuance through the issuance of PIK Notes, as a result of 
which there would be $65.2 million principal amount of New Notes outstanding 
at maturity, assuming no repurchase and retirement of New Notes. The New 
Notes will be redeemable at 100% of the principal amount plus accrued 
interest thereon, and unpaid to the date of purchase by PFC at any time. Upon 
the occurrence of certain events, PFC will be required to redeem all 
outstanding New Notes or make an offer to repurchase all or a portion of the 
outstanding New Notes, in each case at 100% of the aggregate principal amount 
thereof, plus accrued and unpaid interest thereon, if any, to the date of 
purchase. Moreover, one of the provisions of the New Notes will require that, 
on or before the later of December 31, 1999 and the date that is six months 
from the date a plan of reorganization is confirmed, (a) PFC must complete an 
offer to repurchase $7.5 million principal amount of New Notes or purchase in 
the open market or otherwise and retire at least $7.5 million principal 
amount of New Notes, and (b) SLVC must grant liens (subject to prior liens 
securing not more than $35 million of debt) for the benefit of the holders of 
the New Notes on substantially all of its assets. If such requirements are 
not satisfied by the specified date, an event of default will occur under the 
New Notes. The Company will guaranty the payment of principal of, and 
premium, if any, and interest on, the New Notes, and the guaranty will be 
secured by a pledge of the common stock of its Pledged Companies and by liens 
on certain of its other assets.

         The plan of reorganization will be subject to the approval of the 
bankruptcy court, and potentially of other creditors. No assurance can be 
given that the plan of reorganization to be submitted by PFC will be 
confirmed. Giving effect to the issuance of New Notes as of the beginning of 
the period and assuming that PFC elects to pay 50% of the interest payment 
obligations through the fourth interest payment date following issuance of 
the New Notes through the issuance of PIK Notes, the ratio of earnings before 
interest, taxes, depreciation and amortization, rents and corporate charges 
("EBITDA") to cash interest expense less rent for real property would have 
been 1.52-to-one, for the twelve months ended September 30, 1998. Upon 
commencement of the requirement that all interest be paid in cash on the 
fifth interest payment date, the ratio of EBITDA to cash interest expense on 
the New Notes is expected to be less than one-to-one (assuming no offers to 
repurchase New Notes have been made). Therefore, it is expected that PFC 
would not be able to make the cash interest payment on the fifth interest 
payment date, which would be an event of default under the indenture under 
which the New Notes will be issued.

         The payments made to repurchase the 13 1/2% Notes in December 1998 
and the grant of security interest pursuant to the Consent Solicitation may 
be avoidable as a preference and could be subject to recovery by a trustee in 
bankruptcy, an official creditors' committee, other representatives of 
creditors of PFC or PHI, or PFC or PHI as debtors in possession under the 
Bankruptcy Code within one year of the payments. If the payments were 
successfully challenged as preferences, holders would be required to return 
the funds received, together with interest thereon in a rate determined by 
the court, or would be precluded from receiving any distribution on account 
of such holders' 13 1/2% Notes.

         It is possible that three or more holders of the 13 1/2% Notes could 
file an involuntary petition under the Bankruptcy Code with respect to PFC 
prior to PFC filing for relief under Chapter 11. If PFC were to become a 
debtor in a case under the Bankruptcy Code (whether a case were commenced 
voluntarily or involuntarily), it is possible that PHI and the Company would 
file for relief under Chapter 11 of the Bankruptcy Code. The commencement of 
a voluntary case under the Bankruptcy Code by the Company or certain 
circumstances related to an involuntary case under the Bankruptcy Code with 
respect to the Company will cause the automatic acceleration of outstanding 
indebtedness of subsidiaries of the Company, SFHI and SLVC, all of which 
indebtedness is guaranteed by the Company. If acceleration were to occur, the 
Company would expect to negotiate with the creditors of SFHI and SLVC 
regarding a rescission of the acceleration. However, if the creditors holding 
the indebtedness were not to rescind the acceleration, it is likely that SFHI 
and SLVC would file for relief under Chapter 11 of the Bankruptcy Code.


                                      59
<PAGE>

SIERRA NOTE:

         In October 1998, the Company amended the terms of the Sierra Note to 
extend the maturity date to December 2000, provide for a principal reduction 
of $90,000 upon amendment, to add certain mandatory prepayment requirements 
and to require interest only payments until the maturity date. In accordance 
with the amendment, mandatory principal payments are required, if and when, 
and in an amount which equals the percentage of principal amount of Pioneer 
Notes retired.

EQUIPMENT NOTES:

         In December 1998, SFHI  modified the terms of a $4.9 million 
Equipment Note. The amendment  provides for monthly principal and interest 
payments in an amount of $124,000 and a balloon payment of approximately $2.0 
million at maturity in April 2001, in exchange for a discount on the face 
amount of the note to approximately $4.5 million.


                                      60
<PAGE>


24. SUPPLEMENTAL STATEMENT OF  SUBSIDIARY INFORMATION -
       FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998, 1997 AND 1996


     THE COMPANY'S PRIMARY OPERATIONS ARE IN THE HOTEL/CASINO INDUSTRY AND IN 
FISCAL YEARS 1998, 1997 AND 1996 WERE CONDUCTED THROUGH PHI AND SFHI. "OTHER" 
BELOW INCLUDES FINANCIAL INFORMATION FOR THE COMPANY'S OTHER OPERATIONS 
BEFORE ELIMINATING ENTRIES.  IN ADDITION TO THE FINANCIAL INFORMATION FOR THE 
TWELVE MONTHS ENDED SEPTMBER 30, 1998, 1997 AND 1996, AS SET FORTH IN THE 
TABLE BELOW, SEE NOTES 2, 4 AND 7 FOR ADDITIONAL DISCUSSION OF SUBSIDIARY 
OPERATIONS.

<TABLE>

(dollars in thousands)             YEAR           PHI             SFHI             OTHER         ELIMINATIONS      TOTAL
----------------------             ----           ---             ----             -----         ------------      -----
<S>                               <C>          <C>               <C>              <C>            <C>              <C>
OPERATING REVENUES                 1998        $ 40,663          $71,520          $ 1,598         $  (932)        $112,849
                                               ========          =======          =======         =======         ========
                                   1997        $ 40,839          $62,706          $ 2,972         $(1,528)        $104,989
                                               ========          =======          =======         =======         ========
                                   1996        $ 44,415          $61,653          $46,290         $(3,926)        $148,432
                                               ========          =======          =======         =======         ========
                                  
 OPERATING INCOME (LOSS)           1998        $(44,998)         $12,241          $(2,806)        $  (650)        $(36,213)
                                               ========          =======          =======         =======         ========
                                   1997        $     90          $ 5,678          $   341         $(1,045)        $  5,064
                                               ========          =======          =======         =======         ========
                                   1996        $  1,729          $   935          $40,603         $(2,117)        $ 41,150
                                               ========          =======          =======         =======         ========
                                  
 INTEREST EXPENSE                  1998        $  8,139          $14,072          $ 3,811         $  (650)        $ 25,372
                                               ========          =======          =======         =======         ========
                                   1997        $  8,700          $13,280          $ 1,673         $(1,045)        $ 22,608
                                               ========          =======          =======         =======         ========
                                   1996        $  9,371          $13,476          $ 2,447         $  (872)        $ 24,422
                                               ========          =======          =======         =======         ========
                                  
 DEPRECIATION AND AMORTIZATION     1998        $  5,604          $ 6,002          $ 2,118                         $ 13,724
                                               ========          =======          =======         =======         ========
                                   1997        $  5,583          $ 5,240          $   334                         $ 11,157
                                               ========          =======          =======         =======         ========
                                   1996        $  5,878          $ 8,063          $   128                         $ 14,069
                                               ========          =======          =======         =======         ========
                                  
 RENTS                             1998        $    840          $ 1,250                                          $  2,090
                                               ========          =======          =======         =======         ========
                                   1997        $  1,024          $ 3,022                                          $  4,046
                                               ========          =======          =======         =======         ========
                                   1996        $    737          $   455                                          $  1,192
                                               ========          =======          =======         =======         ========
                                  
 CAPITAL EXPENDITURES              1998        $  2,662          $14,137          $    83                         $ 16,882
                                               ========          =======          =======         =======         ========
                                   1997        $    949          $ 1,422          $   475                         $  2,846
                                               ========          =======          =======         =======         ========
                                   1996        $  1,291          $ 3,518          $(2,802)                        $  2,007
                                               ========          =======          =======         =======         ========
                                  
 IDENTIFIABLE ASSETS               1998        $ 47,561          $89,725          $56,884         $(1,245)        $192,925
                                               ========          =======          =======         =======         ========
                                   1997        $107,629          $76,635          $33,277         $(1,245)        $216,296
                                               ========          =======          =======         =======         ========
                                   1996        $116,439          $80,156          $33,307         $(1,245)        $228,657
                                               ========          =======          =======         =======         ========

</TABLE>


                                                 61

<PAGE>

25.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
For the Year Ended September 30,
<TABLE>
<CAPTION>

(dollars in thousands, except per share)      1998         1997
----------------------------------------   ---------    ---------
<S>                                        <C>          <C>
Revenues
  First Quarter                            $  27,359    $  25,408
  Second Quarter                              28,671       27,482
  Third Quarter                               28,839       27,516
  Fourth Quarter                              27,980       24,583
                                           ---------    ---------
                                           $ 112,849    $ 104,989
                                           =========    =========

Operating Income (Loss)
  First Quarter                            $   1,607    $     571
  Second Quarter                               2,108        2,984
  Third Quarter                                2,691        2,743
  Fourth Quarter                             (42,619)      (1,234)
                                           ---------    ---------
                                           $ (36,213)   $   5,064
                                           =========    =========

Net Loss before
extraordinary item
  First Quarter                            $  (4,470)   $  (3,470)
  Second Quarter                              (3,885)      (1,927)
  Third Quarter                               (4,030)      (2,351)
  Fourth Quarter                             (49,958)      (5,965)
                                           ---------    ---------
                                           $ (62,343)   $ (13,713)
                                           =========    =========

Net Loss before
extraordinary net
  per common share
  First Quarter                            $   (0.72)   $   (0.56)
  Second Quarter                           $   (0.63)       (0.31)
  Third Quarter                            $   (0.65)       (0.38)
  Fourth Quarter                           $   (8.06)       (0.96)
                                           ---------    ---------
                                           $  (10.06)   $   (2.21)
                                           =========    =========

Net Loss
  First Quarter                            $  (4,470)   $  (3,470)
  Second Quarter                              (3,885)      (1,927)
  Third Quarter                               (4,030)      (1,979)
  Fourth Quarter                             (49,958)      (4,241)
                                           ---------    ---------
                                           $ (62,343)   $ (11,617)
                                           =========    =========

Net Loss per
Common Share
  First Quarter                            $   (0.78)   $   (0.62)
  Second Quarter                               (0.69)       (0.37)
  Third Quarter                                (0.71)       (0.38)
  Fourth Quarter                               (8.13)       (0.75)
                                           ---------    ---------
                                           $  (10.31)   $   (2.12)
                                           =========    =========
</TABLE>

                                     62

<PAGE>

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

                Not applicable.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information regarding the directors and executive officers of 
the Company to be included in the Company's Proxy Statement for the 1999 
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein 
by reference.

ITEM 11. EXECUTIVE COMPENSATION

         The information regarding Executive Compensation to be included in 
the Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information regarding Security Ownership to be included in the 
Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information regarding Certain Relationships and Related 
Transactions to be included in the Proxy Statement is incorporated herein by 
reference.

                                    PART IV

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

  (a)    1. AND 2.  FINANCIAL STATEMENTS AND SCHEDULES

             The financial statements and schedules filed as part of this
             report are listed in the Index to Consolidated Financial
             Statements under Item 8.

  (b)    REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1998.

             The Registrant filed a Current Report on Form 8-K dated October 
             23, 1998 under Item 5. Other Events, reporting certain 
             information relating to the Sierra Construction Corp. Notes; the 
             recognition of an impairment loss of certain Pioneer Hotel, Inc. 
             assets and the commencement of an Exchange Offer and Consent 
             Solicitation of Pioneer Finance Corp.

             The Registrant filed a Current Report on Form 8-K dated November 
             16, 1998 under Item 5.  Other Events, reporting certain 
             amendments to the Exchange Offer and Consent Solicitation 
             Statement of Pioneer Finance Corp.

             The Registrant filed a Current Report on Form 8-K dated November 
             27, 1998 under Item 5. Other Events, reporting certain 
             information relating to the expiration of the Exchange Offer and 
             Consent Solicitation of Pioneer Finance Corp. and information 
             relating to the continued listing of the Company's common and 
             preferred stock on the American Stock Exchange. 


                                      63


<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>
                  The Registrant filed a Current Report on Form 8-K dated 
                  December 1, 1998 under Item 5. Other Events reporting 
                  certain information relating to an event of default under 
                  the Pioneer Finance Corp. 13 1/2% First Mortgage Bonds due 
                  December 1, 1998.

    (c)           EXHIBITS

 3.1              Articles of Incorporation and Bylaws of the Company 
                  (Previously filed with the Securities and Exchange 
                  Commission as an exhibit to the Company's   S-4 (No. 
                  33-67864) Registration Statement on Form 10-K dated June 
                  15, 1982 and incorporated herein by reference.)

 3.2              Certificate of Designation for Exchangeable Redeemable 
                  Preferred Stock. (Previously filed with the Securities and 
                  Exchange Commission as an exhibit to the Company's 
                  Registration Statement on Form S-4 (No. 33-67864) and 
                  incorporated herein by reference.)

 4.1              Indenture dated as of June 15, 1983 between Hacienda 
                  Resorts, Inc. and Valley Bank of Nevada, as Trustee, with 
                  respect to the Company's 10-1/4% Subordinated Sinking Fund 
                  Debentures due 1998. (Previously filed with the Securities 
                  and Exchange Commission as an exhibit to the Registration 
                  Statement of Hacienda Resorts, Inc. on Form S-1 (No. 
                  2-82796) and incorporated herein by reference.)

 10.1             Form of Indenture (the "Pioneer Indenture")between Pioneer 
                  Finance, the Partnership and Security Pacific National 
                  Bank, as Trustee, relating to the 13-1/2% First Mortgage 
                  Bonds Due 1998 of Pioneer Finance (the "Bonds").(1)

 10.2             Form of Bonds (included as an exhibit to the Pioneer 
                  Indenture).(1)

 10.3             Form of Purchase Money Note relating to the acquisition of 
                  the Pioneer Hotel and Gambling Hall (the "Pioneer 
                  Acquisition") (included as an exhibit to the Pioneer 
                  Indenture).(1)

 10.4             Form of Purchase Money Deed of Trust relating to the Bonds 
                  (included as an exhibit to the Pioneer Indenture).(1)

 10.5             Form of Guaranty of the Partnership relating to the Bonds 
                  (included in the Pioneer Indenture).(1)

 10.6             Form of Assignment Agreement from Pioneer Finance Corp. to 
                  the Trustee relating to the Bonds (included as an exhibit 
                  to the Pioneer Indenture). (1)

 10.7             Form of Subordination Provision relating to the Bonds 
                  (included as an Exhibit to the Pioneer Indenture).(1)

 10.8             Form of PARI PASSU Certificate relating to the Bonds 
                  (included as an exhibit to the Pioneer Indenture).(1)

 10.9             Acquisition Agreement relating to the Pioneer 
                  Acquisition.(1)

 10.10            Pioneer Ground Lease, as amended.(1)

 10.11            Conformed Lessor's Agreement dated as of November 16, 1988 
                  among Lessor, Lessee and Pioneer Operating Partnership 
                  relating to the Pioneer Acquisition.(1)
</TABLE>

                                     64

<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>

 10.12            Standard Form of Agreement between Owner and Contractor by 
                  and between Sahara Operating Partnership and Sierra 
                  Construction Corp.(3)

 10.13            Notes secured by liens on office building in Las Vegas, 
                  Nevada in the original principal amounts of $301,598.05, 
                  $23,337.96 and $649,063.99 bearing interest at 10%, 11% and 
                  13.5% per annum, respectively.(3)

 10.14            Promissory Note in the amount of $4,500,000 dated September 
                  1, 1987 from Sahara Las Vegas to the Partnership.(2)

 10.15            First Supplemental Indenture to Pioneer Indenture dated as 
                  of December 21, 1990 among Pioneer Finance, and Sahara 
                  Casino Partners, L.P. and Security Pacific National Bank. (4)

 10.16            Promissory Note in the amount of $2,760,079 dated October 
                  10, 1990 executed by Santa Fe Operating Limited Partnership 
                  in favor of Deutsche Credit Corporation, collateralized by 
                  equipment. (5)

 10.17            Lease agreement for signage dated April 29, 1991 between 
                  SNET as Lessor and Santa Fe Operating Limited Partnership 
                  as Lessee.  (5)

 10.18            Second Supplemental Indenture dated as of September 30, 
                  1993 between Sahara Resorts, Sahara Gaming Corporation and 
                  Nevada State Bank, as Trustee, with respect to 10-1/4% 
                  Subordinated Sinking Fund Debentures. (6)

 10.19            1993 Key Employee Stock Option Plan. (6)

 10.20            Lease Agreement, dated May 26, 1993, between City of 
                  Parkville, Missouri, and Sahara Casino Partners, L.P., was 
                  previously filed with the Commission as Exhibit 10.86 to 
                  the Company and Santa Fe Hotel Inc.'s Registration 
                  Statement on Form S-1 (No. 33-70286) (7)

 10.21            Amendment to Lease Agreement, made as of September 7, 1993, 
                  by Sahara Casino Partners, L.P., and the City of Parkville, 
                  Missouri (7)

 10.22            Second Amendment to Lease Agreement, made as of December 
                  27, 1993, by Sahara Parkville, Inc. and the City of 
                  Parkville, Missouri (7)

 10.23            Landlord's Consent, Estoppel Certificate and Third 
                  Amendment to Lease Agreement, entered into on December 27, 
                  1993, by and between the City of Parkville, Missouri, 
                  Sahara Parkville, Inc., IBJ Schroeder Bank & Trust Company, 
                  and Santa Fe Hotel Inc. (7)

 10.24            Fourth Amendment to Lease Agreement, made as of January 18, 
                  1994 by Sahara Parkville, Inc and the City of Parkville, 
                  Missouri (7)

 10.25            Fifth Amendment to Lease Agreement, made as of January 
                  18,1994, by Sahara Parkville, Inc. and the City of 
                  Parkville, Missouri (7)

 10.26            Sixth Amendment to Lease Agreement dated June 30, 1995 by 
                  Sahara Parkville, Inc., and the City of Parkville, 
                  Missouri. (8)

</TABLE>
                                      65

<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>

 10.27            Development Agreement by Sahara Parkville, Inc. and the 
                  City of Parkville, Missouri (7)

 10.28            Amendment to Development Agreement, dated January 18, 1994, 
                  by Sahara Parkville, Inc. and the City of Parkville, 
                  Missouri (7)

 10.29            Second Amendment to Development Agreement, dated October 
                  28, 1994, by Sahara Parkville, Inc. and the City of 
                  Parkville, Missouri  (7)

 10.30            Third Amendment to Development Agreements dated June 30, 
                  1995 by Sahara Parkville, Inc. and the City of Parkville, 
                  Missouri. (8)

 10.31            Agreement for Purchase and Sale dated as of January 10, 
                  1995 by and among Hacienda Hotel Inc., Sahara Gaming 
                  Corporation, as Guarantor, and William G. Bennett. (8)

 10.32            Assignment Agreement dated October 2, 1995 by and between 
                  Howard Hughes Properties, Limited Partnership and Sahara 
                  Las Vegas Corp. and Guaranty Agreement dated October 2, 
                  1995 by and between Howard Hughes Properties, Limited 
                  Partnership and Sahara Las Vegas Corp.(9)

 10.33            Lease Modification Letter dated August 24, 1995 by and 
                  between Wet N' Wild Nevada, Inc. and Sahara Corporation.(9)

 10.34            Note Purchase Agreement, dated as of January 16, 1996, by 
                  and among Sahara Gaming Corporation, Sahara Las Vegas Corp. 
                  and SunAmerica Life Insurance Company. (10)

 10.35            Deed of Trust, Fixture Filing and Financing Statement and 
                  Security Agreement with Assignment of Rents, dated as of 
                  January 16, 1996, by and among Sahara Las Vegas Corp., as 
                  trustor, Stewart Title of Nevada, as trustee, and 
                  SunAmerica Life Insurance Company, as beneficiary. (10)

 10.36            Security Agreement, dated as of January 16, 1996, by and 
                  between Sahara Las Vegas Corp. and SunAmerica Life 
                  Insurance Company. (10)

 10.37            Guaranty, dated as of January 16, 1996, made by Sahara 
                  Gaming Corporation in favor of SunAmerica Life Insurance 
                  Company. (10)

 10.38            Option Agreement by and between Santa Fe Gaming Corporation 
                  and Pat Clark dated November 13, 1996. (11)

 10.39            Sahara Las Vegas Corp. Tranche A Note due December 15, 
                  1999, dated July 31, 1997 (12)

 10.40            Casino Properties Guaranty dated July 29, 1997 (12)

 10.41            Sahara Resorts Guaranty dated July 29, 1997 (12)

 10.42            Hacienda Hawaiian Guaranty dated July 29, 1997 (12)

 10.43            First Amendment to Company Security Agreement dated July 
                  29, 1997 (12)
</TABLE>

                                     66

<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>
 10.44            Sahara Resorts Pledge Agreement dated July 29, 1997 (12)

 10.45            Company Pledge Agreement dated July 29, 1997 (12)

 10.46            Casino Properties Pledge Agreement dated July 29, 1997 (12)

 10.47            Hacienda Hawaiian Pledge Agreement dated July 29, 1997 (12)

 10.48            Second Amended and Restated Note Purchase Agreement dated 
                  as of November 25, 1997 among Registrant, SLVC and the 
                  holders named therein. (13)

 10.49            Form of Tranche A Promissory Note. (13)

 10.50            Form of Tranche B Promissory Note. (13)

 10.51            Second Amendment to Deed of Trust, Fixture filing and 
                  Financing Statement and Security Agreement with Assignment 
                  of Rents executed and delivered on November 25, 1997 by 
                  SLVC in favor of SunAmerica Life Insurance Company, as 
                  Collateral Agent. (13)

 10.52            Second Amendment to Security Agreement executed and 
                  delivered on November 25, 1997 between SLVC and SunAmerica 
                  Life Insurance Company, as Collateral Agent. (13)

 10.53            Deed of Trust, Fixture Filing and Financing Statement and 
                  Security Agreement with Assignment of Rents executed and 
                  delivered on November 25, 1997 by SLVC in favor of 
                  SunAmerica Life Insurance Company, Collateral Agent. (13)

 10.54            Second Amendment to Subordination, Non-Disturbance and 
                  Attornment Agreement dated November 25, 1997 among SLVC, 
                  Wet 'N Wild Nevada, Inc. And SunAmerica Life Insurance 
                  Company, as Collateral agent. (13)

 10.55            Second Amendment to the Environmental Indemnity Agreement 
                  executed and delivered on November 25, 1997 by Registrant 
                  and SLVC in favor of Sun America Life Insurance Company, as 
                  Collateral Agent. (13)

 10.56            Environmental Indemnity Agreement issued by Registrant and 
                  SLVC on November 25, 1997 in favor of SunAmerica Life 
                  Insurance Company, as Collateral Agent. (13)

 10.57            Consent to Amendment and Restatement delivered on November 
                  25, 1997 by Registrant, Sahara Resorts, Casino Properties, 
                  Inc. and Hacienda Hawaiian Properties, Inc. (13)

 10.58            Intercreditor Agreement dated as of November 25, 1997 among 
                  SunAmerica Life Insurance Company and Credit Suisse First 
                  Boston Mortgage Capital LLC. (13)

</TABLE>

                                            67

<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>
 10.59            Purchase Agreement by and between Santa Fe Gaming 
                  Corporation and Steve Allen dated November 21, 1997 (14)

 10.60            First Supplemental Indenture with respect to 11% First 
                  Mortgage Notes due 2000 between Santa Fe Hotel Inc., Santa 
                  Fe Gaming Corporation and IBJ Schroder Bank & Trust Company 
                  dated as of April 14, 1998 (15)

 10.61            Amended and Restated Note by an between Santa Fe Hotel 
                  Inc., Santa Fe Gaming Corporation in favor of PDS Financial 
                  Corporation-Nevada, as Collateral Agent dated April 14, 
                  1998 (15)

 10.62            Security Agreement between Santa Fe Hotel Inc. and PDS 
                  Financial Corporation-Nevada, as Collateral Agent dated 
                  April 14, 1998 (15)

 10.63            Amended and Restated Promissory Note by and between Santa 
                  Fe Hotel Inc., Santa Fe Gaming Corporation in favor of PDS 
                  Financial Corporation-Nevada, as Collateral Agent dated 
                  April 14, 1998 (15)

 10.64            Security Agreement between Santa Fe Hotel Inc. and PDS 
                  Financial Corporation-Nevada dated April 14, 1998 (15)

 10.65            Note Purchase Agreement dated as of April 14, 1998 among 
                  Santa Fe Gaming Corporation, Santa Fe Hotel Inc., 
                  SunAmerica Life Insurance Company and Credit Suisse First 
                  Boston Mortgage Capital LLC (15)

 10.66            Form of Promissory Note due December 15, 2000 (15)

 10.67            Deed of Trust, Fixture Filing and Financing Statement and 
                  Security Agreement with Assignment of Rents executed and 
                  delivered on April 14, 1998 by Santa Fe Hotel Inc. in favor 
                  of SunAmerica Life Insurance Company, as Collateral Agent. (15)

 10.68            Security Agreement dated as of April 14, 1998 by Santa Fe 
                  Hotel Inc. in favor of SunAmerica Life Insurance Company, 
                  as Collateral Agent. (15)

 10.69            Environmental Indemnity Agreement dated as of April 14, 
                  1998 by Santa Fe Hotel Inc. in favor of SunAmerica Life 
                  Insurance Company, as Collateral Agent.  (15)

 10.70            Guaranty dated as of April 14, 1998 by Santa Fe Gaming 
                  Corporation  in favor of SunAmerica Life Insurance Company, 
                  as Collateral Agent. (15)

 10.71            Subordination and Intercreditor Agreement dated as of April 
                  14, 1998 among SunAmerica Life Insurance Company, as 
                  Collateral Agent, Santa Fe Hotel Inc. and  IBJ Schroder 
                  Bank & Trust Company, as Trustee (15)

 10.72            Amended and Restated Promissory Note dated as of October 1, 
                  1998 by Santa Fe Gaming Corporation in favor of Sierra 
                  Construction Corp. (16)
</TABLE>

                                              68

<PAGE>
<TABLE>
<CAPTION>

  EXHIBIT
    NO.                            DESCRIPTION OF EXHIBIT
  -------                          ----------------------
  <C>             <S>
 10.73            Employment Agreement by and among Santa Fe Gaming 
                  Corporation and Thomas K.  Land dated October 1, 1998

 10.74            Security Agreement by and between Hacienda Hotel Inc. and 
                  IBJ Schroder Bank & Trust Company dated November 30, 1998.

 10.75            Security Agreement by and between Santa Fe Coffee Company 
                  and IBJ Schroder Bank & Trust Company dated November 30, 
                  1998.

 10.76            Security Agreement by and between Sahara Nevada Corp. and 
                  IBJ Schroder Bank & Trust Company dated November 30, 1998.

 10.82            Fourth Supplemental Indenture by and among IBJ Schroder 
                  Bank & Trust Company, Pioneer Finance Corp, Pioneer Hotel, 
                  Inc. and Santa Fe Gaming Corporation dated November 30, 
                  1998.

 10.83            Security Agreement by and between Santa Fe Gaming 
                  Corporation and IBJ Schroder Bank & Trust Company dated 
                  November 30, 1998.

 10.84            Pledge Agreement by and between Santa Fe Gaming Corporation 
                  and IBJ Schroder Bank & Trust Company dated November 30, 
                  1998.

 22.              Subsidiaries of the Company.  (6)

 23.1             Consent of Deloitte & Touche LLP

 27.              Financial Data Schedule
</TABLE>
                          FOOTNOTES TO EXHIBIT INDEX
                          --------------------------

(1)      Previously filed with the Securities and Exchange Commission as an
         exhibit to the Registration Statement on Form S-1 (No. 33-24589) of
         Pioneer Finance Corp., the Partnership and Pioneer Operating
         Partnership and incorporated herein by reference.

(2)      Previously filed with the Securities and Exchange Commission as an
         exhibit to the Partnership's Annual Report on Form 10-K for the year
         ended September 30, 1987 and incorporated herein by reference.

(3)      Previously filed with the Securities and Exchange Commission as an
         exhibit to the Partnership's Registration Statement on Form S-1 (No.
         33-13214) and incorporated herein by reference.

(4)      Previously filed with the Securities and Exchange Commission as an
         exhibit to post effective Amendment No. 5 to the Registration Statement
         on Form S-1 (No. 33-33031) of Sahara Finance Corp., Sahara Casino
         Partners, L.P., Sahara Operating Limited Partnership, Hacienda
         Operating Limited Partnership, Santa Fe Operating Limited Partnership,
         as filed on April 15, 1991 and incorporated herein by reference.


                                      69

<PAGE>

(5)      Previously filed with the Securities and Exchange Commission as an
         exhibit to post effective Amendment No. 8 to the Registration Statement
         on Form S- 1 (No. 33-33031) of Sahara Finance Corp., Sahara Casino
         Partners, L.P., Sahara Operating Limited Partnership, Hacienda
         Operating Limited Partnership, Santa Fe Operating Limited Partnership,
         as filed December 30, 1991.

(6)      Previously filed with the Securities and Exchange Commission as an
         exhibit to Sahara Gaming Corporation's Annual Report on Form 10-K for
         the year ended September 30, 1993.

(7)      Previously filed with the Securities and Exchange Commission as an
         exhibit to Sahara Gaming Corporation's Report on Form 10-K for the year
         ended September 30, 1994.

(8)      Previously filed with the Securities and Exchange Commission as an
         exhibit to Sahara Gaming Corporation's Report on Form 10-Q for the
         quarter ended June 30, 1995.

(9)      Previously filed with the Securities and Exchange Commission as an
         exhibit to Sahara Gaming Corporation's Report on Form 10-K for the year
         ended September 30, 1995.

(10)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Sahara Gaming Corporation's Report on Form 10-Q for the
         quarter ended December 31, 1995.

(11)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 10-K for the
         year ended September 30, 1996.

(12)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 10-Q for the
         quarter ended June 30, 1997.

(13)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 8-K dated
         December 4, 1997.

(14)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 10-Q for the
         quarter ended December 31, 1997.

(15)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 10-Q for the
         quarter ended March 30, 1998.

(16)     Previously filed with the Securities and Exchange Commission as an
         exhibit to Santa Fe Gaming Corporation's Report on Form 8-K dated
         October 23, 1998.



                                           70


<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.

                                       SANTA FE GAMING CORPORATION


December 28, 1998                      By:   /s/ Paul W. Lowden
                                           --------------------------
                                           Paul W. Lowden, President

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

<TABLE>

         SIGNATURE                             TITLE                                          DATE
         ---------                             -----                                          ----
<S>                              <C>                                                    <C>
/s/ Paul W. Lowden               Chairman of the Board and President
-----------------------             (Principal Executive Officer)                       December 28, 1998
Paul W. Lowden

/s/ William J. Raggio            Director
-----------------------
William J. Raggio                                                                       December 28, 1998


/s/ James W. Lewis               Director                                               December 28, 1998
-----------------------
James W. Lewis

/s/ Suzanne Lowden               Director                                               December 28, 1998
-----------------------
Suzanne Lowden

/s/ John Delaney                 Director                                               December 28, 1998
-----------------------
John Delaney

/s/ Thomas K. Land               Director and Chief Financial Officer
-----------------------             (Principal Financial and
Thomas K. Land                      Accounting Officer)

                                                                                        December 28, 1998

</TABLE>

                                             71