10-K405

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[ ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 for the fiscal year ended ________________.

                                        OR

[X]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 for the transition period from April 1, 1998 to
     December 31, 1998.

Commission file number 000-21640

                              STATION CASINOS, INC.
                              ---------------------
             (Exact name of registrant as specified in its charter)

             Nevada                                  88-0136443
             ------                                  ----------
(State or other jurisdiction of                  (I.R.S. Employer
 incorporation or organization)                  Identification No.)


                2411 West Sahara Avenue, Las Vegas, Nevada 89102
               -------------------------------------------------
               (Address of principal executive offices, Zip Code)

Registrant's telephone number, including area code: (702) 367-2411
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
                                                    $0.01 Par Value
                                                    $3.50 Convertible Preferred
                                                    Stock, $0.01  Par Value

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

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

The aggregate market value of the voting stock held by non-affiliates (all
persons other than executive officers or directors) of the registrant as of
March 3, 1999, based on the closing price per share as reported on the New York
Stock Exchange was $199,795,146.

As of March 3, 1999, the registrant has 35,312,192 shares of common stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrants' 1998 Annual Meeting of 
Stockholders to be held May 24, 1999 (which has not been made publicly 
available as of the date of this filing) are incorporated by reference into 
Part III.



                                   PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

         When used in this report and elsewhere by management from time to 
time, the words "believes," "anticipates," and "expects" and similar 
expressions are intended to identify forward-looking statements with respect 
to the financial condition, results of operations and the business of Station 
Casinos, Inc. (the "Company") and its subsidiaries including the expansion, 
development and acquisition projects, legal proceedings and employee matters 
of the Company and its subsidiaries. Certain important factors, including but 
not limited to, competition from other gaming operations, leverage, 
construction risks, the inherent uncertainty and costs associated with 
litigation, and licensing and other regulatory risks, could cause the 
Company's actual results to differ materially from those expressed in the 
Company's forward-looking statements. Further information on potential 
factors which could affect the financial condition, results of operations and 
business of the Company and its subsidiaries including, without limitation, 
the expansion, development and acquisition projects, legal proceedings and 
employee matters of the Company and its subsidiaries are included in the 
filings of the Company with the Securities and Exchange Commission. Readers 
are cautioned not to place undue reliance on any forward-looking statements, 
which speak only as of the date thereof. The Company undertakes no obligation 
to publicly release any revisions to such forward-looking statements to 
reflect events or circumstances after the date hereof.

GENERAL

         Station Casinos, Inc. is an established multi-jurisdictional gaming 
and entertainment enterprise that currently owns and operates four major 
hotel/casino properties and two smaller casino properties in Las Vegas, 
Nevada, a gaming and entertainment complex in St. Charles, Missouri and a 
gaming and entertainment complex in Kansas City, Missouri. The Company also 
owns and provides slot route management services in southern Nevada. 
Management's growth strategy includes the master-planned expansion of the 
Company's existing gaming facilities in Nevada and Missouri, as well as the 
evaluation and pursuit of additional acquisition or development opportunities 
in Nevada and other gaming markets.

         In Las Vegas, the Company owns and operates Palace Station Hotel & 
Casino ("Palace Station"), Boulder Station Hotel & Casino ("Boulder 
Station"), Texas Station Gambling Hall & Hotel ("Texas Station"), Sunset 
Station Hotel & Casino ("Sunset Station") and Tropicana Station, Inc., the 
operator of Wild Wild West Gambling Hall & Hotel ("Tropicana Station" and, 
together with Palace Station, Boulder Station, Texas Station, and Sunset 
Station, the "Las Vegas Casino Properties"). The Company also owns a 50% 
interest in Town Center Amusements, Inc. d.b.a. Barley's Casino & Brewing 
Company ("Barley's"). Palace Station is situated on 39 acres on Sahara Avenue 
adjacent to Interstate 15, and is near major attractions on the Las Vegas 
Strip and downtown Las Vegas. Boulder Station is situated on 46 acres along 
the Boulder Highway, immediately adjacent to Interstate 515, and is located 
on the opposite side of Las Vegas from Palace Station. Texas Station is 
located on 47 acres at the corner of Lake Mead Boulevard and Tonopah Highway 
in North Las Vegas. Sunset Station is strategically located on 105 acres on 
Sunset Road immediately adjacent to Interstate 515 and features a 
Spanish/Mediterranean-themed hotel/casino. Sunset Station is located eight 
miles southeast of Boulder Station. Each of the Company's Las Vegas casinos 
caters primarily to local Las Vegas residents. The Company markets the 
casinos together under the Station Casinos' brand, offering convenience to 
residents throughout the Las Vegas Valley with its strategically located 
properties.

         In Missouri, the Company owns and operates Station Casino Kansas 
City and Station Casino St. Charles. Station Casino Kansas City, is situated 
on 171 acres immediately east of the heavily traveled Interstate 435 bridge, 
seven miles east of downtown Kansas City. Station Casino Kansas City caters 
to local customers within the greater Kansas City area, as well as tourists 
from outside the region. Station Casino St. Charles is located on 52 acres 
situated immediately north of the Interstate 70 bridge in St. Charles, and is 
strategically located to attract customers from the St. Charles and greater 
St. Louis areas, as well as tourists from outside the region. Management 
employs the same operating strategies that have been successful at the 
Company's properties in the competitive Las Vegas market in order to secure a 
strong presence in the Missouri markets.

                                       2



OPERATING STRATEGY

         Management believes that the following key principles have been 
integral to its success as a gaming operator and intends to continue to 
employ these strategies at each of its various operations.

         TARGETED CUSTOMER BASE

         The Company's operating strategy emphasizes attracting and retaining 
customers primarily from the local and repeat visitor markets. The Las Vegas 
Casino Properties and Station Casino Kansas City and Station Casino St. 
Charles (collectively the "Casino Properties") attract customers from their 
local markets through innovative, frequent and high-profile promotional 
programs, focused marketing efforts and convenient locations, and from the 
repeat visitor market through aggressive marketing and the development of 
strong relationships with specifically targeted travel wholesalers. Although 
perceived value initially attracts a customer to the Casino Properties, 
actual value generates customer satisfaction and loyalty. Management believes 
that actual value becomes apparent during the customer's visit through an 
enjoyable, affordable and high-quality entertainment experience. Las Vegas, 
which is and has been one of the fastest growing cities in the United States, 
is characterized by a strong economy and demographics which include an 
increasing number of retirees and other active gaming customers. This 
strategy applies as well to the Missouri markets. The Company believes that 
its visitor patrons are also discerning customers who enjoy the Company's 
value-oriented, high-quality approach. This is particularly true in Las Vegas 
where patrons view the Company's hotel and casino product as a preferable 
alternative to attractions located on the Las Vegas Strip and downtown Las 
Vegas.

         PROVIDE A HIGH-VALUE EXPERIENCE

         Because the Company targets the repeat customer, management is 
committed to providing a high-value entertainment experience for its 
customers in its restaurants, hotels, casinos, and other entertainment 
amenities. Management believes that the value offered by restaurants at each 
of the Casino Properties is a major factor in attracting its local gaming 
customers, as dining is a primary motivation for casino visits by many 
locals. Through their restaurants, each of which has a distinct theme and 
style of cuisine, the Company's Casino Properties offer generous portions of 
high-quality food at reasonable prices. In addition, the Company's operating 
strategy focuses on slot and video poker machine play. The Company's target 
market consists of frequent gaming patrons who seek not only a friendly 
atmosphere and convenience, but also higher than average payout rates. 
Because locals and repeat visitors demand variety and quality in their slot 
and video poker machine play, the Casino Properties offer the latest in slot 
and video poker technology, including several games designed exclusively for 
the Company.

         As part of its commitment to providing a quality entertainment 
experience for its patrons, the Company is dedicated to ensuring a high level 
of customer satisfaction and loyalty by providing attentive customer service 
in a friendly, casual atmosphere. Management recognizes that consistent 
quality and a comfortable atmosphere stem from the collective care and 
friendliness of each employee. The Company, which began as a family-run 
business, has maintained close-knit relationships among its management and 
endeavors to instill among its employees this same sense of loyalty. Toward 
this end, management takes a hands-on approach through active and direct 
involvement with employees at all levels. An indication of the value of this 
approach may be seen by the number of Las Vegas residents seeking employment 
with the Company.

         MARKETING AND PROMOTION

         The Company employs an innovative marketing strategy that utilizes 
frequent, high-profile promotional programs in order to attract customers and 
establish a high level of name recognition. In addition to aggressive 
marketing through television, radio and newspaper advertising, the Company 
has created and sponsored such promotions as "Car-A-Day", "Paycheck Bonanza" 
and the "Great Giveaway," a popular football season contest. These promotions 
have become a tradition in the locals' market and have had a positive impact 
upon the Company's patronage during their respective promotion periods.

                                       3



LAS VEGAS CASINO PROPERTIES

         PALACE STATION

         Palace Station is situated on approximately 39 acres strategically 
located at the intersection of Sahara Avenue and Interstate 15, one of Las 
Vegas' most heavily traveled areas, and a short distance from McCarran 
International Airport and from major attractions on the Las Vegas Strip and 
downtown Las Vegas. With Palace Station's ample parking and its convenient 
location, customers are assured easy access to the hotel and casino, a factor 
that management believes is particularly important in attracting and 
retaining its customers. The Palace Station complex has approximately 287,000 
square feet of main facility area and features a turn-of-the-century railroad 
station theme. The complex includes a 1,028-room hotel, an approximately 
84,000-square foot casino, two swimming pools, 3,700 parking spaces 
(including 1,900 spaces in two multi-level parking structures), an 
approximately 20,000-square foot banquet and convention center, five 
full-service restaurants, several fast-food outlets, a 24-hour gift shop and 
a non-gaming video arcade. The casino offers approximately 2,085 slot and 
video poker machines, 43 gaming tables, a keno lounge, a poker room, a bingo 
parlor, and a race and sports book. The hotel features 587 rooms in a 
21-story tower. Guests in the tower enjoy a view of the Las Vegas Strip, 
downtown Las Vegas and the surrounding mountains. The remaining 441 hotel 
rooms are located in low-rise buildings adjoining the tower and casino.

         Palace Station's five full-service restaurants have a total of over 
1,225 seats. These restaurants offer a variety of high-quality food at 
reasonable prices, including the 24-hour Iron Horse Cafe (featuring a Chinese 
menu in addition to American fare), an all-you-can-eat buffet known as "The 
Feast," the Broiler (a steak and seafood restaurant), the Pasta Palace (an 
Italian restaurant) and the Guadalajara Bar & Grille (a Mexican restaurant). 
Palace Station guests also may take advantage of the Palace Saloon Piano Bar 
and the recently completed Trax Lounge, which provide music, dancing and 
entertainment.

         BOULDER STATION

         Boulder Station, which opened in August 1994, is situated on 
approximately 46 acres strategically located on the opposite side of Las 
Vegas from Palace Station. Patrons enjoy convenient access to this facility 
which is located on the Boulder Highway and immediately adjacent to the 
Interstate 515 interchange. Interstate 515 and the Boulder Highway are the 
major thoroughfares into Las Vegas for visitors from Arizona. Management 
believes that its highly visible location at this well-traveled intersection 
offers a competitive advantage relative to existing hotels and casinos 
located on the Boulder Highway. Boulder Station is located approximately four 
miles east of the Las Vegas Strip and approximately four miles southeast of 
downtown Las Vegas. The Boulder Station complex has approximately 337,000 
square feet of main facility area and, like Palace Station, features a 
turn-of-the-century railroad station theme. The complex includes a 300-room 
hotel, an approximately 89,000-square foot casino, 4,350 parking spaces 
(including a 1,900-space multi-level parking structure), five full-service 
restaurants, several fast-food outlets, a 280-seat entertainment lounge, 
eight additional bars, a high-quality 11-screen movie theater complex, a 
Kid's Quest child-care facility, a swimming pool, a non-gaming video arcade 
and a gift shop. The casino offers approximately 3,042 slot and video poker 
machines, 43 gaming tables, a keno lounge, a poker room, a bingo parlor and a 
race and sports book.

         Boulder Station's five full-service restaurants have a total of over 
1,400 seats. These restaurants offer a variety of high-quality food at 
reasonable prices. Restaurant themes and menus are similar to Palace 
Station's, allowing Boulder Station to benefit from the market acceptance and 
awareness of this product. Restaurants include the 24-hour Iron Horse Cafe 
(featuring a Chinese menu in addition to American fare), an all-you-can-eat 
buffet known as "The Feast," the Broiler (a steak and seafood restaurant), 
the Pasta Palace (an Italian restaurant), and the Guadalajara Bar & Grille (a 
Mexican restaurant). In addition to these restaurants which are similar to 
the offerings at Palace Station, Boulder Station offers fast-food outlets, 
including Pizza Palace, Viva Salsa, and China Express. Additionally, the 
Company leases space to the operators of such restaurants as Burger King, 
TCBY and Starbuck's Coffee to enhance the customers' dining selection. 
Boulder Station's restaurants and bars are located in open settings that are 
designed to intermingle the dining and gaming experience.

                                       4



         TEXAS STATION

         Texas Station, which opened in July 1995, is situated on 
approximately 47 acres strategically located at the corner of Lake Mead 
Boulevard and Tonopah Highway in North Las Vegas. The facility features a 
friendly, "down-home" Texas atmosphere, highlighted by its distinctive early 
Texas architecture. In February 1999, the Company completed a $55 million 
master-planned expansion of Texas Station. Upon completing this expansion, 
Texas Station has approximately 390,000 square feet of main facility area in 
a low rise complex plus a six story, 200-room hotel tower and approximately 
5,300 parking spaces (including two multi-level parking structures). The 
complex includes an approximately 95,000-square foot casino, five 
full-service restaurants, several fast-food outlets, a 10,000-square foot 
Kid's Quest child-care facility, a 132-seat entertainment lounge, seven 
additional bars, a high-quality 18-screen movie theater complex, a swimming 
pool, a non-gaming video arcade and a gift shop. The casino offers 
approximately 2,800 slot and video poker machines, 34 gaming tables, a keno 
lounge, a poker room, a bingo parlor and a race and sports book. Management 
believes that the theater complex provides a competitive advantage for the 
property and is an additional attraction that draws a significant number of 
patrons to the facility.

         Texas Station's five full-service restaurants have a total of over 
1,300 seats. These restaurant facilities offer a variety of high-quality food 
at reasonable prices, including the 24-hour Yellow Rose Cafe (a 24-hour 
coffee shop), the Stockyard Steakhouse, the Laredo Cantina and Cafe (a 
Mexican restaurant), the San Lorenzo (an Italian restaurant) and the Market 
Street Buffet (featuring seven different food stations). In addition to the 
Texas Station-themed restaurants, guests may also take advantage of the 
unique features of the Martini Ranch, the Whiskey Bar with a seven-foot high 
bronco rider, which rotates on a pedestal and may be viewed by patrons on all 
sides, the Garage Bar which features a 1976, fire engine red Cadillac 
Eldorado with seven-foot Texas long-horns on the hood, or the Armadillo Honky 
Tonk where a 3,000 piece cut glass armadillo is the centerpiece of a dance 
hall. The facility also offers fast-food outlets, including a pizza kitchen 
and ice cream shop. Management believes that the quality and variety of the 
restaurants offered at the facility are a major draw in the rapidly growing 
North Las Vegas and Summerlin markets.

         SUNSET STATION

         Sunset Station, which opened in June 1997, is located on an 
approximately 105-acre parcel at the intersection of Interstate 515 and 
Sunset Road. Multiple access points provide customers convenient access to 
the gaming complex and parking areas. Situated in the path of development 
along Interstate 515, the major thoroughfare into Las Vegas from Boulder City 
and Arizona, Sunset Station has prominent visibility from the freeway and the 
Sunset commercial corridor. Sunset Station is located approximately nine 
miles east of McCarran International Airport and eight miles southeast of 
Boulder Station. In November 1998, the Company completed a $34 million 
master-planned expansion of Sunset Station.

         Sunset Station is distinguished from the Company's other properties 
by its interior and exterior Spanish/Mediterranean-style architecture. The 
facility features approximately 428,000 square feet of main facility area, 
plus a 20-story, 467-room hotel tower and approximately 5,700 parking spaces 
(including a 2,000-space multi-level parking structure). The complex includes 
an approximately 110,000-square foot casino, with approximately 3,000 slot 
and video poker machines, 49 gaming tables, a keno lounge, a poker room, a 
bingo parlor and a race and sports book. The complex also includes seven 
full-service restaurants, themed to capitalize on the restaurants at the 
Company's other properties, an entertainment lounge, additional bars, a 
microbrewery, a gift shop, a non-gaming video arcade, tenant lease space for 
additional restaurants, a high-quality 13-screen movie theater complex, a 
Kid's Quest child-care facility, an outdoor swimming pool and an 
amphitheater, as well as several fast-food outlets and franchises.

         Sunset Station's seven full-service restaurants have a total of over 
2,100 seats featuring "live-action" cooking and simulated patio dining. These 
restaurant facilities offer a variety of high-quality food at reasonable 
prices, including the 24-hour Sunset Cafe (a 24-hour coffee shop), the Sonoma 
Cellar (a steakhouse), the Casa Del Sol (a seafood restaurant), the Capri (an 
Italian restaurant), Rosalitas (a Mexican restaurant), Sunset Brewing Company 
(a microbrewery) and The Feast Around the World, a live action buffet 
featuring Mexican, Italian, barbecue, American and Chinese cuisine. Guests 
may also take advantage of the Gaudi Bar, a centerpiece of the casino 
featuring over 8,000 square feet of stained-glass and a water light display. 
The facility also offers fast-food outlets including Fat Burger, Viva Salsa, 
and Ben & Jerry's Ice Cream.

                                       5



         Sunset Station is located on approximately 105 acres, of which only 
approximately 70 acres have been developed. The Company is currently 
evaluating potential development plans for the undeveloped property. Uses for 
the land could include a lifestyle entertainment retail center, as well as 
the development of several pads for various build-to-suit retail, restaurant 
and entertainment concepts. Timing and definitive plans have not yet been 
determined for such a development.

MISSOURI CASINO PROPERTIES

         STATION CASINO KANSAS CITY

         Station Casino Kansas City opened in January 1997. This facility is 
a master-planned gaming and entertainment destination facility featuring a 
historic Missouri riverboat theme and is strategically located to attract 
customers from the greater Kansas City area, as well as tourists from outside 
the region. The facility is located on an approximately 171-acre site 
immediately east of the heavily traveled Interstate 435 bridge, seven miles 
east of downtown Kansas City. Station Casino Kansas City's marketing programs 
are specifically designed to effectively target and capture repeat customer 
demand from the local customer base and also emphasize the strong visitor and 
overnight markets. Management believes that Station Casino Kansas City has 
specific advantages relative to other riverboat facilities in the region and 
that it is the premier facility in the Kansas City market. The site is 
adjacent to the Interstate 435 bridge, which supports traffic flow of 
approximately 71,000 cars per day. Interstate 435 is a six-lane, north-south 
expressway offering quick and easy accessibility to the site, and also 
provides direct visibility of the site.

         The Station Casino Kansas City facility features two continuously 
docked gaming vessels situated in a man-made protective basin. The two gaming 
facilities feature approximately 140,000 square feet of gaming space that 
offers approximately 3,149 slot and video poker machines and 162 gaming 
tables and a poker room. The Company believes the Station Casino Kansas City 
facility offers the first Las Vegas-style gaming experience in the Midwest. 
The gaming facilities are docked adjacent to a land-based entertainment 
facility with approximately 526,000 square feet of main facility area which 
includes a 200-room hotel, six full-service restaurants, several fast-food 
outlets, 11 bars and lounges, a 1,400-seat Grand Pavillion featuring headline 
entertainment, a Kid's Quest child-care facility, a high-quality 18-screen 
movie theater complex, a 5,700-square foot non-gaming video arcade and midway 
operated by Sega GameWorks, a gift shop and parking for 5,000 vehicles.

         Station Casino Kansas City's restaurants offer a variety of 
high-quality food at reasonable prices. Restaurants include an 
all-you-can-eat live action buffet "Feast Around the World," featuring 
Italian, Mexican, Chinese, barbecue, and traditional American fare, Bugatti's 
Little Italy Cafe, featuring fine Italian cuisine and a wine bar with an 
extensive selection, Pancho Villa's Cantina, featuring southwestern foods, 
the Orleans Seafood Co. and Oyster Bar, featuring fresh Louisiana style 
seafood, and the Hafbrauhaus Brewery & Biergarten featuring a wide selection 
of micro-brewed lagers, an assortment of American and Bavarian cuisine and 
live entertainment. In addition, Station Casino Kansas City leases space to a 
well-known Kansas City favorite, Arthur Bryant's Barbeque.

         STATION CASINO ST. CHARLES

         Station Casino St. Charles opened in May 1994. Station Casino St. 
Charles is situated immediately north of the Interstate 70 bridge in St. 
Charles on approximately 52 acres owned by the Company. The Station Casino 
St. Charles complex is strategically located to attract customers from the 
St. Charles and greater St. Louis area, as well as tourists from outside the 
region. The site is adjacent to the Interstate 70 bridge. Interstate 70 is a 
10-lane, east-west expressway offering quick and easy accessibility to and 
direct visibility of the Station Casino St. Charles site.

         Station Casino St. Charles currently features two gaming vessels, a 
292-foot long by 74-feet wide gaming riverboat known as "The Station Casino 
Belle" and a floating two-story, 105,000-square foot gaming and entertainment 
facility. The two current gaming vessels have 47,000 square feet of gaming 
space with capacity for 4,000 gaming customers, as well as food and beverage 
and other related facilities. Station Casino St. Charles offers approximately 
1,878 slot and video poker machines, 66 gaming tables and a poker room. 
Station Casino St. Charles features a 250-seat all-you-can-eat buffet known 
as "The Feast," as well as an 80-seat specialty steakhouse known as "The 
Broiler." In addition to the casinos and restaurants, the facility offers 
seven bars, a fast-food court, an entertainment lounge, a lobby, a ticketing 
facility and a gift shop.

                                       6



         In furtherance of the Station Casino St. Charles master plan, the 
Company completed construction of a new elevated roadway and a 4,000-space 
five-story parking structure in May 1996. The parking facility is constructed 
above the existing flood plain. The elevated roadway and parking structure 
provide improved access to the current and new gaming facilities and 
significantly diminish Station Casino St. Charles' susceptibility to closure 
during the spring flooding season.

         In the fall of 1996, the Company commenced an expansion project at 
Station Casino St. Charles which included the building of a backwater basin 
containing two new gaming vessels and a new retail and entertainment complex. 
Since March 31, 1998, construction on the Station Casino St. Charles 
expansion project has been halted.

         The Company currently believes the Station Casino St. Charles 
expansion project as originally contemplated fulfills a strategic need in the 
St. Louis, Missouri market. While the Company desires to complete and operate 
these new facilities, circumstances may arise in the future, including the 
lack of available financing, a downturn in the demand for gaming facilities 
or increased regulatory requirements unique to the state of Missouri and more 
attractive uses of available capital, which may prevent the expansion project 
from being completed as originally designed, if at all. In this event, 
certain costs incurred to date may be deemed to possess little or no value 
necessitating the recognition of an impairment loss in the period such a 
determination is made. The impairment loss could include substantially all of 
the amount invested in the Station Casino St. Charles expansion project.

         As of December 31, 1998, the Company had invested approximately 
$169.0 million related to the Station Casino St. Charles expansion project. 
The Company does not anticipate that any major construction activity on the 
expansion project will resume in the near term.

THE SOUTHWEST COMPANIES

         The Company provides slot route management services to numerous food 
and beverage establishments and commercial businesses in Southern Nevada 
through its subsidiary, Southwest Gaming Services, Inc. ("SGSI"). SGSI 
commenced its slot route business in southern Nevada in December 1990. 
Management combined its gaming experience with its route management abilities 
to capitalize on the rapidly expanding slot route business. SGSI has 
approximately 895 machines in service throughout southern Nevada.

EXPANSION STRATEGY

         SELECTION CRITERIA

         Management believes that a highly visible central location, 
convenient access and ample parking are critical factors in attracting local 
patronage and repeat visitors. Additionally, sites must be large enough to 
support multi-phased master-planned growth. The Company selects sites that 
are centrally located within a dense population base so that the facility 
cannot be cutoff from its primary market. These sites generally have been 
adjacent to high-traffic surface streets and interstate highways. Management 
believes that each of its casino properties' locations has provided the 
Company with a significant competitive advantage to attract its targeted 
customer base.

                                       7



         MASTER-PLANNED DEVELOPMENT

         Management's expansion strategy includes the master-planned 
expansion of its existing and future gaming locations. In designing project 
sites, the Company plans and engineers for multi-phased facility expansion to 
accommodate future growth and to allow the Company to develop dominant 
properties in each market place. A project's master-planned design typically 
allows the option of adding hotel rooms, casino space and non-gaming 
entertainment such as movie theaters, additional restaurants, retail shops, 
and various other entertainment venues.

        EXPANSION, DEVELOPMENT AND ACQUISITION OPPORTUNITIES

         The Company continually evaluates the timing and scope of its 
master-planned developments at each of its properties and may determine from 
time to time to expand the scope of, improve on or suspend the implementation 
of its master plans. These decisions are dependent upon the availability of 
financing, competition and future economic and gaming regulatory 
environments, many of which are beyond the Company's control.

         The Company also evaluates other development and acquisition 
opportunities in current and emerging gaming markets, including land-based, 
dockside, riverboat and Indian gaming opportunities. The Company's decision 
whether to proceed with any new gaming development or acquisition opportunity 
is dependent upon future economic and regulatory factors, the availability of 
financing and competitive and strategic considerations, many of which are 
beyond the Company's control.

COMPETITION

         The gaming industry includes land-based casinos, dockside casinos, 
riverboat casinos, casinos located on Indian reservations and other forms of 
legalized gaming. There is intense competition among companies in the gaming 
industry, many of which have significantly greater resources than the 
Company. Certain states have recently legalized, and several other states are 
currently considering legalizing, casino gaming in designated areas. 
Legalized casino gaming in such states and on Indian reservations will 
provide strong competition to the Company and could adversely affect the 
Company's operations, particularly to the extent that such gaming is 
conducted in areas close to the Company's operations. Proposition 5, a 
California ballot initiative passed by voters in California on November 3, 
1998, permits Indian tribes who enter into agreements with the State of 
California to conduct certain gaming activities including horse race 
wagering, gaming devices (including slot machines), banked card games and 
lotteries. Various opposition factions have challenged the implementation of 
Proposition 5 by filing an action in the Supreme Court of California. On 
December 2, 1998, the California Supreme Court granted a stay on the 
implementation of Proposition 5 pending consideration of arguments on 
constitutionality grounds. The California Supreme Court's decision is not 
expected until the summer of 1999. It is not certain when Proposition 5 will 
be effective or how it will affect the Company; however, because visitors 
from California make up Nevada's largest visitors market, if Proposition 5 is 
implemented, increased competition from Indian gaming may result in a decline 
in the Company's revenues and may have a material adverse effect on the 
Company's business.

         The Las Vegas Casino Properties face competition from all other 
casinos and hotels in the Las Vegas area, including to some degree, from each 
other. Such competition includes at least nine hotel/casinos targeted 
primarily towards local residents and repeat visitors, as well as numerous 
non-hotel gaming facilities targeted towards local residents. The Company 
competes with other locals oriented hotel/casinos by focusing on repeat 
customers and attracting these customers through innovative marketing 
programs. The Company's value-oriented, high-quality approach is designed to 
generate repeat business. Additionally, the casino properties are 
strategically located and designed to permit convenient access and ample 
parking, which are critical factors in attracting local visitors and repeat 
patrons. Currently, there are approximately 30 major gaming properties 
located on or near the Las Vegas Strip, 14 located in the downtown area and 
several located in other areas of Las Vegas. In addition, four new 
hotel/casinos and three hotel/casino expansions are under construction or 
have been announced, which will add approximately 9,500 rooms to the Las 
Vegas area over approximately the next two years. Three of the new 
hotel/casinos are major resorts with a theme and an attraction which are 
expected to draw significant numbers of visitors. These new facilities could 
have a positive effect on the Las Vegas Casino Properties through increased 
local employment and if more visitors are drawn to Las Vegas. However, major 
additions, expansions or enhancements of existing properties or the 
construction of new properties by competitors, could also have a material 
adverse effect on the businesses of the Las Vegas Casino Properties. The 
additional capacity has had little, if

                                       8



any, impact on the Las Vegas Casino Properties' hotel occupancy or casino 
volume to date, although there can be no assurance that hotel occupancy or 
casino volume will not be adversely affected in the future.

         The Las Vegas Casino Properties face more direct competition from 
nine hotel/casinos primarily targeted to the local and the repeat visitor 
markets. Some of these competitors have completed expansions and existing 
competitors and new entrants into these markets are in the planning stages or 
under construction on other projects. Other gaming operators own undeveloped 
properties on which they could develop gaming facilities in the immediate 
vicinity of Texas Station and Sunset Station. At least one operator is 
exploring development opportunities in the immediate vicinity of Sunset 
Station. In June 1999, The Resort at Summerlin Hotel and Casino ("Summerlin") 
is expected to open in northwest Las Vegas approximately 5 miles from Texas 
Station. Although not targeted at the local market, Summerlin will compete 
indirectly with Texas Station because of its close proximity to Texas 
Station. Although the Company has competed strongly in these marketplaces, 
there can be no assurance that additional capacity will not have a negative 
impact on the Company.

         The Missouri Gaming Commission has been empowered to determine the 
number of gaming licenses supportable by the region's economic situation. As 
of December 31, 1998, 37 applications for gaming licenses had been filed with 
the State of Missouri, including nine applications to operate in the St. 
Louis marketplace. Ten licensees are currently licensed in Missouri, in St. 
Louis, Kansas City, St. Joseph and Caruthersville, Missouri. Station Casino 
St. Charles competes primarily with other gaming operations in and around St. 
Louis, Missouri. Currently, in addition to Station Casino St. Charles, there 
are five competitors operating in the St. Louis market. In particular, 
Station Casino St. Charles directly competes with two facilities located in 
Maryland Heights which opened in 1997. Such direct competition is due to the 
Maryland Heights facilities' size, quality and close proximity. The Company 
has experienced a decline in revenues at Station Casino St. Charles since the 
opening of the Maryland Heights facilities. The Company has taken steps that 
management believes will mitigate the effects of such competition and the 
decline in revenues has stabilized. However, in light of ever increasing 
competition, there can be no assurance as to the future performance of 
Station Casino St. Charles. Additionally, two of the five competitors 
operating in the St. Louis market are located in Illinois, which does not 
impose the $500 loss limit imposed in Missouri. Gaming also has been approved 
by local voters in jurisdictions near St. Louis, including St. Charles, 
Jefferson City and other cities and counties along the Mississippi and 
Missouri Rivers. Any new gaming operations developed near St. Louis would 
likely provide significant competition to Station Casino St. Charles. Gaming 
laws in surrounding states and in other areas may be amended in ways that 
would increase the competition to Station Casino St. Charles. This increasing 
competition could have a material adverse effect on the Company's business.

         Recently, Davis Gaming was selected for investigation for licensure 
for a gaming operation which it intends to develop in Boonville, Missouri, a 
city in central Missouri near Jefferson City and Columbia, and Mark Twain 
Casino L.L.C. was selected for investigation for licensure for a gaming 
operation which it intends to develop in LaGrange, Missouri, a city in 
northeastern Missouri. Neither area is currently served by a Missouri gaming 
facility. The Davis Gaming Project has proceeded and has received preliminary 
site and development approval from the Missouri Gaming Commission. The Mark 
Twain Casino Project has not progressed since the initial selection decision.

         Station Casino Kansas City competes primarily with other gaming 
operations in and around Kansas City, Missouri. In addition to Station Casino 
Kansas City, there are three other gaming facilities currently operating in 
the Kansas City market. Earlier entrants to the Kansas City market may have 
an advantage over the Company due to their ability to establish early market 
share. Gaming has been approved by local voters in jurisdictions near Kansas 
City, including St. Joseph (which currently has one riverboat gaming 
operation), Jefferson City and other cities and counties along the Missouri 
River. Since the opening of Station Casino Kansas City, Sam's Town, the 
closest gaming development to Station Casino St. Charles, closed and Boyd 
Gaming, the owner of Sam's Town, sold most of Sam's Town's assets to 
Harrah's, the operator of Harrah's-North Kansas City, the next closest gaming 
operator in the area. Any new gaming operations developed near Kansas City 
would likely provide significant competition to Station Casino Kansas City.

         Several companies are engaging in riverboat gaming in states 
neighboring Missouri. Illinois sites, including Alton, East St. Louis, and 
Metropolis, enjoy certain competitive advantages over Station Casino St. 
Charles because Illinois, unlike Missouri, does not impose limits on the size 
of losses and places fewer restrictions on the extension of credit to 
customers. In contrast, Missouri gaming law provides for a maximum loss of 
$500 per player on each cruise and prohibits the extension of credit (except 
credit cards and checks). Unlike Illinois gaming law, the Missouri gaming law 
places no

                                       9



limits on the number of gaming positions allowed at each site. As of December 
31, 1998, Illinois had approved a total of ten licenses; however, only nine 
licensees are operating riverboat gaming facilities. While riverboats 
currently are the only licensed form of casino-style gaming in Illinois and 
the number of licenses is restricted to ten, possible future competition may 
arise if gaming is legalized in or around Chicago, which was specifically 
excluded from the legislation permitting gaming in Illinois.

         The Company's Missouri gaming operations also compete to a lesser 
extent with the riverboat and floating gaming facilities in Mississippi, 
Louisiana, Iowa and Indiana. Like Illinois, neither Mississippi nor Louisiana 
gaming legislation imposes limits on wagers or losses. Gaming laws in these 
states and in other areas may be amended in ways that would increase the 
competition to the Company's Missouri gaming operations.

         To a lesser extent, the Company's operations compete with gaming 
operations in other parts of the state of Nevada, such as Reno, Laughlin and 
Lake Tahoe, with facilities in Atlantic City, New Jersey and other parts of 
the world and with state-sponsored lotteries, on-and-off-track pari-mutuel 
wagering, card parlors and other forms of legalized gambling.

REGULATION AND LICENSING

         NEVADA GAMING REGULATIONS

         The ownership and operation of casino gaming facilities, the 
operation of gaming device routes and the manufacture and distribution of 
gaming devices in Nevada are subject to: (i) the Nevada Gaming Control Act 
and the rules and regulations promulgated thereunder (collectively, the 
"Nevada Act"); and (ii) various local ordinances and regulations. The 
Company's gaming operations are subject to the licensing and regulatory 
control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada 
State Gaming Control Board ("Nevada Board"), the City of Las Vegas, the Clark 
County Liquor and Gaming Licensing Board (the "Clark County Board"), the City 
of North Las Vegas, the City of Henderson and certain other local regulatory 
agencies. The Nevada Commission, the Nevada Board, the City of Las Vegas, the 
Clark County Board, the City of North Las Vegas, the City of Henderson, and 
certain other local regulatory agencies are collectively referred to as the 
"Nevada Gaming Authorities."

         The laws, regulations and supervisory procedures of the Nevada 
Gaming Authorities are based upon declarations of public policy which are 
concerned with, among other things: (i) the prevention of unsavory or 
unsuitable persons from having a direct or indirect involvement with gaming 
at any time or in any capacity; (ii) the establishment and maintenance of 
responsible accounting practices and procedures; (iii) the maintenance of 
effective controls over the financial practices of licensees, including the 
establishment of minimum procedures for internal controls and the 
safeguarding of assets and revenues, providing reliable record keeping and 
requiring the filing of periodic reports with the Nevada Gaming Authorities; 
(iv) the prevention of cheating and fraudulent practices; and (v) providing a 
source of state and local revenues through taxation and licensing fees. 
Change in such laws, regulations and procedures could have an adverse effect 
on the Company's gaming operations.

         The Company's direct and indirect subsidiaries that conduct gaming 
operations in Nevada are required to be licensed by the Nevada Gaming 
Authorities. The gaming licenses require the periodic payment of fees and 
taxes and are not transferable. SGSI is licensed as a distributor and as an 
operator of a slot machine route. Palace Station Hotel & Casino, Inc. 
("PSHC"), Boulder Station, Inc. ("BSI"), Texas Station, Inc. ("TSI"), Sunset 
Station, Inc. ("SSI"), and Tropicana Station, Inc. ("TRSI") have received 
licenses to conduct nonrestricted gaming operations. Town Center Amusements, 
Inc. ("TCAI") has been licensed to conduct nonrestricted gaming operations at 
Barley's Casino & Brewing Company ("Barley's Casino"), a micro brewery and 
casino located in Southeast Las Vegas. The Company's ownership in TCAI is 
held through an intermediary company known as Green Valley Station, Inc. 
("GVSI") which is licensed as a member and Manager of TCAI. The Company is 
registered by the Nevada Commission as a publicly traded corporation (a 
"Registered Corporation") and has been found suitable to own the stock of 
PSHC, BSI, TSI, SSI, TRSI, GVSI, and SGSI. The Company is also licensed as a 
manufacturer and distributor. PSHC, BSI, TSI, SSI, TRSI, GVSI, and SGSI are 
each a corporate gaming licensee and TCAI is a limited liability company 
licensee (individually a "Gaming Subsidiary" and collectively the "Gaming 
Subsidiaries") under the terms of the Nevada Act. As a Registered 
Corporation, the Company is required periodically to submit detailed 
financial and operating reports to the Nevada Commission and the Nevada Board 

                                      10



and furnish any other information which the Nevada Commission or the Nevada 
Board may require. No person may become a stockholder or holder of an 
interest of, or receive any percentage of profits from the Gaming 
Subsidiaries without first obtaining licenses and approvals from the Nevada 
Gaming Authorities. The Company and the Gaming Subsidiaries have obtained 
from the Nevada Gaming Authorities the various registrations, findings of 
suitability, approvals, permits and licenses (individually, a "Gaming 
License" and collectively, the "Gaming Licenses") required in order to engage 
in gaming activities in Nevada.

         The Nevada Gaming Authorities may investigate any individual who has 
a material relationship to, or material involvement with, a Registered 
Corporation, such as the Company or the Gaming Subsidiaries, which hold a 
license, in order to determine whether such individual is suitable or should 
be licensed as a business associate of a Registered Corporation or a gaming 
licensee. Officers, directors and certain key employees of the Gaming 
Subsidiaries must file applications with the Nevada Gaming Authorities and 
may be required to be licensed or found suitable by the Nevada Gaming 
Authorities. Officers, directors and key employees of the Company who are 
actively and directly involved in gaming activities of the Gaming 
Subsidiaries may be required to be licensed or found suitable by the Nevada 
Gaming Authorities. The Nevada Gaming Authorities may deny an application for 
licensing for any cause which they deem reasonable. A finding of suitability 
is comparable to licensing, and both require submission of detailed personal 
and financial information followed by a thorough investigation. The applicant 
for licensing or a finding of suitability must pay all the costs of the 
investigation. Changes in licensed positions must be reported to the Nevada 
Gaming Authorities and in addition to their authority to deny an application 
for a finding of suitability or licensure, the Nevada Gaming Authorities have 
jurisdiction to disapprove a change in corporate position.

         If the Nevada Gaming Authorities were to find an officer, director 
or key employee unsuitable for licensing or unsuitable to continue to have a 
relationship with the Company or the Gaming Subsidiaries, the companies 
involved would have to sever all relationships with such person. In addition, 
the Nevada Commission may require the Company or the Gaming Subsidiaries to 
terminate the employment of any person who refuses to file the appropriate 
applications. Determinations of suitability or questions pertaining to 
licensing are not subject to judicial review in Nevada.

         The Company and the Gaming Subsidiaries are required to submit 
detailed financial and operating reports to the Nevada Commission. 
Substantially all material loans, leases, sales of securities and similar 
financing transactions by the Company and the Gaming Subsidiaries must be 
reported to or approved by the Nevada Commission and/or the Nevada Board.

         If it were determined that the Nevada Act was violated by a Gaming 
Subsidiary, the gaming licenses it holds could be limited, conditioned, 
suspended or revoked, subject to compliance with certain statutory and 
regulatory procedures. In addition, the Company, the Gaming Subsidiaries and 
the persons involved could be subject to substantial fines for each separate 
violation of the Nevada Act at the discretion of the Nevada Commission. 
Further, a supervisor could be appointed by the Nevada Commission to operate 
Palace Station, Boulder Station, Texas Station, Sunset Station, Wild Wild 
West and Barley's Casino and, under certain circumstances, earnings generated 
during the supervisor's appointment (except for the reasonable rental value 
of the premises) could be forfeited to the State of Nevada. Limitation, 
conditioning or suspension of the Gaming Licenses of the Gaming Subsidiaries 
or the appointment of a supervisor could (and revocation of any Gaming 
License would) materially adversely affect the Company's gaming operations.

         Any beneficial owner of the Company's voting securities, regardless 
of the number of shares owned, may be required to file an application, be 
investigated, and have their suitability as a beneficial owner of the 
Company's voting securities determined if the Nevada Commission has reason to 
believe that such ownership would otherwise be inconsistent with the declared 
policies of the state of Nevada. The applicant must pay all costs of 
investigation incurred by the Nevada Gaming Authorities in conducting any 
such investigation.

         The Nevada Act provides that persons who acquire beneficial 
ownership of more than 5% of the voting securities of a Registered 
Corporation must report the acquisition to the Nevada Commission. The Nevada 
Act also requires that beneficial owners of more than 10% of the voting 
securities of a Registered Corporation must apply to the Nevada Commission 
for a finding of suitability within thirty days after the Chairman of the 
Nevada Board mails the written notice requiring such filing. An 
"institutional investor," as defined in the Nevada Commission's regulations, 
which acquires beneficial ownership of more than 10%, but not more than 15% 
of the Company's voting securities may apply to the

                                      11



Nevada Commission for a waiver of such finding of suitability if such 
institutional investor holds the voting securities for investment purposes 
only. An institutional investor shall not be deemed to hold voting securities 
for investment purposes unless the voting securities were acquired and are 
held in the ordinary course of business as an institutional investor and not 
for the purpose of causing, directly or indirectly, the election of a 
majority of the members of the board of directors of the Company, any change 
in the Company's corporate charter, bylaws, management policies or operations 
of the Company, or any of its gaming affiliates, or any other action which 
the Nevada Commission finds to be inconsistent with holding the Company's 
voting securities for investment purposes only. Activities which are not 
deemed to be inconsistent with holding voting securities for investment 
purposes only include: (i) voting on all matters voted on by stockholders; 
(ii) making financial and other inquiries of management of the type normally 
made by securities analysts for informational purposes and not to cause a 
change in its management, policies or operations; and (iii) such other 
activities as the Nevada Commission may determine to be consistent with such 
investment intent. If the beneficial holder of voting securities 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. The applicant is required to pay all costs of investigation.

         Any person who fails or refuses to apply for a finding of 
suitability or a license within thirty days after being ordered to do so by 
the Nevada Commission or the Chairman of the Nevada Board, may be found 
unsuitable. The same restrictions apply to a record owner if the record 
owner, after request, fails to identify the beneficial owner. Any stockholder 
who is found unsuitable and who holds, directly or indirectly, any beneficial 
ownership of the common stock of a Registered Corporation beyond such period 
of time as may be prescribed by the Nevada Commission may be guilty of a 
criminal offense. The Company is subject to disciplinary action if, after it 
receives notice that a person is unsuitable to be a stockholder or to have 
any other relationship with the Company or the Gaming Subsidiaries, the 
Company (i) pays that person any dividend or interest upon voting securities 
of the Company, (ii) allows that person to exercise, directly or indirectly, 
any voting right conferred through securities held by that person, (iii) pay 
remuneration in any form to that person for services rendered or otherwise, 
or (iv) fails to pursue all lawful efforts to require such unsuitable person 
to relinquish his voting securities including, if necessary, the immediate 
purchase of said voting securities for cash at fair market value. 
Additionally, the Clark County Board has the authority to approve all persons 
owning or controlling the stock of any corporation controlling a gaming 
license.

         The Nevada Commission may, in its discretion, require the holder of 
any debt security of a Registered Corporation to file applications, be 
investigated and be found suitable to own the debt security of a Registered 
Corporation if the Nevada Commission has reason to believe that such 
ownership would otherwise be inconsistent with the declared policies of the 
State of Nevada. If the Nevada Commission determines that a person is 
unsuitable to own such security, then pursuant to the Nevada Act, the 
Registered Corporation can be sanctioned, including the loss of its 
approvals, if without the prior approval of the Nevada Commission, it: (i) 
pays to the unsuitable person any dividend, interest, or any distribution 
whatsoever; (ii) recognizes any voting right by such unsuitable person in 
connection with such securities; (iii) pays the unsuitable person 
remuneration in any form; or (iv) makes any payment to the unsuitable person 
by way of principal, redemption, conversion, exchange, liquidation or similar 
transaction.

         The Company is required to maintain a current stock ledger in Nevada 
which may be examined by the Nevada Gaming Authorities at any time. If any 
securities 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 holder unsuitable. The Company is also required to 
render maximum assistance in determining the identity of the beneficial 
owner. The Nevada Commission has the power to require the Company's stock 
certificates to bear a legend indicating that the securities are subject to 
the Nevada Act. However, to date, the Nevada Commission has not imposed such 
a requirement on the Company.

         The Company may not make a public offering of its securities without 
the prior approval of the Nevada Commission if the securities or proceeds 
therefrom are intended to be used to construct, acquire or finance gaming 
facilities in Nevada, or to retire or extend obligations incurred for such 
purposes. On May 22, 1997, the Nevada Commission granted the Company prior 
approval to make offerings under a Shelf Registration for a period of 
twenty-two months, subject to certain conditions ("Shelf Approval"). The 
Shelf Approval was amended and restated on June 23, 1998 to include TRSI and 
to be effective for 11 months. However, the Shelf Approval may be rescinded 
for good cause without prior notice upon the issuance of an interlocutory 
stop order by the Chairman of the Nevada Board and must be renewed at the end 
of the two year approval period. The Shelf Approval also applies to any 
affiliated company wholly-owned by the

                                      12



Company (an "Affiliate") which is a publicly traded corporation or would 
thereby become a publicly traded corporation pursuant to a public offering. 
The Shelf Approval also includes approval for the Gaming Subsidiaries to 
guarantee any security issued by, or to hypothecate their assets to secure 
the payment or performance of any obligations issued by, the Company or an 
Affiliate in a public offering under the Shelf Approval. The Shelf Approval 
does not constitute a finding, recommendation or approval by the Nevada 
Commission or the Nevada Board as to the accuracy or adequacy of the 
prospectus or the investment merits of the securities offered. Any 
representation to the contrary is unlawful.

         Changes in control of the Company through merger, consolidation, 
stock or asset acquisitions, management or consulting agreements, or any act 
or conduct by a person whereby such person obtains control, may not occur 
without the prior approval of the Nevada Commission. Entities seeking to 
acquire control of a Registered Corporation must satisfy the Nevada Board and 
the Nevada Commission that they meet a variety of stringent standards prior 
to assuming control of such Registered Corporation. The Nevada Commission may 
also require controlling stockholders, officers, directors and other persons 
having a material relationship or involvement with the entity proposing to 
acquire control, to be investigated and licensed as part of the approval 
process relating to the transaction.

         The Nevada legislature has declared that some corporate acquisitions 
opposed by management, repurchases of voting securities and corporate defense 
tactics affecting Nevada corporate gaming licensees, and Registered 
Corporations that are affiliated with those operations, may be injurious to 
stable and productive corporate gaming. The Nevada 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 gaming licensees 
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 affairs. Approvals are, in certain 
circumstances, required from the Nevada Commission before a Registered 
Corporation can make exceptional repurchases of voting securities above the 
current market price thereof and before a corporate acquisition opposed by 
management can be consummated. The Nevada Act also requires prior approval of 
a plan of recapitalization proposed by the Registered Corporation's Board of 
Directors in response to a tender offer made directly to the Registered 
Corporation's stockholders for the purpose of acquiring control of the 
Registered Corporation.

         License fees and taxes, computed in various ways depending on the 
type of gaming or activity involved, are payable to the State of Nevada and 
to the counties and cities in which the Nevada licensee's respective 
operations are conducted. Depending upon the particular fee or tax involved, 
these fees and taxes are payable either monthly, quarterly or annually and 
are based upon either: (i) a percentage of the gross revenues received; (ii) 
the number of gaming devices operated; or (iii) the number of table games 
operated. A casino entertainment tax is also paid by casino operations where 
entertainment is furnished in connection with the serving or selling of food 
or refreshments or the selling of any merchandise. Nevada licensees that hold 
a license as an operator of a slot route, or manufacturer's or distributor's 
license also pay certain fees and taxes to the state of Nevada.

         Any person who is licensed, required to be licensed, registered, 
required to be registered, or is under common control with such persons 
(collectively, "Licensees"), and who proposes to become involved in a gaming 
venture outside of Nevada, is required to deposit with the Nevada Board, and 
thereafter maintain, a revolving fund in the amount of $10,000 to pay the 
expenses of investigation by the Nevada Board of their participation in such 
foreign gaming. The revolving fund is subject to increase or decrease in the 
discretion of the Nevada Commission. Thereafter, licensees are required to 
comply with certain reporting requirements imposed by the Nevada Act. 
Licensees are also subject to disciplinary action by the Nevada Commission if 
they knowingly violate any laws of the foreign jurisdiction pertaining to the 
foreign gaming operation, fail to conduct the foreign gaming operation in 
accordance with the standards of honesty and integrity required of Nevada 
gaming operations, engage in activities or enter into associations that are 
harmful to the state of Nevada or its ability to collect gaming taxes and 
fees, or employ, contract with or associate with a person in the foreign 
operation who has been denied a license or finding of suitability in Nevada 
on the grounds of personal unsuitability or whom a court in the state of 
Nevada has found guilty of cheating. The loss or restriction of the Company's 
gaming licenses in Nevada would have a material adverse effect on its 
business and could require the Company to cease gaming operations in Nevada.

                                      13



         NEVADA LIQUOR REGULATIONS

         The sale of alcoholic beverages at Palace Station is subject to 
licensing, control and regulation by the City of Las Vegas. The sale of 
alcoholic beverages at Boulder Station and Wild Wild West is subject to 
licensing control and regulation by the Clark County Board. Texas Station is 
subject to licensing control and regulation of the City of North Las Vegas. 
Sunset Station and Barley's Casino are subject to the licensing control and 
regulation of the City of Henderson and the Department of Treasury, Bureau of 
Alcohol, Tobacco and Firearms. All licenses are revocable and are not 
transferable. The agencies involved have full power to limit, condition, 
suspend or revoke any such license, and any such disciplinary action could 
(and revocation would) have a material adverse effect on the operations of 
the Gaming Subsidiaries.

         MISSOURI GAMING REGULATIONS

         Gaming was originally authorized in the State of Missouri and the 
City of St. Charles on November 3, 1992, by referendum, although no 
governmental action was taken to enforce or implement the original law. On 
April 29, 1993, Missouri enacted the Missouri Gaming Law which replaced the 
original law and established the Missouri Gaming Commission, which is 
responsible for the licensing and regulation of riverboat gaming in Missouri. 
The Missouri Gaming Commission has discretion to approve gaming license 
applications for both permanently moored ("dockside") riverboat casinos and 
powered ("excursion") riverboat casinos. On September 20, 1993, the Company 
filed its initial application with the Missouri Gaming Commission for either 
a dockside or a cruising gaming license in St. Charles, Missouri, which 
license was issued on May 27, 1994, thereby making the Company one of the 
first two entrants in the Missouri riverboat gaming market.

         Opponents of gaming in Missouri have brought several legal 
challenges to gaming in the past and may possibly bring similar challenges in 
the future. There can be no assurances that any future challenges, if 
brought, would not further interfere with full-scale gaming operations in 
Missouri, including the operations of the Company and its subsidiaries.

         On January 25, 1994, as a result of a cause of action brought by 
anti-gaming interests, the Missouri Supreme Court held that games of chance, 
including certain games authorized under the Missouri Gaming Law such as 
bingo and keno, constitute "lotteries" and were therefore prohibited under 
the Missouri Constitution. A statewide election on April 5, 1994, failed to 
adopt a constitutional amendment that would have exempted excursion boats and 
floating facilities from such constitutional prohibition on lotteries. 
Therefore, in May 1994, the Company commenced operations only with those 
games which involve some element of skill ("limited gaming"), such as poker 
and blackjack, that would be constitutionally permissible. The authorization 
of both games of skill and games of chance ("full-scale gaming") occurred on 
November 8, 1994 with passage by Missouri voters of a constitutional 
amendment virtually identical to the measure which was defeated on April 5, 
1994. Full-scale gaming became effective on December 9, 1994, and by the end 
of December 1994, the Company was conducting full-scale gaming on both its 
excursion and dockside casinos in St. Charles, Missouri.

         On January 16, 1997, the Missouri Gaming Commission granted Station 
Casino Kansas City a Class A Excursion Gambling Boat license to own and 
operate the River King and River Queen floating gaming facilities.

         On November 25, 1997, the Supreme Court ruled, in a case again 
brought by anti-gaming interests involving certain operators who compete with 
Station Casino St. Charles in Maryland Heights, Missouri, that gaming may 
occur only in artificial spaces that are contiguous to the surface stream of 
the Missouri and Mississippi rivers. On November 3, 1998, the citizens of the 
State of Missouri approved a Constitutional amendment which was proposed by 
initiative petition, that retroactively legalized lotteries, gift enterprises 
and games of chance aboard excursion gambling boats and floating facilities 
located within artificial spaces containing water that are within 1,000 feet 
of the closest edge of the main channel of the Mississippi or Missouri 
Rivers. This amendment to the Constitution was certified on November 23, 1998.

         Under the Missouri Gaming Law, the ownership and operation of 
riverboat gaming facilities in Missouri are subject to extensive state and 
local regulation. By virtue of its gaming license in Missouri, the Company, 
any subsidiaries it has or it may form and certain of its officers and 
employees are subject to the Missouri Gaming Law and the regulations of the 
Missouri Gaming Commission.

                                      14



         As part of the application and licensing process for a gaming 
license, the applicant must submit detailed financial, operating and other 
reports to the Missouri Gaming Commission. Each applicant has an ongoing duty 
to update the information provided to the Missouri Gaming Commission in the 
application. In addition to the information required of the applicant, 
directors, officers and other key persons must submit Personal Disclosure 
Forms which include detailed personal financial information and are subject 
to thorough investigations. All gaming employees must obtain an occupational 
license issued by the Missouri Gaming Commission. Operators' licenses are 
issued through application to the Missouri Gaming Commission, which requires, 
among other things, (a) investigations into an applicant's character, 
financial responsibility and experience qualifications and (b) that 
applicants furnish (i) an affirmative action plan for the hiring and training 
of minorities and women and (ii) an economic development or impact report. 
License fees are a minimum of $50,000 for the initial application and $25,000 
annually thereafter.

         The Missouri Gaming Commission may revoke or suspend gaming licenses 
and impose other penalties for violation of the Missouri Gaming Law and the 
rules and regulations which may be promulgated thereunder, including, without 
limitation, forfeiture of all gaming equipment used for improper gaming and 
fines of up to three times an operator's highest daily amount of gross 
receipts from wagering on the gambling games conducted during the preceding 
twelve months. No gaming licensee or occupational licensee may pledge, 
hypothecate or transfer in any way any license, or any interest in a license, 
issued by the Missouri Gaming Commission. An ownership interest in a gaming 
licensee that is not a publicly held entity or a holding company that is not 
a publicly held entity may not be pledged or hypothecated in any way to, or 
otherwise be subject to any type of security interest held by, any entity or 
person other than a regulated bank or saving and loan association without 
prior approval of the Missouri Gaming Commission. Missouri Gaming Commission 
regulations prohibit a licensee from consummating any of the following 
transactions without at least 60 days' prior notice to the Missouri Gaming 
Commission, and during such period, the Missouri Gaming Commission may 
disapprove the transaction or require the transaction be delayed pending 
further investigation; (i) any transfer or issuance of an ownership interest 
in a gaming licensee that is not a publicly held entity or a holding company 
that is not a publicly held entity; and (ii) any pledge or hypothecation or 
grant of any type of security interest in an ownership interest in a gaming 
licensee that is not a publicly held entity or a holding company that is not 
a publicly held entity to a regulated bank or saving and loan association; 
provided that no ownership interest may be transferred in any way pursuant to 
any pledge, hypothecation or security interest without separate notice to the 
Missouri Gaming Commission at least thirty days prior to such transfer, which 
restriction must be specifically included in the grant of pledge, 
hypothecation or security interest.

         Missouri Gaming Commission regulations require a licensee to notify 
the Missouri Gaming Commission of its intention to consummate any of the 
following transactions at least fifteen days prior to such consummation, and 
the Missouri Gaming Commission may reopen the licensing hearing prior to or 
following the consummation date to consider the effect of the transaction on 
the licensee's suitability; (i) any issuance of ownership interest in a 
publicly held gaming licensee or a publicly held holding company, if such 
issuance would involve, directly or indirectly, an amount of ownership 
interest equaling five percent or greater of the ownership interest in the 
gaming licensee or holding company after the issuance is complete; (ii) any 
private incurrence of debt equal to or exceeding one million dollars by a 
gaming licensee or holding company that is affiliated with the holder of a 
license; (iii) any public issuance of debt by a gaming licensee or holding 
company that is affiliated with the holder of a license; and (iv) any 
significant related party transaction as defined in the regulations.

         The Missouri Gaming Law imposes operational requirements on 
riverboat operators, including a charge of two dollars per gaming customer 
that licensees must pay to the Missouri Gaming Commission, certain minimum 
payout requirements, a 20% tax on adjusted gross receipts, prohibitions 
against providing credit to gaming customers (except for the use of credit 
cards and cashing checks) and a requirement that each licensee reimburse the 
Missouri Gaming Commission for all costs of any Missouri Gaming Commission 
staff necessary to protect the public on the licensee's riverboat. Licensees 
must also submit audited quarterly financial reports to the Commission and 
pay the associated auditing fees. Other areas of operation which are subject 
to regulation under Missouri rules are the size, denomination and handling of 
chips and tokens; the surveillance methods and computer monitoring of 
electronic games; accounting and audit methods and procedures; and approval 
of an extensive internal control system. The Missouri rules also require that 
all of an operator's purchases of chips, tokens, dice, playing cards and 
electronic gaming devices must be acquired from suppliers licensed by the 
Missouri Gaming Commission. The Missouri Gaming Law provides for a loss limit 
of $500 per person per excursion and requires licensees to maintain scheduled 
excursions with boarding and disembarking times regardless of whether the 
riverboat cruises. Although the Missouri Gaming Law provides no limit on the 
amount of

                                      15



riverboat space that may be used for gaming, the Missouri Gaming Commission 
is empowered to impose such space limitations through the adoption of rules 
and regulations. Additionally, United States Coast Guard safety regulations 
could affect the amount of riverboat space that may be devoted to gaming. The 
Missouri Gaming Law also includes requirements as to the form of riverboats, 
which must resemble Missouri's riverboat history to the extent practicable 
and include certain non-gaming amenities. All ten licensees currently 
operating riverboat gaming operations in Missouri are authorized to conduct 
all or a portion of their operations on a dockside basis.

         With respect to the availability of dockside gaming, which may be 
more profitable than excursion gaming, the Missouri Gaming Commission is 
empowered to determine on a site-by-site basis where such gaming is 
appropriate and shall be permitted. On December 27, 1994, Station Casino St. 
Charles was granted a dockside gaming license for its floating gaming 
facility by the Missouri Gaming Commission. On April 16, 1996, Station Casino 
St. Charles, subsequently received approval from the Missouri Gaming 
Commission to conduct its operations on its excursion gaming riverboat on a 
continuously docked basis. The U.S. Coast Guard has recommended to the 
Missouri Gaming Commission that all gaming vessels on the Missouri River be 
required to remain dockside because certain characteristics of the Missouri 
River, including turbulence, lack of emergency response infrastructure and 
potential congestion, create substantially elevated risks for the operation 
of large capacity passenger vessels. Dockside gaming in Missouri may differ 
from dockside gaming in other states, such as Mississippi, because the 
Missouri Gaming Commission has the ability to require "simulated cruising." 
This requirement permits customers to board dockside riverboats only at 
specific times and prohibits boarding during a certain portion of each 
simulated cruise, which are required to be a minimum of two hours and a 
maximum of four hours. Dockside gaming in Missouri may not be as profitable 
as dockside gaming in other states, that allow for continuous customer 
ingress and egress.

         GENERAL GAMING REGULATIONS IN OTHER JURISDICTIONS

         If the Company becomes involved in gaming operations in any other 
jurisdictions, such gaming operations will subject the Company and certain of 
its officers, directors, key employees, stockholders and other affiliates 
("Regulated Persons") to strict legal and regulatory requirements, including 
mandatory licensing and approval requirements, suitability requirements, and 
ongoing regulatory oversight with respect to such gaming operations. Such 
legal and regulatory requirements and oversight will be administered and 
exercised by the relevant regulatory agency or agencies in each jurisdiction 
(the "Regulatory Authorities"). The Company and the Regulated Persons will 
need to satisfy the licensing, approval and suitability requirements of each 
jurisdiction in which the Company seeks to become involved in gaming 
operations. These requirements vary from jurisdiction to jurisdiction, but 
generally concern the responsibility, financial stability and character of 
the owners and managers of gaming operations as well as persons financially 
interested or involved in gaming operations. In general, the procedures for 
gaming licensing, approval and finding of suitability require the Company and 
each Regulated Person to submit detailed personal history information and 
financial information to demonstrate that the proposed gaming operation has 
adequate financial resources generated from suitable sources and adequate 
procedures to comply with the operating controls and requirements imposed by 
law and regulation in each jurisdiction, followed by a thorough investigation 
by such Regulatory Authorities. In general, the Company and each Regulated 
Person must pay the costs of such investigation. An application for any 
gaming license, approval or finding of suitability may be denied for any 
cause that the Regulatory Authorities deem reasonable. Once obtained, 
licenses and approvals may be subject to periodic renewal and generally are 
not transferable. The Regulatory Authorities may at any time revoke, suspend, 
condition, limit or restrict a license, approval or finding of suitability 
for any cause they deem reasonable. Fines for violations may be levied 
against the holder of a license or approval and in certain jurisdictions, 
gaming operation revenues can be forfeited to the state under certain 
circumstances. There can be no assurance that the Company will obtain all of 
the necessary licenses, approvals and findings of suitability or that its 
officers, directors, key employees, other affiliates and certain other 
stockholders will satisfy the suitability requirements in one or more 
jurisdictions, or that such licenses, approvals and findings of suitability, 
if obtained, will not be revoked, limited, suspended or not renewed in the 
future.

         Failure by the Company to obtain, or the loss or suspension of, any 
necessary licenses, approval or findings of suitability would prevent the 
Company from conducting gaming operations in such jurisdiction and possibly 
in other jurisdictions. The Company may be required to submit detailed 
financial and operating reports to Regulatory Authorities.

                                      16



         The laws, regulations and procedures pertaining to gaming are 
subject to the interpretation of the Regulatory Authorities and may be 
amended. Any changes in such laws, regulations, or their interpretations 
could have a material adverse effect on the Company.

EMPLOYEES

         As of December 31, 1998, the Company and its subsidiaries had 
approximately 10,829 employees. From time to time, certain employees of the 
Company are contacted by unions and the Company engages in discussions with 
such employees regarding establishment of collective bargaining agreements. 
In 1998, approximately 12 of the Company's employees in the receiving area of 
Palace Station voted to become unionized. While the Company is from time to 
time faced with such movements by employees, the Company does not believe 
that such movements will have any broad-based impact on its employees; 
however there can be no assurances to that effect. Management believes that 
it has good relationships with its employees.

ITEM 2.  PROPERTIES

         Palace Station is situated on approximately 39 acres located on the 
west side of Las Vegas, Nevada. The Company owns 26 acres and leases the 
remaining 13 acres pursuant to five long-term ground leases with unaffiliated 
third parties. The property is subject to a lien to secure borrowings under 
the Amended Bank Facility.

         Boulder Station is situated on approximately 46 acres located on the 
east side of Las Vegas, Nevada. The Company owns 19 acres and leases the 
remaining 27 acres from a trust pursuant to a long-term ground lease. The 
trustee of such trust is Bank of America National Trust and Savings 
Association ("Bank of America NT&SA") and the beneficiary of which is KB 
Enterprises, an affiliated company owned by Frank J. Fertitta, Jr. and 
Victoria K. Fertitta (the "Related Lessor"), the parents of Frank J. Fertitta 
III, Chairman of the Board and Chief Executive Officer of the Company. The 
lease has a maximum term of 65 years, ending in June 2058. The lease provides 
for monthly payments of $135,525 through June 2008. In July 2008, and every 
ten years thereafter, the rent will be adjusted by a cost of living factor. 
In July 2003, and every ten years thereafter, the rent will be adjusted to 
the product of the fair market value of the land and the greater of (i) the 
then prevailing annual rate of return for comparably situated property or 
(ii) 8% per year. In no event will the rent for any period be less than the 
immediately preceding period. Pursuant to the ground lease, the Company has 
an option, exercisable at five-year intervals beginning in June 1998, to 
purchase the land at fair market value. The Company did not exercise its June 
1998 option. The Company believes that the terms of the ground lease are as 
fair to the Company as could be obtained from an independent third party. The 
Company's leasehold interest in the property and the acreage it owns directly 
are subject to a lien to secure borrowings under the Amended Bank Facility.

         Texas Station is situated on approximately 47 acres located in North 
Las Vegas, Nevada. The Company leases the property from a trust pursuant to a 
long-term ground lease. The trustee of such trust is Bank of America NT&SA 
and the beneficiary of which is Texas Gambling Hall & Hotel, Inc., an 
affiliate company of the Related Lessor. The lease has a maximum term of 65 
years, ending in July 2060. The lease provides for monthly rental payments of 
$150,000 through June 2000. In July 2000, and every ten years thereafter, the 
rent will be adjusted to the product of the fair market value of the land and 
the greater of (i) the then prevailing annual rate of return being realized 
for owners of comparable land in Clark County or (ii) 8% per year. The rent 
will be further adjusted by a cost of living factor after the first ten years 
and every ten years thereafter. In no event will the rent for any period be 
less than the immediately preceding period. Pursuant to the ground lease, the 
Company has an option, exercisable at five-year intervals beginning in May 
2000, to purchase the land at fair market value. Pursuant to the ground 
lease, the lessor will have a right to put the land to the Company, 
exercisable no later than one year after the first to occur of (a) a change 
of control (as defined in the lease), or (b) delivery of written notice that 
such a change of control is anticipated, at a purchase price equal to fair 
market value as determined by negotiation. The Company believes that the 
terms of the ground lease are as fair to the Company as could be obtained 
from an independent third party. The Company's leasehold interest in the 
property is subject to a lien to secure borrowings under the Amended Bank 
Facility.

         Station Casino St. Charles is situated on approximately 52 acres 
located immediately north of Interstate 70 on the edge of the Missouri River 
in St. Charles, Missouri. The Company owns the entire 52 acres. The Company's 
ownership interest in the St. Charles property is subject to liens to secure 
borrowings under the Amended Bank Facility.

                                      17



         Station Casino Kansas City is situated on approximately 171 acres in
Kansas City, Missouri. The Company entered into a joint venture with an
unaffiliated third party to acquire the property. Station Casino Kansas City
leases the site from the joint venture with monthly payments of $91,800 through
the remainder of the lease term. The lease term was extended to March 31, 2006,
with the option to extend the lease for up to eight renewal periods of ten years
each plus one additional period of seven years. Commencing April 1, 1998, the
rent was, and every anniversary thereafter the rent will be, adjusted by a cost
of living factor. In connection with the joint venture agreement, the Company
received an option that provided for the right to acquire the joint venture
partners interest in this joint venture. The Company has the option to purchase
this interest at any time after April 1, 2002 through April 1, 2011 for $11.7
million, however, the purchase price will be adjusted by a cost of living factor
of not more than 5% or less than 2% per annum commencing April 1, 1998. The
Company paid $2.6 million for this option. The Company's leasehold interest in
the property is subject to a lien to secure borrowings under the Amended Bank
Facility, and under certain circumstances the Amended Bank Facility permits the
lenders to force the exercise of such option.

         Sunset Station is situated on approximately 105 acres located in the 
Green Valley/Henderson area of Las Vegas, Nevada. The Company leases 
approximately 48 acres pursuant to a long-term ground lease with an 
unaffiliated third party. The lease was entered into in June 1994, and has a 
term of 65 years with monthly rental payments of $120,000, adjusted on each 
subsequent five-year anniversary by a cost of living factor. On the seventh 
anniversary date of the lease, the Company has the option to purchase the 
land for $23.8 million. The lessor also has an option to sell the land to the 
Company for $21.8 million on the seventh anniversary of the lease. Of the 
remaining land, approximately 52 acres were purchased by the Company in 
September 1995, for approximately $11.0 million.

         The Company has acquired or leased several parcels of land in various
jurisdictions as part of the Company's development activities. Included in land
for held development at December 31, 1998 is approximately $17.0 million related
to land which had been acquired for potential gaming projects in jurisdictions
where gaming has been approved.

ITEM 3.  LEGAL PROCEEDINGS

         The Company and its subsidiaries are defendants in various lawsuits
relating to routine matters incidental to their business. As with all
litigation, no assurance can be provided as to the outcome of the following
matters and litigation inherently involves significant costs.

         CRESCENT CASE

         On January 16, 1998, the Company entered into an Agreement and Plan of
Merger, as amended (the "Merger Agreement") with Crescent Real Estate Equities
Company, a Texas real estate investment trust ("Crescent"). The Merger Agreement
provided for the merger (the "Merger") of the Company and Crescent at the time
of effectiveness of the Merger in accordance with the Merger Agreement.

         On July 27, 1998, the Company and Crescent announced the postponement
of the previously announced annual and special meeting of stockholders of the
Company, originally scheduled to be held August 4, 1998, in order to address
concerns expressed by holders of the Company's preferred stock. Although
Crescent issued its own press release announcing the postponement of the
meeting, Crescent has advised the Company that Crescent takes the position that
postponing the meeting was a breach of the Merger Agreement. On July 28, 1998,
the Company requested that Crescent purchase $20 million of the Company's
Redeemable Preferred Stock issuable under the Merger Agreement. Under the terms
of the Merger Agreement, Crescent is required to fund up to $115 million of
Redeemable Preferred Stock, even in the event of termination of the Merger
Agreement, so long as the Company is not in material breach of its covenants,
representations or warranties. On July 30, 1998, the Company filed suit against
Crescent in Clark County District Court, State of Nevada, seeking declaratory
relief. The suit asserts, among other things, that postponement of the meeting
did not breach the Merger Agreement, that the Company had received Crescent's
consent to postponement of the meeting and was otherwise in full compliance with
its obligations under the Merger Agreement.

         On August 7, 1998, Crescent filed suit against the Company in the
United States District Court, Northern District of Texas, seeking damages and
declaratory relief. The suit alleges that the Company breached the Merger
Agreement by 


                                      18


canceling and failing to reschedule the August 4, 1998 stockholders meeting. 
The suit seeks a declaratory judgment that the Company's actions with respect 
to the meeting, together with certain alleged misrepresentations in the 
Merger Agreement relating to the tax qualification of compensation allegedly 
issued pursuant to the Company's stock plans, relieve Crescent of its 
obligation under the Merger Agreement to purchase an aggregate $115 million 
of the Redeemable Preferred Stock. For the same reasons, Crescent alleged 
that it was excused from further performance under the Merger Agreement. 
Crescent did not specify the amount of damages it sought. Simultaneously with 
the filing of its suit, Crescent sent notice of termination of the Merger 
Agreement to the Company. The Company believes that Crescent, and not the 
Company, breached the Merger Agreement.

         On August 11, 1998, the Company requested that Crescent purchase the
additional $95 million of Redeemable Preferred Stock. Also on August 11, 1998,
the Company amended its complaint in Nevada state court to include claims
regarding Crescent's breaches of the Merger Agreement. The Company's lawsuit
against Crescent seeks significant damages for Crescent's breaches and specific
performance requiring Crescent to fulfill its obligation under the Merger
Agreement to purchase $115 million of Redeemable Preferred Stock.

         On August 12, 1998, Crescent announced that it intended to assert a
claim for damages for the $54 million break-up fee under the Merger Agreement or
its equivalent and for expenses. Any payment by the Company of such fee would
require consent of the lenders under the Amended Bank Facility.

         On December 15, 1998, Crescent's suit against the Company pending in
the United States District Court for the Northern District of Texas was
dismissed for lack of jurisdiction. On December 21, 1998, Crescent served the
Company with a notice of appeal of the dismissal.

         On February 10, 1999, Crescent filed an appeal in the United States 
Court of Appeals for the Fifth Circuit seeking to reverse the District 
Court's judgement dismissing the Texas complaint. On March 29, 1999, the 
Company filed an opposition brief with the Fifth Circuit Court of Appeals 
seeking the affirmance of the District Court's judgement.

         On December 22, 1998, Crescent filed its answer and counterclaims to 
the Company's suit pending in the Nevada state court. The answer generally 
denied the Company's claims, and the counterclaims sought damages and 
declaratory relief alleging that the Company breached the Merger Agreement by 
canceling and failing to reschedule the stockholders meeting. The suit sought 
a declaratory judgment that the Company's actions with respect to the 
meeting, together with certain alleged misrepresentations in the Merger 
Agreement, relieve Crescent of its obligation under the Merger Agreement to 
fund up to $115 million of the Redeemable Preferred Stock. Crescent alleged 
that it was excused from further performance under the Merger Agreement. 
Crescent did not specify the amount of damages it sought. On January 11, 
1999, the Company filed its reply to Crescent's counterclaims in which the 
Company denied the allegations of Crescent's counterclaims. Discovery is 
ongoing in this action.

         While the Company believes that Crescent has breached the Merger
Agreement and that Crescent's allegations are without merit, as with any
litigation, no assurance as to the outcome of such litigation can be made at
this time. In the event that the Company is required to pay the $54 million
break-up fee, that payment would have a material adverse effect on the Company's
business. In addition, any litigation inherently involves significant costs of
conducting the litigation.

         CLASS ACTION/DERIVATIVE ACTION

         A suit seeking status as a class action and a derivative action was
filed by plaintiff, Crandon Capital Partners, as class representative, on August
7, 1998, in Clark County District Court, State of Nevada, naming the Company and
its Board of Directors as defendants. The lawsuit, which was filed as a result
of the failed merger between the Company and Crescent, alleges, among other
things, a breach of fiduciary duty owed to the shareholders/class members. The
lawsuit seeks damages allegedly suffered by the shareholders/class members as a
result of the transactions with Crescent, as well as all costs and disbursements
of the lawsuit. Although no assurance can be provided with respect to any
litigation, the Company and the Board of Directors do not believe the suit has
merit and intend to defend themselves vigorously.

         LOW WATER LEVEL AT STATION CASINO ST. CHARLES; EPA INVESTIGATION

         During December 1998 and January 1999, the water level of the Missouri
River was well below normal. In addition, over time silt and debris flowing
downstream have built up under the gaming barges and other ancillary barges at
Station Casino St. Charles. These circumstances have caused a portion of these
barges, at times, to touch the river bottom. Because these barges have touched
the river bottom, the American Bureau of Shipping decertified the barges on
January 8, 1999. As a result of the decertification, the Missouri Gaming
Commission expressed concern regarding the 


                                      19


effect of the low water level on the barges. However, based upon recent 
improvement in the water level and the Company's agreement to work with 
American Bureau of Shipping to re-certify all of the barges at a time when 
the river levels permit, the Missouri Gaming Commission has allowed the 
gaming facility to remain open. The Company continues to monitor the 
situation very carefully and believes that the facility should remain in 
operation. However, there can be no assurance that the Company's assessment 
will not change or that the relevant authorities will continue to permit the 
operation of the facility. A prolonged closure of the facility as a result of 
the low water level would have a material adverse effect on the Company's 
business, financial position and results of operations.

         The Company has taken steps and intends to take further steps to remedy
the problems caused by the low water level. These further steps include dredging
material from under the barges and constructing a sheet metal wall to divert
silt and debris and keep it from building up under the barges. The Company does
not expect the cost of these remedial activities to be material, although there
can be no assurance that such costs will not exceed the Company's expectations.
Dredging and construction activities generally require permits from the United
States Army Corps of Engineers. The Company is currently in the process of
applying for the required permits. There can be no assurance that the United
States Army Corps of Engineers will grant such permits or that they will be
granted on a timely basis. If there is a significant delay in the Company
receiving the required permits and the low water level returns, the Company
could be forced to close the facility. The Company's ability to receive the
required permits could be adversely affected by the investigation described
below.

         On February 3, 1999, the Company received a subpoena issued by the EPA
requesting that documentation relating to the Company's dredging activities at
the facility be furnished to the Grand Jury in the United States District Court
for the Eastern District of Missouri. Several employees and persons who
contracted to work for the Company received similar subpoenas. The Company
believes that the EPA is investigating allegations that the Company or the
Company's contractors dredged and disposed of silt and debris from the area of
the facility either without proper permits or without complying with such
permits. The Company is in the process of investigating the substance of the
allegations and intends to cooperate fully with the EPA's investigation. The
investigation could lead to further proceedings against the Company which could
result in significant fines and other penalties imposed on the Company. Based on
the initial results of the Company's own investigation, the Company believes
that any fines or other penalties, if imposed, would not have a material adverse
effect on the Company's business, financial position or results of operations.

         POULOS/AHEARN CASE

         A suit seeking status as a class action lawsuit was filed by plaintiff,
William H. Poulos, et al., as class representative, on April 26, 1994, in the
United States District Court, Middle District of Florida, naming 41
manufacturers, distributors and casino operators of video poker and electronic
slot machines, including the Company. On May 10, 1994, a lawsuit alleging
substantially identical claims was filed by another plaintiff, William Ahearn,
et al., as class representative, in the United States District Court, Middle
District of Florida, against 48 manufacturers, distributors and casino operators
of video poker and electronic slot machines, including the Company and most of
the other major hotel/casino companies. The lawsuits allege that the defendants
have engaged in a course of fraudulent and misleading conduct intended to induce
persons to play such games based on a false belief concerning how the gaming
machines operate, as well as the extent to which there is an opportunity to win.
The two lawsuits have been consolidated into a single action, and have been
transferred to the United States District Court for the District of Nevada. On
September 26, 1995, a lawsuit alleging substantially identical claims was filed
by plaintiff, Larry Schreier, et. al, as class representative, in the United
States District Court for the District of Nevada, naming 45 manufacturers,
distributors, and casino operators of video poker and electronic slot machines,
including the Company. Motions to dismiss the Poulos/Ahearn and Schreier cases
were filed by defendants. On April 17, 1996, the Poulos/Ahearn lawsuits were
dismissed, but plaintiffs were given leave to file Amended Complaints on or
before May 31, 1996. On May 31, 1996, an Amended Complaint was filed, naming
William H. Poulos, et. al, as plaintiff. Defendants filed a motion to dismiss.
On August 15, 1996, the Schreier lawsuit was dismissed with leave to amend. On
September 27, 1996, Schreier filed an Amended Complaint. Defendants filed
motions to dismiss the Amended Complaint. In December 1996, the Court
consolidated the Poulos/Ahearn, the Schreier, and a third case not involving the
Company and ordered all pending motions be deemed withdrawn without prejudice,
including Defendants' Motions to Dismiss the Amended Complaints. The plaintiffs
filed a Consolidated Amended Complaint on February 13, 1997. On or about
December 19, 1997, the Court issued formal opinions granting in part and denying
in part the defendants' motion to dismiss. In so doing, the Court ordered
plaintiffs to file an amended complaint in accordance with the Court's orders in


                                      20


January of 1998. Accordingly, plaintiffs amended their complaint and filed it
with the United Stated District Court for the District of Nevada in February
1998. The Company and all other defendants continue to deny the allegations
contained in the amended complaint filed on behalf of plaintiffs. The plaintiffs
are seeking compensatory, special, consequential, incidental, and punitive
damages in unspecified amounts. The defendants have committed to vigorously
defend all claims and allegations contained in the consolidated action. The
parties have fully briefed the issues regarding class certification, which are
currently pending before the court. The discovery stay remains in effect pending
resolution of these issues. The Company does not expect that the lawsuits will
have a material adverse effect on the Company's financial position or results of
operations.

         NICOLE ANDERSON CASE

         A suit seeking status as a class action lawsuit was filed by plaintiff
Nicole Anderson, et. al., as class representative, on September 24, 1997, in the
United States District Court for the Eastern District of Missouri, Eastern
Division. The lawsuit alleges certain racially based discriminatory action at
Station Casino St. Charles and seeks injunctive relief and compensatory,
special, consequential, incidental and punitive damages in unspecified amounts.
On or about October 24, 1997, plaintiff filed her first amended complaint. On
November 24, 1997, the Company filed its answer to plaintiff's first amended
complaint which denied the allegations contained therein. The Company does not
believe the suit has merit and intends to continue defending itself vigorously.

         On August 25, 1998, a hearing was held to determine whether this
lawsuit could be certified as a class action. The Court conditionally certified
a subclass of dealers in the table game department; the other plaintiffs may
proceed individually with their claims. Discovery in all these cases has begun,
but as yet no trial date has been set.

         MISSOURI REFERENDUM

         On January 16, 1997, the Company's gaming license in Kansas City was
formally issued for its facility, which is located in a man-made basin filled
with water piped in from the surface of the Missouri River. In reliance on
numerous approvals from the Missouri Gaming Commission specific to the
configuration and granted prior to the formal issuance of its gaming license,
the Company built and opened the Station Casino Kansas City facility. The
license issued to the Company and the resolutions related thereto specifically
acknowledge that the Missouri Gaming Commission had reviewed and approved this
configuration. On November 25, 1997, the Supreme Court of Missouri, in a case
challenging the gaming licenses of certain competitors of Station Casino St.
Charles located in Maryland Heights, Missouri, ruled that gaming may occur only
in artificial spaces that are contiguous to the surface stream of the Missouri
and Mississippi Rivers. On November 3, 1998, the citizens of the State of
Missouri approved a Constitutional amendment which was proposed by initiative
petition, that retroactively legalized lotteries, gift enterprises and games of
chance aboard excursion gambling boats and floating facilities, like the
Company's, that are located within artificial spaces containing water that are
within 1,000 feet of the closest edge of the main channel of the Mississippi or
Missouri Rivers. This amendment to the Constitution became effective on November
23, 1998. The Missouri Gaming Commission has stayed its preliminary orders of
disciplinary action against licensees that operate within artificial basins, and
has dismissed the preliminary orders for disciplinary action with respect to all
applicable licensees except Station Casino Kansas City. The Missouri Gaming
Commission has not dismissed the disciplinary proceeding against Station Casino
Kansas City because it is investigating an alleged violation by Station Casino
Kansas City that is related to the placement of the Company's gaming facilities
in an artificial basin. While the Company anticipates that the disciplinary
action with respect to Station Casino Kansas City will be dismissed, the Company
cannot be sure that the Missouri Gaming Commission will take such action or that
the Missouri Gaming Commission will not impose a fine or other penalty against
the Company in connection with such dismissal. Numerous active organizations
oppose gaming in Missouri and may in the future take action to cause gaming
operations in Missouri to be restricted or prohibited.


                                      21


         STEPHEN B. SMALL CASE

         A class action lawsuit was filed by plaintiff Stephen B. Small, et al.,
as class representative, on November 28, 1997, in the United States District
Court for the Western District of Missouri, naming four gaming operators in
Kansas City, Missouri, including Kansas City Station Corporation. The lawsuit
alleged that the defendants are conducting gaming operations that are not
located on the Missouri River in violation of certain state and federal
statutes. The plaintiff also sought compensatory, special, consequential, and
incidental damages in unspecified amounts. On September 1, 1998, the United
States District Court granted Kansas City Station Corporation's motion to
dismiss the lawsuit. On February 16, 1999, the plaintiff served the defendants
with a notice of appeal of the federal court dismissal. On October 30, 1998, the
plaintiff filed a similar lawsuit in the Circuit Court of Cole County, Missouri.
The lawsuit alleged that the operators were conducting illegal games of chance
prior to December 3, 1998, the effective date of a Constitutional amendment
passed by Missouri voters on November 3, 1998, legalizing gaming facilities
within 1,000 feet of the main channel of the Mississippi and Missouri Rivers. On
February 9, 1999, the Cole County Circuit Court granted Kansas City Station
Corporation's motion to dismiss the lawsuit. On February 19, 1999, the plaintiff
served the defendants with a notice of appeal of the state court dismissal.
Management believes that the plaintiff's claims are without merit and does not
expect that the lawsuit will have a material adverse effect on the Company's
financial position or results of operations.

         CANFORA CASE

         In June 1997, Joseph J. Canfora, a former employee of the Company,
commenced a lawsuit against the Company in the United States District Court for
the Western District of Missouri asserting (1) breach of employment agreement,
(2) bad faith discharge and (3) violations of ERISA. In December 1997, the
claims relating to bad faith discharge and ERISA violations were dismissed.
Canfora subsequently amended his complaint and alleged breach of employment
agreement and tortious interference with business expectancies. On January 18,
1999, the Company and Canfora agreed to a final settlement of the lawsuit and
therefore the Company anticipates no further litigation in this matter.

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

         There were no matters submitted to a vote of security holders during
the third quarter of Transition Period 1998 (as defined in Item 6).


                                      22


                                    PART II

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

         The Common Stock trades on New York Stock Exchange under the symbol
"STN". Prior to September 5, 1996, the common stock traded on the Nasdaq Stock
Market under the symbol "STCI." The following table sets forth, for the periods
indicated, the high and low sale price per share of the Common Stock as reported
on the New York Stock Exchange.



                                                         HIGH         LOW
                                                         ----         ---
                                                              
    TRANSITION PERIOD ENDING DECEMBER 31, 1998
         First Quarter                                   15.88       13.19
         Second Quarter                                  15.31        5.06
         Third Quarter                                    8.50        4.00

    FISCAL YEAR ENDING MARCH 31, 1998
         First Quarter                                    9.50        8.00
         Second Quarter                                   8.38        7.00
         Third Quarter                                   10.50        6.13
         Fourth Quarter                                  16.63        9.94


         As of March 3, 1999, there were 889 holders of record of the Company's
common stock.

         The Company has never paid cash dividends on any shares of Common
Stock. The Company does not intend to pay cash dividends in the foreseeable
future so that it may reinvest its earnings in the development of its business.
The payment of dividends in the future will be at the discretion of the Board of
Directors of the Company. Restrictions imposed by the Company's debt instruments
and other agreements, including the Convertible Preferred Stock, limit the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Description of Certain
Indebtedness and Capital Stock".


                                      23


ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

         On November 6, 1998, the Company filed a Form 8-K announcing its change
in fiscal year end from March 31 of each year to December 31 of each year. This
change is effective for the nine month period ended December 31, 1998 (the
"Transition Period 1998").

         The selected consolidated financial data presented below as of and for
the Company's fiscal years ended March 31, 1995, 1996, 1997 and 1998 and for the
Transition Period 1998 have been derived from consolidated financial statements
which, except for 1995 and 1996, are contained elsewhere in this Transition
Report on Form 10-K. The selected consolidated financial data set forth below
are qualified in their entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, the notes thereto and
other financial and statistical information included elsewhere in this
Transition Report on Form 10-K.



                                                         TRANSITION 
                                                           PERIOD                FOR THE YEARS ENDED MARCH 31,
                                                            1998          1998          1997         1996          1995
                                                            ----          ----          ----         ----          ----
                                                                 (amounts in thousands, except per share amounts)
                                                                                                  
STATEMENT OF OPERATIONS DATA:
Operating revenues:
   Casino..........................................        $ 509,149     $ 600,847     $ 450,013    $ 358,495     $ 210,534
   Food and beverage...............................          104,538       131,365        92,220       73,057        43,208
   Room............................................           30,040        37,330        27,420       23,614        17,690
   Other...........................................           47,663        53,494        48,957       39,099        36,561
                                                        ------------- ------------- ------------- ------------  ------------
       Gross revenues..............................          691,390       823,036       618,610      494,265       307,993
   Promotional allowances..........................          (49,176)      (53,426)      (35,095)     (27,408)      (17,715)
                                                        ------------- ------------- ------------- ------------  ------------
      Net revenues.................................          642,214       769,610       583,515      466,857       290,278
                                                        ------------- ------------- ------------- ------------  ------------

Operating costs and expenses:
   Casino..........................................          249,353       291,102       203,857      150,805        92,812
   Food and beverage...............................           66,121        89,928        68,994       57,659        34,045
   Room............................................           11,515        13,461        10,318        9,147         7,014
   Other...........................................           19,463        24,658        23,927       24,902        27,270
   Selling, general and administrative.............          135,769       172,258       120,285       97,466        60,810
   Corporate expenses..............................           12,311        15,633        18,284       15,979        13,141
   Restructuring charge............................                -             -         2,016            -             -
   Development expenses............................                -           104         1,302        3,960         7,200
   Depreciation and amortization...................           52,975        67,414        44,589       35,039        22,220
   Impairment loss.................................           30,011             -             -            -             -
   Preopening expenses.............................                -        10,866        31,820        2,436        19,378
                                                        ------------- ------------- ------------- ------------  ------------
      Total operating costs and expenses...........          577,518       685,424       525,392      397,393       283,890
                                                        ------------- ------------- ------------- ------------  ------------

Operating income...................................           64,696        84,186        58,123       69,464         6,388

Interest expense, net..............................          (66,127)      (78,826)      (36,698)     (30,563)      (19,967)
Interest expense - defeasance, net.................             (835)            -             -            -             -
Merger and related legal costs.....................           (2,943)            -             -            -             -
Write-off of costs to elect REIT status............                -        (2,914)            -            -             -
Other income (expense).............................           (4,655)       (6,566)          (47)       1,150         2,160
                                                        ------------- ------------- ------------- ------------  ------------
Income (loss) before income taxes and 
  extraordinary item...............................           (9,864)       (4,120)       21,378       40,051       (11,419)
Income tax benefit (provision).....................              871           966        (7,615)     (14,579)        3,477
                                                        ------------- ------------- ------------- ------------  ------------
Income (loss) before extraordinary item............           (8,993)       (3,154)       13,763       25,472        (7,942)
Extraordinary item - loss on early retirement of 
  debt, net of applicable income tax benefit.......           (3,104)       (2,042)            -            -             -
                                                        ------------- ------------- ------------- ------------  ------------
Net income (loss)..................................          (12,097)       (5,196)       13,763       25,472        (7,942)
Preferred stock dividends..........................           (5,434)       (7,245)       (7,245)         (53)            -
                                                        ------------- ------------- ------------- ------------  ------------
Net income (loss) applicable to common stock.......        $ (17,531)    $ (12,441)      $ 6,518     $ 25,419      $ (7,942)
                                                        ------------- ------------- ------------- ------------  ------------
                                                        ------------- ------------- ------------- ------------  ------------
Basic and diluted earnings per common share:                                                                   
Earnings (loss) applicable to common stock.........          $ (0.50)      $ (0.35)       $ 0.18       $ 0.75       $ (0.26)
Weighted average common shares outstanding.........           35,312        35,309        35,316       33,918        30,113




                                      24




                                                         TRANSITION 
                                                           PERIOD                  FOR THE YEARS ENDED MARCH 31,
                                                            1998          1998          1997         1996          1995
                                                            ----          ----          ----         ----          ----
                                                                 (amounts in thousands, except per share amounts)
                                                                                                  
OTHER DATA (1):
Number of hotel rooms.................................         2,455         2,195         1,728        1,528         1,328
Average daily occupancy rate..........................           90%           93%           96%          94%           95%
Casino square footage.................................       567,500       521,000       432,000      278,000       206,000
Number of slot machines...............................        16,451        16,237        13,008        9,555         7,020
Capital expenditures (2)..............................     $  99,460     $ 134,385     $ 506,096    $ 307,745     $ 163,884
EBITDA, As Adjusted (3)...............................       147,682       162,466       136,548      106,939        47,986
Cash flows provided by (used in):
   Operating activities...............................     $  76,692     $ 104,955     $ 111,803     $ 77,953      $ 48,494
   Investing activities...............................       (93,771)     (219,407)     (479,008)    (266,935)     (157,585)
   Financing activities...............................       228,344       122,088       294,859      286,889       109,893

BALANCE SHEET DATA:
Cash and cash equivalents (4).........................     $ 261,423     $  50,158     $  42,522    $ 114,868      $ 16,961
Total assets..........................................     1,533,931     1,300,216     1,234,118      827,314       436,538
Long-term debt (4)....................................     1,147,266       900,226       760,963      464,998       299,814
Stockholders' equity..................................       269,761       286,887       298,848      278,470        87,886



(1) Other Data relating to the number of hotel rooms, the casino square footage
and the number of slot machines represent end of period data.

(2) Capital expenditures for the fiscal year ended March 31, 1995 include 
$52.9 million related to the development of Station Casino St. Charles and 
$90.7 million related to the development of Boulder Station. Capital 
expenditures for the fiscal year ended March 31, 1996 include $84.9 million 
related to the acquisition and completion of Texas Station, $25.0 million 
related to the parking garage and entertainment complex at Boulder Station, 
$62.8 million related to the development and construction of Station Casino 
Kansas City, $29.7 million related to the development and construction of 
Sunset Station and $39.4 million related to the expansion of Station Casino 
St. Charles including an elevated roadway, a parking structure and restaurant 
facilities. Capital expenditures for the fiscal year ended March 31, 1997 
include $211.1 million related to the development and construction of Station 
Casino Kansas City, $112.8 million related to the development and 
construction of Sunset Station and $99.6 million related to the development 
and construction of an expansion of Station Casino St. Charles. Capital 
expenditures for the fiscal year ended March 31, 1998 include $43.5 million 
related to the development and construction of Sunset Station and $31.9 
million associated with the development and construction of an expansion of 
Station Casino St. Charles. Capital expenditures for the transition period 
1998 include $31.6 million related to the parking garage, restaurant, meeting 
space and casino expansion at Sunset Station and $39.2 million related to the 
parking garage, entertainment complex and casino expansion at Texas Station.

(3) "EBITDA, As Adjusted" consists of operating income plus depreciation, 
amortization, preopening expenses, impairment loss and a one time 
restructuring charge in 1997. The Company believes that in addition to cash 
flows and net income, EBITDA, As Adjusted is a useful financial performance 
measurement for assessing the operating performance of the Company. Together 
with net income and cash flows, EBITDA, As Adjusted provides investors with 
an additional basis to evaluate the ability of the Company to incur and 
service debt and incur capital expenditures. To evaluate EBITDA, As Adjusted 
and the trends it depicts, the components should be considered. The impact of 
interest, taxes, depreciation and amortization, preopening expenses, 
impairment loss, and a one time restructuring charge in 1997, each of which 
can significantly affect the Company's results of operations and liquidity 
and should be considered in evaluating the Company's operating performance, 
cannot be determined from EBITDA, As Adjusted. Further, EBITDA, As Adjusted 
does not represent net income or cash flows from operating, financing and 
investing activities as defined by generally accepted accounting principles 
("GAAP") and does not necessarily indicate that cash flows will be sufficient 
to fund cash needs. It should not be considered as an alternative to net 
income, as an indicator of the Company's operating performance or to cash 
flows as a measure of liquidity. In addition, it should be noted that not all 
gaming companies that report EBITDA or adjustments to such measures may 
calculate EBITDA, or such adjustments in the same manner as the Company, and 
therefore, the Company's measures of EBITDA, As Adjusted may not be 
comparable to similarly titled measures used by other gaming companies.

(4) Cash and cash equivalents as of December 31, 1998 includes $202.4 million
restricted for payment of $187.6 million of long-term debt, repaid January 4,
1999, along with accrued interest and related prepayment premium.


                                     25


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

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the financial statements and notes
thereto included elsewhere in this Transition Report on Form 10-K.

RESULTS OF OPERATIONS

The following table highlights the results of operations for the Company
(dollars in thousands):



                                                                    Nine                     Fiscal                   Fiscal
                                                     Nine          Months       Fiscal        Year        Fiscal       Year
                                    Transition       Month          Ended       Period        Ended        Year        Ended
                                      Period        Percent     December 31,    Percent     March 31,     Percent    March 31,
                                       1998         Change          1997        Change        1998        Change       1997  
                                     --------      ---------     ---------    ---------    ----------    --------     -------
                                                                 (unaudited)
                                                                                                
NET REVENUES - TOTAL                $642,214         13.7%        $564,809      (16.6%)     $769,610       31.9%     $583,515
     Nevada Operations (a)           397,908         16.5%         341,447      (15.4%)      470,393       31.7%      357,193
     Missouri Operations (a)         219,734          8.0%         203,374      (19.7%)      273,800       38.4%      197,831
     Other                            24,572         22.9%          19,988       (3.3%)       25,417      (10.8%)      28,491

OPERATING INCOME (LOSS) - TOTAL     $ 64,696         14.5%        $ 56,502      (23.2%)     $ 84,186       44.8%     $ 58,123
     Nevada Operations (a)            83,669         39.4%          60,028       (5.2%)       88,261       21.6%       72,592
     Missouri Operations (a)          (5,056)      (179.5%)          6,358     (151.1%)        9,886      130.2%        4,295
     Other                           (13,917)       (40.8%)         (9,884)       0.3%       (13,961)      25.6%     (18,764)

CASH FLOWS FROM:
     Operating activities           $ 76,692          4.6%        $ 73,326      (26.9%)     $104,955       (6.1%)    $111,803

EBITDA, AS ADJUSTED (B) - TOTAL     $147,682         25.4%        $117,764       (9.1%)     $162,446       19.0%     $136,548
     Nevada Operations (a)           113,284         18.0%          96,029      (14.9%)      133,158       33.3%       99,905
     Missouri Operations (a)          43,163         45.6%          29,640        5.8%        40,791      (19.5%)      50,680
     Other                            (8,765)       (10.9%)         (7,905)      23.7%       (11,483)      18.2%     (14,037)

EBITDA, AS ADJUSTED (b), ADJUSTED 
  FOR THE SUNSET EQUIPMENT 
  LEASE - TOTAL                     $154,186         26.4%        $121,942       (8.6%)     $168,688       23.5%     $136,548
     Nevada Operations (a)           119,788         19.5%         100,207      (14.1%)      139,400       39.5%       99,905



(a)  The Nevada Operations include the accounts of: Palace Station Hotel & 
     Casino, Inc., Boulder Station, Inc., Texas Station, Inc. and Sunset 
     Station, Inc. The Missouri Operations include the accounts of: 
     St. Charles Riverfront Station, Inc. and Kansas City Station Corporation.

(b)  "EBITDA, As Adjusted" consists of operating income plus depreciation, 
     amortization, preopening expenses, impairment loss, and a one time 
     restructuring charge in 1997. The Company believes that in addition to 
     cash flows and net income, EBITDA, As Adjusted is a useful financial 
     performance measurement for assessing the operating performance of the 
     Company. Together with net income and cash flows, EBITDA, As Adjusted 
     provides investors with an additional basis to evaluate the ability of 
     the Company to incur and service debt and incur capital expenditures. To 
     evaluate EBITDA, As Adjusted and the trends it depicts, the components 
     should be considered. The impact of interest, taxes, depreciation and 
     amortization, preopening expenses, impairment loss, and a one time 
     restructuring charge in 1997, each of which can significantly affect the 
     Company's results of operations and liquidity and should be considered 
     in evaluating the Company's operating performance, cannot be determined 
     from EBITDA, As Adjusted. Further, EBITDA, As Adjusted does not 
     represent net income or cash flows from operating, financing and 
     investing activities as defined by generally accepted accounting 
     principles ("GAAP") and does not necessarily indicate cash flows will be 
     sufficient to fund cash needs. It should not be considered as an 
     alternative to net income, as an indicator of the Company's operating 
     performance or to cash flows as a measure of liquidity. In addition, it 
     should be noted that not all gaming companies that report EBITDA or 
     adjustments to such measures may calculate EBITDA, or such adjustments 
     in the same manner as the Company, and therefore, the Company's measure 
     of EBITDA, As Adjusted may not be comparable to similarly titled 
     measures used by other gaming companies.

                                       26


         Consolidated net revenues, operating income, cash flows from 
operating activities, and EBITDA, As Adjusted for the Transition Period 1998 
decreased as compared to the fiscal year ended March 31, 1998. These 
decreases are due to the fact that the Transition Period 1998 is nine months 
as compared to the fiscal year ended March 31, 1998, which is twelve months. 
The above table presents certain results of operations from the unaudited 
nine month period ended December 31, 1997 for comparison purposes.

         CONSOLIDATED NET REVENUES

         The increase in consolidated net revenues for the Transition Period
1998 as compared to the nine months ended December 31, 1997 is due to increasing
revenues from the Nevada properties generally, and the fact that results from
Sunset Station, which opened in June 1997, are included for only seven months in
the nine months ended December 31, 1997. Also, revenues from the Station Casino
Kansas City facility continue to steadily improve. Net revenues at Station
Casino St. Charles declined 5% as a result of significant competition in the St.
Louis market.

         The increase in consolidated net revenues for the fiscal year ended
March 31, 1998 as compared to the fiscal year ended March 31, 1997 is due
primarily to the opening of Sunset Station in June 1997, as well as continued
improvement in results at Texas Station. Also positively impacting consolidated
net revenues for the fiscal year ended March 31, 1998 is a full year of
operations at Station Casino Kansas City, which opened in January 1997.
Offsetting these increases, net revenues at Boulder Station declined
approximately 2.8% due primarily to the opening of Sunset Station. Additionally,
net revenues at Station Casino St. Charles declined 23.5% due to increasing
competition in the St. Louis market with the opening of a new hotel/casino in
Maryland Heights in March 1997.

         OPERATING INCOME/OPERATING MARGIN

         The Company's operating income was impacted by certain charges in each
of the above periods that affect the ability to analyze year to year
comparisons. The following table identifies these charges (dollars in
thousands):



                                                                                     Fiscal             Nine           Fiscal
                                                                                      Year             Months           Year
                                                                  Transition          Ended             Ended           Ended
                                                                    Period          March 31,       December 31,      March 31,
                                                                     1998             1998              1997            1997    
                                                                  ----------       -----------      -----------      -----------
                                                                                                    (unaudited)
                                                                                                         
         Operating income...................................       $64,696           $84,186         $56,502           $58,123
             OPERATING MARGIN...............................         10.1%             10.9%           10.0%             10.0%

         Certain charges:
              Impairment loss...............................        30,011             ----            ----              ----
              Preopening expenses...........................         ----             10,866          10,866            31,820
              Restructuring charge..........................         ----              ----            ----              2,016

         Operating income, excluding certain charges........        94,707            95,052          67,368            91,959
              OPERATING MARGIN, EXCLUDING CERTAIN CHARGES...         14.7%             12.4%           11.9%             15.8%


         Operating margin, excluding certain charges, improved in the Transition
Period 1998 as compared to the fiscal year ended March 31, 1998 primarily as a
result of significantly improved operations at Station Casino Kansas City.
Operating income, excluding certain charges at Station Casino Kansas City,
improved by $17.8 million in the Transition Period 1998 as compared to the nine
months ended December 31, 1997. The only casino property experiencing a decline
in operating income, excluding certain charges, was Station Casino St. Charles,
which experienced a $4.4 million decline due to the increased competition
discussed above.


                                     27


         Operating margin, excluding certain charges, declined in the fiscal
year ended March 31, 1998 as compared to the fiscal year ended March 31, 1997,
primarily due to a $23.7 million decline in operating income at Station Casino
St. Charles. This decline was offset by increases in operating income, excluding
certain charges, due to the opening of Sunset Station in June 1997, operating
improvements at Texas Station, and reduced corporate expense.

         The following table highlights the various sources of revenues and
expenses for the Company as compared to prior periods (dollars in thousands):



                                                                    Nine                     Fiscal                   Fiscal
                                                     Nine          Months       Fiscal        Year        Fiscal       Year
                                    Transition       Month          Ended       Period        Ended        Year        Ended
                                      Period        Percent     December 31,    Percent     March 31,     Percent    March 31,
                                       1998         Change          1997        Change        1998        Change       1997  
                                     --------       ------       ---------    --------     ----------    --------     -------
                                                                 (unaudited)
                                                                                                     
Casino revenues                     $509,149         16.5%        $436,872     (15.3%)      $600,847       33.5%     $450,013
Casino expenses                      249,353         17.9%         211,502     (14.3%)       291,102       42.8%      203,857
     MARGIN                            51.0%                        51.6%                      51.6%                   54.7%
                                                                                                                      
Food and beverage revenues          $104,538          6.8%        $ 97,859     (20.4%)      $131,365       42.4%     $ 92,220
Food and beverage expenses            66,121         (2.2%)         67,626     (26.5%)        89,928       30.3%       68,994
     MARGIN                            36.7%                        30.9%                      31.5%                   25.2%
                                                                                                                      
Room revenues                       $ 30,040          8.5%        $ 27,692     (19.5%)      $ 37,330       36.1%     $ 27,420
Room expenses                         11,515         15.1%          10,001     (14.5%)        13,461       30.5%       10,318
     MARGIN                            61.7%                        63.9%                      63.9%                   62.4%
                                                                                                                      
Other revenues                      $ 47,663         15.6%        $ 41,233     (10.9%)      $ 53,494        9.3%     $ 48,957
                                                                                                                      
Selling, general and administrative $135,769                      $127,419                  $172,258                 $120,285
     PERCENT OF NET REVENUES           21.1%                        22.6%                      22.4%                   20.6%
                                                                                                                      
Corporate expenses                  $ 12,311                      $ 11,168                  $ 15,633                 $ 18,284
     PERCENT OF NET REVENUES            1.9%                         2.0%                      2.0%                    3.1%



         CASINO.  Casino revenues increased for the Transition Period 1998 as 
compared to the nine months ended December 31, 1997 and for the fiscal year 
ended March 31, 1998 as compared to the fiscal year ended March 31, 1997 as a 
result of the same factors affecting consolidated net revenues discussed 
above.

         Casino profit margin for the Transition Period 1998 remained relatively
consistent with results for the fiscal year ended March 31, 1998. Casino profit
margins declined to 51.6% for the fiscal year ended March 31, 1998 from 54.7%
for the fiscal year ended March 31, 1997. This decline was a result of the
negative impact of competition on the St. Louis market as described above. Also
negatively impacting casino margins was the addition of Station Casino Kansas
City for a full year in the fiscal year ended March 31, 1998. Casino profit
margin at Station Casino Kansas City is lower than the Company's overall casino
profit margin due primarily to significantly higher gaming tax rates in Missouri
as compared to Nevada.

         FOOD AND BEVERAGE. Food and beverage revenues for the Transition Period
1998 increased 6.8% over food and beverage revenues for the nine months ended
December 31, 1997. The primary reason for this increase is the fact that results
from Sunset Station, which opened in June 1997, are included for only seven
months in the nine months ended December 31, 1997.The increase in food and
beverage revenues is less than the overall increase in revenues. This is
primarily due to a decline in food and beverage revenues at Station Casino
Kansas City. In the prior year's period, the Company was very aggressive in
promoting Station Casino Kansas City's food operations.

         Food and beverage revenues for the fiscal year ended March 31, 1998
increased 42.4% over the prior fiscal year due primarily to the opening of
Sunset Station and a full year of operations at Station Casino Kansas City.


                                     28


         Food and beverage net profit margins improved to 36.7% for the
Transition Period 1998, from 31.5% in the prior year. This increase in margin is
due to improvement at the Company's Nevada Operations, primarily as a result of
continued focus on cost control, as well as selected menu price increases.

         ROOM. Room revenues for the Transition Period 1998 increased 8.5% over
room revenues for the nine months ended December 31, 1997. The primary reason
for this increase is the fact that results from Sunset Station, which opened in
June 1997, are included for only seven months in the nine months ended December
31, 1997. Additionally, the Company opened the Wild Wild West Gambling Hall &
Hotel in July 1998, which contributed $1.1 million of room revenues in the
Transition Period 1998. Offsetting these increases was a decline in room
revenues at Palace Station and Boulder Station. These declines were primarily a
result of a lower average daily room rate. Room rates in Las Vegas are expected
to be under continued pressure for the foreseeable future due to the addition of
9,062 new rooms in Las Vegas during calendar 1999, an 8.3% increase in overall
capacity.

         Room revenues for the fiscal year ended March 31, 1998 increased 36.1%
over the prior fiscal year due primarily to the opening of Sunset Station and a
full year of operations at Station Casino Kansas City.

         SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). As a percent of net 
revenues, SG&A decreased to 21.1% in the Transition Period 1998, as compared 
to 22.4% for the fiscal year ended March 31, 1998. This decrease is due 
primarily to the fine tuning of operations at Sunset Station and Station 
Casino Kansas City. In the Company's experience when a new property opens, 
SG&A as a percent of net revenues is higher than normal for a period of time. 
The increase in SG&A as a percent of net revenues for the year ended March 
31, 1998 as compared to the prior fiscal year is due to these two properties 
opening during the year ended March 31, 1998.

         CORPORATE EXPENSES. Corporate expenses as a percent of net revenues for
the Transition Period 1998 were relatively consistent with the fiscal year ended
March 31, 1998. Corporate expenses as a percent of net revenues declined to 2.0%
in the fiscal year ended March 31, 1998 as compared to 3.1% for the fiscal year
ended March 31, 1997. This reduction was the result of management's efforts to
lower corporate expenses.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.6 million in the Transition Period 1998 to $53.0 million as compared to $50.4
million in the nine months ended December 31, 1997. This increase is due to the
results of Sunset Station being included for only seven months in the nine
months ended December 31, 1997. Depreciation and amortization is expected to
increase during calendar 1999 as a result of the completion of expansion
projects at Sunset Station and Texas Station.

         Depreciation and amortization increased to $67.4 million for the fiscal
year ended March 31, 1998, from $44.6 million in the prior year. This increase
is due primarily to the opening of Sunset Station and a full year of operations
at Station Casino Kansas City as discussed previously.

         IMPAIRMENT LOSS. In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company recorded an impairment loss of $30.0 million to adjust the carrying
value of its fixed assets and land held for development to their estimated fair
value in 1998. The impairment loss principally involves assets at the Station
Casino St. Charles facility, including a riverboat formerly used in the Missouri
operations, capitalized project costs associated with various parcels of land
determined to have no value, and several parcels of land within close proximity
to the St. Charles, Missouri site that were being held for future development.
The fair value of the impaired assets was primarily determined through the
current market interest in riverboats and barges, and on the current
comparable sales prices on parcels of land in the St. Charles area. The total
amount of the impairment loss related to this category of assets was
approximately $23.4 million. In addition to the assets described above, the most
significant portion of the remaining impairment loss relates to several parcels
of land in Nevada and Texas that the Company had acquired in the past for either
defensive or expansion purposes. The value of these parcels was determined based
on current sales prices for comparable parcels of land on the market. The
following two circumstances led to the Company's decision to write-down these
assets to their fair market value: (1) the passage, in Nevada, of legislation
which places significantly higher requirements on land to be zoned for gaming
purposes, and (2) the termination of the Plan of Merger with Crescent Real
Estate Equities Company (see "Legal Proceedings -- Crescent Case").


                                       29


         Included in other assets, net on the accompanying consolidated balance
sheet as of December 31, 1998, is $6.7 million related to these assets held for
sale. The Company is actively attempting to dispose of these non-strategic
assets and expects to complete the sale of certain of these assets in the first
half of calendar year 1999.

         PREOPENING EXPENSES. The Company capitalized preopening expenses
associated with its construction projects, including Sunset Station, which
opened in June 1997, and Station Casino Kansas City, which opened in January
1997. Such amounts were expensed upon the opening of the related project. During
the fiscal years ended March 31, 1998 and 1997, the Company expensed preopening
expenses of $10.9 million and $31.8 million, respectively, related primarily to
these projects.

         INTEREST EXPENSE, NET. Interest costs incurred (expensed and
capitalized) for the Transition Period 1998 of $67.6 million remained relatively
consistent with interest costs incurred for the nine months ended December 31,
1997 of $68.9 million.

         Interest costs incurred (expensed and capitalized) increased 56.8% to
$92.3 million for the fiscal year ended March 31, 1998, as compared with the
prior fiscal year. This increase is primarily attributable to added interest
costs associated with the 9 3/4% senior subordinated notes issued by the Company
in April 1997, borrowings under the Sunset Station loan agreement and borrowings
under the reducing revolving credit facility. Effective January 1, 1998, the
Company had ceased capitalizing interest on the expansion project at Station
Casino St. Charles.

         During the first quarter of calendar year 1999, the Company will 
record an extraordinary charge of $10.3 million (net of applicable tax 
benefit) to reflect the write-off of the unamortized debt discount, 
unamortized loan costs and the premium to redeem the 9 5/8% senior 
subordinated notes, which were repaid on January 4, 1999.

LIQUIDITY AND CAPITAL RESOURCES

         During the Transition Period 1998, the Company generated cash flows
from operating activities of $76.7 million. Other sources of capital included
net proceeds of $196.1 million from the issuance of $199.9 million of 8 7/8%
senior subordinated notes due December 2008, which were used on January 4, 1999
to redeem all of the Company's $193 million 9 5/8% senior subordinated notes due
2003, and to pay a portion of the premium related to the redemption of such
securities. Additionally, in November 1998, the Company entered into the Second
Amended and Restated Secured Reducing Revolving and Term Loan Agreement (the
"Amended Bank Facility") (See "Description of Certain Indebtedness and Capital
Stock - Amended Bank Facility"), which provides for borrowings of up to $425
million. Proceeds from borrowings under the Amended Bank Facility were used to
repay $278.0 million of borrowings under the Company's previous bank facility
and to repay $80.0 million borrowed under a supplemental revolving credit
facility. At December 31, 1998, the Company had available borrowings under the
Amended Bank Facility of $46.0 million, subject to certain covenant
restrictions, and $261.4 million of cash and cash equivalents. Of the $261.4
million of cash and cash equivalents, $202.4 million was restricted to defease
the 9 5/8% senior subordinated notes on January 4, 1999.

         During the Transition Period 1998, total capital expenditures were
approximately $99.5 million, of which approximately (i) $31.6 million was
associated with the development and construction of the expansion project at
Sunset Station, (ii) $39.2 million was associated with the development and
construction of the expansion project at Texas Station, (iii) $15.9 million was
for maintenance capital expenditures, (iv) $3.0 million was associated with the
development and construction of the Wild Wild West Gambling Hall & Hotel, (v)
$2.8 million was associated with the reconstruction of Palace Station's casino
area due to flood damage, and (vi) $7.0 million was associated with various
other projects.

         The Company's primary capital requirements during fiscal year 1999 are
expected to include (i) the payment of construction contracts payable of
approximately $10.4 million as of December 31, 1998, (ii) the remaining cost of
the expansion project at Texas Station, estimated to be approximately $15.8
million, (iii) maintenance capital expenditures, (iv) principal and interest
payments on indebtedness, and (v) dividend payments on convertible preferred
stock.

         The Company believes that cash flows from operations, borrowings under
the Amended Bank Facility, vendor and lease financing of equipment, and existing
cash balances will be adequate to satisfy the Company's anticipated uses of


                                       30


capital during fiscal year 1999. The Company, however, continually is 
evaluating its financing needs. If more attractive financing alternatives or 
expansion, development or acquisition opportunities become available to the 
Company, the Company may amend its financing plans assuming such financing 
would be permitted under its existing debt agreements (See "Description of 
Certain Indebtedness and Capital Stock") and other applicable agreements.

RECENTLY ISSUED ACCOUNTING STANDARDS

         The Financial Accounting Standards Board has issued Statement on
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," both of which became effective in the Transition Period
1998. These SFAS's had no impact on the Company's results of operations or
financial position.

         The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position No. 98-5,
"Reporting on the Costs of Start-up Activities". The provisions of SOP 98-5 are
effective for fiscal years beginning after December 15, 1998 and require that
the costs associated with start-up activities (including preopening costs of
casinos) be expensed as incurred.

YEAR 2000 READINESS

         BACKGROUND

         In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result, information
technology ("IT") such as date-sensitive computer software as well as non-IT
systems, such as equipment containing microcontrollers or other embedded
technology may recognize a date using "00" as the year 1900 rather than the year
2000. This is generally referred to as the Year 2000 issue. If this situation
occurs, the potential exists for computer system failures or miscalculations by
computer programs, which could disrupt operations.

         RISK FACTORS

         Date-sensitive IT and non-IT systems and equipment are utilized
throughout the Company's properties. As such, the Company is exposed to the risk
that Year 2000 problems could disrupt operations at the Company's affected
properties and have a material adverse impact upon the Company's operating
results.

         The Company is also exposed to the risk of possible failure of IT and
non-IT systems external to the Company's operations. These External Risk Factors
arise from the fact that the Company's operations, like most businesses, depend
upon numerous other private, public, and governmental entities. While these
External Risk Factors are not the Company's responsibility and the remediation
of these factors is beyond the Company's control, the Company is attempting to
monitor these risks and form such contingency plans as the Company deems
necessary. As a result of these External Risk Factors, the Company may be
materially and adversely impacted even if the Company's own IT and non-IT
systems and equipment are Year 2000 compliant. The most significant of these
External Risk Factors are as follows:

- -    One or more of the Company's suppliers could experience Year 2000 problems
     that impact the ability of the suppliers to provide goods and services
     required in the operation of the Company's properties. The Company believes
     that the impact of such a potential disruption would be limited due to the
     availability of alternative suppliers, but the Company cannot be sure that
     such a disruption would not have an adverse impact on the Company's
     operations.

- -    One or more of the Company's utility providers (including electric, natural
     gas, water, sewer, garbage collection and similar services) could
     experience Year 2000 problems that impact the ability of the utility to
     provide the service. Furthermore, the Company could be adversely impacted
     if disruption of utility services occurred in any of the Company's key
     customer markets, as this could impact the customary flow of visitors from
     the affected market.

- -    Airline service to and from the principal markets in which the Company
     operates could experience disruption due to Year 2000 problems, thus
     limiting the ability of potential customers to visit the Company's
     properties.


                                       31


- -    A significant portion of the Company's customers in the Las Vegas locals'
     market are either directly employed by or dependent upon the major
     hotels/casinos operating on the Las Vegas strip. The Company could be
     significantly impacted if a long-term disruption of business of the Las
     Vegas strip operations resulted from Year 2000 problems.

- -    The possible disruption of banking services due to Year 2000 problems could
     impair the Company's daily banking operations including the deposit of
     monies and processing of checks. Furthermore, customer's credit card
     processing and access to cash via automated teller machines could also be
     disrupted.

         The Company is not in the position to determine whether the External
Risk Factors will have a material adverse impact on the Company's operating
results. While the Company is in the initial stages of developing contingency
plans with respect to identified risk factors, the nature of many External Risk
Factors is such that the Company does not believe a viable alternative would be
available. For example, should airline service be disrupted, there are no
equivalent alternatives available. Consequently, the occurrence of any of the
previously listed disruptions could, depending upon the severity and duration of
the disruption, have a material adverse impact on the Company's operating
results.

         APPROACH

         The Company has established a task force to coordinate the Company's
response to the Year 2000. This task force, which reports to the Company's Chief
Financial Officer, is led by the Vice President of Information Technology. The
Company also engaged an outside consultant which assisted the Company in
establishing an approach to dealing with the Year 2000 issue, and the Company is
in the process of implementing a Year 2000 compliance program at the Company's
properties. The program consists of the following phases:

- -        Phase 1.  Compilation of an inventory of IT and non-IT systems that 
         may be sensitive to the Year 2000 problem.

- -        Phase 2. Identification and prioritization of the critical systems from
         the systems inventory compiled in Phase 1 and inquiries of third
         parties with whom the Company does significant business (i.e. vendors
         and suppliers) as to the state of their Year 2000 readiness.

- -        Phase 3. Analysis of critical systems to determine which systems are
         not Year 2000 compliant and evaluation of the costs to repair or
         replace those systems.

- -        Phase 4. Repair or replace noncompliant systems and testing of those
         systems for which a representation as to Year 2000 compliance has not
         been received or for which a representation was received but has not 
         been confirmed.

         STATUS

         Phases 1 and 2 are substantially complete, though the Company has not
received all responses to inquiries of significant third parties as to their
Year 2000 readiness. Phases 3 and 4 are ongoing and will continue through the
first half of the calendar 1999. It is the Company's goal to have this project
completed by mid-1999. Based upon the analysis conducted to date, the Company
believes all of the major critical systems at the Company's properties are
currently compliant or will be compliant by mid-1999. The only significant
aspect of the Company's Year 2000 compliance which has been identified to date
is the need to replace older computers and software packages whose systems are
not Year 2000 compatible.

         COSTS

         The total cost to the Company of making the Company's systems Year 2000
compliant is currently estimated to be in the range of $1 million to $2 million.
Of that amount the Company has incurred approximately $600,000 as of December
31, 1998. The Company is, however, still in the process of identifying
non-compliant systems and the cost of replacing or repairing such systems, so
the actual cost of making the Company's systems Year 2000 compliant may be
materially greater than the amount the Company currently estimates. The majority
of this cost relates to the acquisition of new computer hardware to replace the
systems noted above and the purchase of new software to replace non-compliant


                                       32


software. These costs will be capitalized and depreciated over their expected
useful life. To the extent existing hardware or software is replaced, the
Company will recognize a loss currently for the undepreciated balance. This loss
is included in the above cost estimate. Furthermore, all costs related to
software modification, as well as all costs associated with the Company's
administration of the Company's Year 2000 project, are being expensed as
incurred and are likewise included in the cost estimated above.

REGULATION AND TAXES

         The Company is subject to extensive regulation by the Nevada and
Missouri gaming authorities and will be subject to regulation, which may or may
not be similar to that in Nevada, by any other jurisdiction in which it may
conduct gaming activities in the future. Changes in applicable laws or
regulations could have a significant impact on the Company's operations.
Pursuant to legislation enacted in 1996, a federal commission is in the process
of conducting a two-year study of the gaming industry in the United States and
will report its findings and recommendations to Congress.

         The gaming industry represents a significant source of tax revenues,
particularly to the State of Nevada and its counties and municipalities. From
time to time, various state and federal legislators and officials have proposed
changes in tax law, or in the administration of such law, affecting the gaming
industry. Proposals in recent years that have not been enacted included a
federal gaming tax and increases in state or local taxes.

         Management believes that the Company's recorded tax balances are
adequate. However, it is not possible to determine with certainty the likelihood
of possible changes in tax law or in the administration of such law. Such
changes, if adopted, could have a material adverse effect on the Company's
operating results.

DESCRIPTION OF CERTAIN INDEBTEDNESS AND CAPITAL STOCK

         AMENDED BANK FACILITY

         In November 1998, the Company secured a $425.0 million bank credit
facility which amended the Company's existing reducing revolving credit facility
and repaid a supplemental facility which had been obtained in September 1998.
The Amended Bank Facility consists of three secured tranches. Two revolving
tranches constitute a reducing revolving credit facility (the "Revolving
Facility") which provides for borrowings up to an aggregate principal amount of
$350.0 million and the third tranche constitutes a $75.0 million term loan (the
"Term Loan"). The Revolving Facility includes a swing line facility with a
sub-limit on borrowing of $15.0 million. The borrowers under the Amended Bank
Facility are Palace Station, Boulder Station, Texas Station, Sunset Station,
Station Casino Kansas City and Station Casino St. Charles (collectively, the
"Borrowers"). The Amended Bank Facility is secured by substantially all of the
assets of the Borrowers. The Company, Southwest Gaming Services, Inc. and
certain other subsidiaries guarantee the borrowings under the Amended Bank
Facility (collectively the "Guarantors"). The maturity date for the Revolving
Facility is September 30, 2003. The availability under the Revolving Facility
will reduce by $7.0 million on September 30, 1999; by $12.25 million on each of
December 31, 1999, March 31, 2000 and June 30, 2000; by $14.0 million on
September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001; and by
$17.5 million on each fiscal quarter end thereafter. The Term Loan matures on
December 31, 2005 and amortizes in installments of $187,500 on each fiscal
quarter end from March 31, 2000 until and including December 31, 2004 and of
$17.8 million on each fiscal quarter end thereafter. Borrowings under the
Revolving Facility bear interest at a margin above the Alternate Base Rate or
the Eurodollar Rate (each, as defined in the Amended Bank Facility), as selected
by the Company. The margin above such rates, and the fee on the unfunded
portions of the Revolving Facility, will vary quarterly based on the Company's
combined consolidated ratio of average quarterly adjusted funded debt to net
income before interest, taxes, depreciation and amortization adjusted for
non-recurring gains and losses and preopening expenses, if any ("Adjusted
EBITDA"). As of December 31, 1998, the Borrowers' margin above the Eurodollar
Rate on borrowings under the Revolving Facility was 2.25%. The maximum margin
for Eurodollar Rate borrowings is 2.75%. The maximum margin for Alternate Base
Rate borrowings is 1.50%. The maximum fee for the unfunded portion of the
Revolving Facility is 0.50% multiplied by the average of the unfunded portion of
the Revolving Facility. The interest rate on the Term Loan is 3.25% above the
Eurodollar Rate. The Company recognized an extraordinary loss of $3.1 million
net of the applicable income tax benefit, as a result of the early retirement of
debt, as described above.


                                    33



         The Amended Bank Facility contains certain financial and other
covenants. These include a maximum funded debt to Adjusted EBITDA ratio for the
Borrowers combined of 2.50 to 1.00 for each fiscal quarter, a minimum fixed
charge coverage ratio for the preceding four quarters for the Borrowers combined
of 1.40 to 1.00 until and including March 31, 1999 and for each quarter
thereafter, 1.50 to 1.00, limitations on indebtedness, limitations on asset
dispositions, limitations on investments, limitations on prepayments of
indebtedness and rent and limitations on capital expenditures. As of December
31, 1998, the Borrowers combined funded debt to Adjusted EBITDA ratio was 2.13
to 1.00 and their combined fixed charge coverage ratio for the preceding four
quarters ended December 31, 1998 was 1.86 to 1.00. A tranche of the Revolving
Facility contains a minimum tangible net worth requirement for Palace Station
($10 million plus 95% of net income determined as of the end of each fiscal
quarter with no reduction for net losses) and certain restrictions on
distributions of cash from Palace Station to the Company. As of December 31,
1998, Palace Station's tangible net worth exceeded the requirement by
approximately $8.5 million. These covenants limit Palace Station's ability to
make payments to the Company, a significant source of anticipated cash for the
Company.

         In addition, the Amended Bank Facility has financial and other
covenants relating to the Company. These include a tangible net worth covenant
of $265.0 million (adjusted upward for 95% of cumulative net income (without
deduction for any net loss) and 100% of capital stock issuances and downward for
certain capital stock repurchases, preferred stock dividends, or certain
permissible asset dispositions, required write down of assets and preopening
expense, if any) and a consolidated funded debt to Adjusted EBITDA ratio of no
more than 5.50 to 1.00 on December 31, 1998 and reducing quarterly to 4.00 to
1.00 on September 30, 2001. Other covenants limit prepayments of indebtedness or
rent (including, subordinated debt other than refinancings meeting certain
criteria), limitations on asset dispositions, limitation on dividends,
limitations on indebtedness, limitations on investments and limitations on
capital expenditures. The Amended Bank Facility also prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and preferred stock, the amounts necessary to fund casino
bankroll in the ordinary course of business, any amount required to be held by
the Company or any restricted subsidiary by any gaming boards, and $2.0 million.
The Company has pledged the stock of all of its subsidiaries except Kansas City
Station Corporation and St. Charles Riverfront Station, Inc. and has agreed to
pledge the stock of the latter two subsidiaries upon regulatory approval (which
is expected to be obtained). The Company and the Guarantors waive certain
defenses and rights including rights of subrogation and reimbursement. The
Amended Bank Facility contains customary events of default and remedies and is
cross-defaulted to the Company's senior subordinated notes and a change of
control default (which definition is substantially similar to the definition of
Change of Control Triggering Event in the indentures governing the senior
subordinated notes).

         SENIOR SUBORDINATED NOTES

         The Company has $729.4 million, net of unamortized discount of $11.5 
million, of senior subordinated notes outstanding as of December 31, 1998, 
$187.6 million of these notes bear interest, payable semi-annually, at a rate 
of 9 5/8% per year (repaid January 4, 1999), $197.0 million of these notes 
bear interest, payable semi-annually, at a rate of 10 1/8% per year, $144.9 
million of these notes bear interest, payable semi-annually, at a rate of 
9 3/4% per year and $199.9 million of these notes bear interest, payable 
semi-annually, at a rate of 8 7/8% per year (collectively the "Existing 
Notes"). The indentures governing the Existing Notes (the "Existing 
Indentures") contain certain customary financial and other covenants which 
prohibit the Company and its subsidiaries from incurring indebtedness 
(including capital leases) other than (a) non-recourse debt for certain 
specified subsidiaries, (b) certain equipment financings, (c) the Existing 
Notes, (d) up to $15 million of additional indebtedness, (e) additional 
indebtedness if, after giving effect thereto, a 2.00 to 1.00 pro forma 
Consolidated Coverage Ratio (as defined) has been met, (f) Permitted 
Refinancing Indebtedness (as defined), (g) borrowings of up to $72 million 
under the Amended Bank Facility (contained in the indentures governing the 
9 5/8% Notes - repaid January 4, 1999) and borrowings under the Amended Bank 
Facility not to exceed the greater of $200 million or 1.5 times Operating 
Cash Flow (as defined) for the four most recent quarters (contained in the 
indentures governing the 8 7/8%, 9 3/4% and 10 1/8% Senior Subordinated Notes) 
and (h) certain other indebtedness. At December 31, 1998, the Company's 
Consolidated Coverage Ratio was 1.98 to 1.00. In addition, the Existing 
Indentures prohibit the Company from paying dividends on any of its capital 
stock unless at the time of and after giving effect to such dividends, among 
other things, the aggregate amount of all Restricted Payments and Restricted 
Investments (as defined in the Existing Indentures, and which include any 
dividends on any capital stock of the Company) do not exceed the sum of (i) 
50% of Cumulative Consolidated Net Income (as defined) of the Company (less 
100% of any consolidated net losses), (ii) certain net proceeds from the sale 
of equity securities of the Company, and (iii) $15 million. The limitation on 
the incurrence of additional indebtedness

                                      34



and dividend restrictions in the Existing Indentures may significantly affect
the Company's ability to pay dividends on its capital stock. The Existing
Indentures also give the holders of the Existing Notes the right to require the
Company to purchase the Existing Notes at 101% of the principal amount of the
Existing Notes plus accrued interest thereon upon a Change of Control and Rating
Decline (each as defined in the Existing Indentures) of the Company.

         SUNSET OPERATING LEASE

         The Company has entered into an operating lease for furniture, fixtures
and equipment (the "Equipment") with a cost of $40.0 million, dated as of
September 25, 1996 (the "Sunset Operating Lease") between the Company and First
Security Trust Company of Nevada. The Sunset Operating Lease expires in October
2000 and carries a lease rate of 2.25% above the Eurodollar Rate. A total of
$35.7 million of the Sunset Operating Lease has been drawn and no further draws
pursuant to the lease will be made. The Company has entered into a sublease with
Sunset Station for the Equipment pursuant to an operating lease with financial
terms substantially similar to the Sunset Operating Lease. The Company currently
incurs approximately $2.1 million of rent expense per quarter related to this
lease. The Company has an option to purchase the equipment for $30.5 million at
December 31, 1998. This amount reduces throughout the term of the lease to $21.4
million at October 2000.

         In connection with the Sunset Operating Lease, the Company also entered
into a participation agreement, dated as of September 25, 1996 (the
"Participation Agreement") with the trustee, as lessor under the Sunset
Operating Lease, and holders of beneficial interests in the Lessor Trust (the
"Holders"). Pursuant to the Participation Agreement, the Holders advanced funds
to the trustee for the purchase by the trustee of, or to reimburse the Company
for the purchase, of the Equipment, which is currently being leased to the
Company under the Sunset Operating Lease, and in turn subleased to Sunset
Station. Pursuant to the Participation Agreement, the Company also agreed to
indemnify the Lessor and the Holders against certain liabilities.

         COMMON STOCK

         The Company is authorized to issue up to 90,000,000 shares of its
common stock, $0.01 par value per share (the "Common Stock"), 35,312,192 shares
of which were issued and outstanding as of December 31, 1998. Each holder of the
Common Stock is entitled to one vote for each share held of record on each
matter submitted to a vote of stockholders. Holders of the Common Stock have no
cumulative voting, conversion, redemption or preemptive rights or other rights
to subscribe for additional shares other than pursuant to the Rights Plan
described below. Subject to any preferences that may be granted to the holders
of the Company's preferred stock, each holder of Common Stock is entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor as well as any distributions to the
stockholders and, in the event of liquidation, dissolution or winding up of the
Company, is entitled to share ratably in all assets of the Company remaining
after payment of liabilities.

         RIGHTS PLAN

         On October 6, 1997, the Company declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock. The
dividend was paid on October 21, 1997. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series A Preferred
Stock, par value $0.01 per share ("Preferred Shares") of the Company at a price
of $40.00 per one one-hundredth of a Preferred Share, subject to adjustment. The
Rights are not exercisable until the earlier of 10 days following a public
announcement that a person or group of affiliated or associated persons have
acquired beneficial ownership of 15% or more of the outstanding Common Stock
("Acquiring Person") or 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Stock.
The Rights will expire on October 21, 2007. Acquiring Persons do not have the
same rights to receive Common Stock as other holders upon exercise of the
Rights. Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
Common Share. In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, the proper provisions will be made so that
each holder of a Right, other than Rights beneficially owned 


                                      35



by the Acquiring Person (which will thereafter become void), will thereafter 
have the rights to receive upon exercise that number of Common Shares having 
a market value of two times the exercise price of the Right. In the event 
that the Company is acquired in a merger or other business combination 
transaction or 50% or more of its consolidated assets or earning power are 
sold after a person or group has become an Acquiring Person, proper provision 
will be made so that each holder of a Right will thereafter have the right to 
receive, upon exercise thereof, that number of shares of common stock of the 
acquiring company which at the time of such transaction will have a market 
value of two times the exercise price of the Right. Because of the 
characteristics of the Rights in connection with a person or group of 
affiliated or associated persons becoming an Acquiring Person, the Rights may 
have the effect of making an acquisition of the Company more difficult and 
may discourage such an acquisition.

         PREFERRED STOCK

         The Company is authorized to issue up to 5,000,000 shares of its
preferred stock, $0.01 par value per share (the "Preferred Stock"). As of
December 31, 1998, 2,070,000 shares of $3.50 Convertible Preferred Stock (the
"Convertible Preferred Stock") have been issued and are outstanding. The Board
of Directors, without further action by the holders of Common Stock or the
Convertible Preferred Stock, may issue shares of Preferred Stock in one or more
series and may fix or alter the rights, preferences, privileges and
restrictions, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation rates,
liquidation preferences, conversion rights and the description and number of
shares constituting any wholly unissued series of Preferred Stock. Except as
described above, the Board of Directors, without further stockholder approval,
may issue shares of Preferred Stock with rights that could adversely affect the
rights of the holders of Common Stock or the Convertible Preferred Stock. The
issuance of shares of Preferred Stock under certain circumstances could have the
effect of delaying or preventing a change of control of the Company or other
corporate action.

         CONVERTIBLE PREFERRED STOCK

         Each of the Convertible Preferred Stock shares outstanding, have a
liquidation preference of $50.00 per share plus an amount equal to any
accumulated and unpaid dividends at the annual rate of $3.50 per share, or 7.0%
of such liquidation preference. Such dividends accrue and are cumulative from
the date of issuance and are payable quarterly. The Convertible Preferred Stock
is convertible at the option of the holder thereof at any time, unless
previously redeemed, into shares of Common Stock at an initial conversion rate
of 3.2573 shares of Common Stock for each share of Convertible Preferred Stock,
subject to adjustment in certain circumstances. The Company may reduce the
conversion price of the Convertible Preferred Stock by any amount for any period
of at least 20 days, so long as the decrease is irrevocable during such period.
The Convertible Preferred Stock is redeemable, at the option of the Company, in
whole or in part, for shares of Common Stock, at any time after March 15, 1999,
initially at a price of $52.45 per share of Convertible Preferred Stock, and
thereafter at prices decreasing annually to $50.00 per share of Convertible
Preferred Stock on and after March 15, 2006, plus accrued and unpaid dividends.
The Common Stock to be issued is determined by dividing the redemption price by
the lower of the average daily closing price for the Company's Common Stock for
the preceding 20 trading days or the closing price of the Company's Common Stock
on the first business day preceding the date of the redemption notice. Any
fractional shares would be paid in cash. There is no mandatory sinking fund
obligation with respect to the Convertible Preferred Stock. The holders of the
Convertible Preferred Stock do not have any voting rights, except as required by
applicable law and in connection with certain extraordinary events and except
that, among other things, whenever accrued and unpaid dividends on the
Convertible Preferred Stock are equal to or exceed the equivalent of six
quarterly dividends payable on the Convertible Preferred Stock, the holders of
the Convertible Preferred Stock, voting separately as a class with the holders
of any other series of parity stock upon which like voting rights have been
conferred and are exercisable, will be entitled to elect two directors to the
Board of Directors until dividend arrearage has been paid or amounts have been
set apart for such payment. The Convertible Preferred Stock is senior to the
Common Stock with respect to dividends and upon liquidation, dissolution or
winding-up.


                                      36



         REDEEMABLE PREFERRED STOCK

         The Company has authorized the issuance of an aggregate of 115,000
shares of redeemable preferred stock to Crescent pursuant to the terms of the
Merger Agreement. The Company and Crescent are currently in litigation with
respect to the Merger Agreement, including the purchase of the redeemable
preferred stock. (See "Legal Proceedings - Crescent Case").

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Company's primary exposure to market risk is interest rate
risk associated with its long-term debt. The Company attempts to limit its
exposure to interest rate risk by managing the mix of its long-term fixed-rate
borrowings and short-term borrowings under the Amended Bank Facility. Borrowings
under the Amended Bank Facility bear interest, at the Company's option, at the
prime rate or at a specified premium over the one-, two-, three-, or six-month
London Interbank Offered Rate ("LIBOR"). However, the amount of outstanding
borrowings is expected to fluctuate and may be reduced from time to time. The
Amended Bank Facility matures in September 2003.

         The following table provides information about the Company's long-term
debt at December 31, 1998 (see also "Description of Certain Indebtedness and 
Capital Stock") (amounts in thousands):



                                                                 Maturity                    Face        Carrying      Estimated
                                                                   Date                     Amount         Value      Fair Value 
                                                     ----------------------------------------------------------------------------
                                                                                                          
Amended Bank Facility at a weighted average
interest rate of approximately 7.56%...............  Various to December 2005               379,000        379,000       379,000
8 7/8% senior subordinated notes...................  December 2008                          199,900        199,900       198,821
9 3/4% senior subordinated notes...................  April 2007                             150,000        144,914       153,450
10 1/8% senior subordinated notes..................  March 2006                             198,000        196,981       206,316
9 5/8% senior subordinated notes...................  June 2003, defeased January 1999       193,000        187,635       197,825
Other notes, interest ranging from 7.25% to 11.25%   Various to June 2007                    38,836         38,836        38,836 
                                                                                        -----------------------------------------
                                                                                          1,158,736      1,147,266     1,174,248 
                                                                                        -----------------------------------------
                                                                                        -----------------------------------------


                                      37



ITEM 8.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                          PAGE
                                                                          ----
                                                                       
Report of Independent Public Accountants.................................   39
Consolidated Balance Sheets..............................................   40
Consolidated Statements of Operations....................................   41
Consolidated Statements of Stockholders' Equity..........................   42
Consolidated Statements of Cash Flows....................................   43
Notes to Consolidated Financial Statements...............................   44


                                      38



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders of Station Casinos, Inc.:

         We have audited the accompanying consolidated balance sheets of Station
Casinos, Inc. (a Nevada corporation) and subsidiaries as of December 31, 1998
and March 31, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the nine months ended December 31, 1998
and for each of the two years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Station Casinos,
Inc. and subsidiaries as of December 31, 1998 and March 31, 1998, and the
results of their operations and their cash flows for the nine months ended
December 31, 1998 and for each of the two years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.




                                                             ARTHUR ANDERSEN LLP

Las Vegas, Nevada
January 21, 1999 (except for Note 6,
            as to which the date is
            February 3, 1999)

                                      39



                              STATION CASINOS, INC.
                           CONSOLIDATED BALANCE SHEETS
                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



                                                                                      DECEMBER 31,     MARCH 31,
                                                                                         1998            1998
                                                                                         ----            ----
                                                                                     (SEE NOTE 1)
                                                                                                
                                               ASSETS
Current assets:
      Cash and cash equivalents ................................................     $    59,040      $    50,158
      Cash - restricted for payment of long-term debt - defeased January 4, 1999         202,383             --
      Accounts and notes receivable, net .......................................          18,372           12,288
      Inventories ..............................................................           5,466            4,209
      Prepaid gaming taxes .....................................................           8,908            6,763
      Prepaid expenses and other ...............................................          11,767           14,073
                                                                                     -----------      -----------
          Total current assets .................................................         305,936           87,491

Property and equipment, net ....................................................       1,147,890        1,132,719
Land held for development ......................................................          17,009           24,268
Other assets, net ..............................................................          63,096           55,738
                                                                                     -----------      -----------
          Total assets .........................................................     $ 1,533,931      $ 1,300,216
                                                                                     -----------      -----------
                                                                                     -----------      -----------

                                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Current portion of long-term debt ........................................     $    13,323      $    97,931
      Accounts payable .........................................................          18,636           16,498
      Accrued payroll and related ..............................................          25,081           21,896
      Construction contracts payable ...........................................          10,399           10,534
      Accrued interest payable .................................................          15,306           16,776
      Accrued expenses and other current liabilities ...........................          42,110           33,874
                                                                                     -----------      -----------
          Total current liabilities ............................................         124,855          197,509

Long-term debt, less current portion ...........................................         946,308          615,244
9 5/8% Senior subordinated notes - defeased January 4, 1999 ....................         187,635          187,051
Deferred income taxes, net .....................................................           5,372           13,525
                                                                                     -----------      -----------
          Total liabilities ....................................................       1,264,170        1,013,329
                                                                                     -----------      -----------

Commitments and contingencies (Note 6)

Stockholders' equity:
      Preferred stock, par value $.01; authorized 5,000,000 shares;
         2,070,000 convertible preferred shares issued and outstanding .........         103,500          103,500
      Common stock, par value $.01; authorized 90,000,000 shares;
         35,312,192 and 35,310,623 shares issued and outstanding ...............             353              353
      Additional paid-in capital ...............................................         167,216          167,180
      Deferred compensation - restricted stock .................................            (159)            (528)
      Retained earnings (accumulated deficit) ..................................          (1,149)          16,382
                                                                                     -----------      -----------
          Total stockholders' equity ...........................................         269,761          286,887
                                                                                     -----------      -----------
          Total liabilities and stockholders' equity ...........................     $ 1,533,931      $ 1,300,216
                                                                                     -----------      -----------
                                                                                     -----------      -----------



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


                                      40



                              STATION CASINOS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



                                                                                            FOR THE YEARS ENDED 
                                                                                            -------------------
                                                                 FOR THE NINE                     MARCH 31,     
                                                                 MONTHS ENDED                     ---------
                                                               DECEMBER 31, 1998           1998                1997
                                                               -----------------           ----                ----
                                                                 (SEE NOTE 1)
                                                                                                   
Operating revenues:
      Casino .............................................        $    509,149         $    600,847         $    450,013
      Food and beverage ..................................             104,538              131,365               92,220
      Room ...............................................              30,040               37,330               27,420
      Other ..............................................              47,663               53,494               48,957
                                                                  ------------         ------------         ------------
           Gross revenues ................................             691,390              823,036              618,610
      Promotional allowances .............................             (49,176)             (53,426)             (35,095)
                                                                  ------------         ------------         ------------
           Net revenues ..................................             642,214              769,610              583,515
                                                                  ------------         ------------         ------------

Operating costs and expenses:
      Casino .............................................             249,353              291,102              203,857
      Food and beverage ..................................              66,121               89,928               68,994
      Room ...............................................              11,515               13,461               10,318
      Other ..............................................              19,463               24,658               23,927
      Selling, general and administrative ................             135,769              172,258              120,285
      Corporate expense ..................................              12,311               15,633               18,284
      Restructuring charge ...............................                --                   --                  2,016
      Development expenses ...............................                --                    104                1,302
      Depreciation and amortization ......................              52,975               67,414               44,589
      Impairment loss ....................................              30,011                 --                   --
      Preopening expenses ................................                --                 10,866               31,820
                                                                  ------------         ------------         ------------
                                                                       577,518              685,424              525,392
                                                                  ------------         ------------         ------------

Operating income .........................................              64,696               84,186               58,123
                                                                  ------------         ------------         ------------

Other income (expense):
      Interest expense, net ..............................             (66,127)             (78,826)             (36,698)
      Interest expense - defeasance, net .................                (835)                --                   --
      Merger and related legal costs .....................              (2,943)                --                   --
      Write-off of costs to elect REIT status ............                --                 (2,914)                --
      Other ..............................................              (4,655)              (6,566)                 (47)
                                                                  ------------         ------------         ------------
                                                                       (74,560)             (88,306)             (36,745)
                                                                  ------------         ------------         ------------
Income (loss) before income taxes and
      extraordinary item .................................              (9,864)              (4,120)              21,378
Income tax (provision) benefit ...........................                 871                  966               (7,615)
                                                                  ------------         ------------         ------------
Income (loss) before extraordinary item ..................              (8,993)              (3,154)              13,763

Extraordinary item - loss on early retirement of debt, net
   of applicable income tax benefit ......................              (3,104)              (2,042)                --
                                                                  ------------         ------------         ------------
Net income (loss) ........................................             (12,097)              (5,196)              13,763
Preferred stock dividends ................................              (5,434)              (7,245)              (7,245)
                                                                  ------------         ------------         ------------
Net income (loss) applicable to common stock .............        $    (17,531)        $    (12,441)        $      6,518
                                                                  ------------         ------------         ------------
                                                                  ------------         ------------         ------------
Weighted average common shares outstanding ...............          35,311,715           35,309,189           35,316,077
                                                                  ------------         ------------         ------------
                                                                  ------------         ------------         ------------

Basic and diluted earnings (loss) per common share:
   Earnings (loss) applicable to common stock, before 
      extraordinary item..................................        $      (0.41)        $      (0.29)        $       0.18
   Extraordinary item ....................................        $      (0.09)        $      (0.06)        $       --
   Earnings (loss) applicable to common stock ............        $      (0.50)        $      (0.35)        $       0.18


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


                                      41



                              STATION CASINOS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (AMOUNTS IN THOUSANDS)



                                                                                  DEFERRED         RETAINED
                                                                ADDITIONAL      COMPENSATION -     EARNINGS           TOTAL
                                      PREFERRED       COMMON    PAID - IN        RESTRICTED      (ACCUMULATED     STOCKHOLDERS'
                                        STOCK         STOCK      CAPITAL           STOCK            DEFICIT)         EQUITY
                                        -----         -----      -------           -----            --------         ------
                                                                                                
Balances, March 31,1996 ....        $  90,000      $     353    $ 167,623         $  (1,811)        $  22,305         $ 278,470
Issuance of preferred
    stock (Note 7) .........           13,500           --           (405)             --                --              13,095
Exercise of stock options ..             --             --            179              --                --                 179
Amortization of deferred
  compensation .............             --             --           --                 586              --                 586
Preferred stock dividends ..             --             --           --                --              (7,245)           (7,245)
Net income .................             --             --           --                --              13,763            13,763
                                    ---------      ---------    ---------         ---------         ---------         ---------
Balances, March 31,1997 ....          103,500            353      167,397            (1,225)           28,823           298,848
Exercise of stock options ..             --             --             26              --                --                  26
Cancellation of restricted
  stock ....................             --             --           (243)              243              --                --
Amortization of deferred
  compensation .............             --             --           --                 454              --                 454
Preferred stock dividends ..             --             --           --                --              (7,245)           (7,245)
Net loss ...................             --             --           --                --              (5,196)           (5,196)
                                    ---------      ---------    ---------         ---------         ---------         ---------
Balances, March 31, 1998 ...          103,500            353      167,180              (528)           16,382           286,887
Exercise of stock options ..             --             --             36              --                --                  36
Amortization of deferred
  compensation .............             --             --           --                 369              --                 369
Preferred stock dividends ..             --             --           --                --              (5,434)           (5,434)
Net loss ...................             --             --           --                --             (12,097)          (12,097)
                                    ---------      ---------    ---------         ---------         ---------         ---------
Balances, December 31, 1998,
  (see Note 1) .............        $ 103,500      $     353    $ 167,216         $    (159)        $  (1,149)        $ 269,761
                                    ---------      ---------    ---------         ---------         ---------         ---------
                                    ---------      ---------    ---------         ---------         ---------         ---------



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


                                      42



                              STATION CASINOS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)



                                                                                                          FOR THE YEARS ENDED 
                                                                                                          -------------------
                                                                                 FOR THE NINE                  MARCH 31,      
                                                                                  MONTHS ENDED                 ---------
                                                                               DECEMBER 31, 1998        1998               1997
                                                                               -----------------        ----               ----
                                                                                 (SEE NOTE 1)
                                                                                                                  
Cash flows from operating activities:
Net income (loss) ..........................................................        $ (12,097)        $  (5,196)        $  13,763
                                                                                    ---------         ---------         ---------
Adjustments to reconcile net income (loss) to net cash provided by operating
  activities:
    Depreciation and amortization ..........................................           52,975            67,414            44,589
    Amortization of debt discount and issuance costs .......................            4,254             6,443             5,279
    Loss on early retirement of debt .......................................            4,775             2,668              --
    Merger and related legal costs .........................................            2,943              --                --
    Asset impairment .......................................................           30,011              --                --
    Write-off of costs to elect REIT status ................................             --               2,914              --
    Preopening expenses ....................................................             --              10,866            31,820
    (Decrease) increase in deferred income taxes ...........................           (6,410)            2,854            (3,752)
    Changes in assets and liabilities:
      Increase in accounts and notes receivable, net .......................           (5,598)           (4,845)           (1,151)
      Increase in inventories and prepaid expenses and other ...............           (2,839)           (3,228)           (3,751)
      Increase (decrease) in accounts payable ..............................            2,138            (4,608)           10,015
      Increase in accrued expenses and other current liabilities ...........            9,531            23,160            13,723
    Other, net .............................................................           (2,991)            6,513             1,268
                                                                                    ---------         ---------         ---------
              Total adjustments ............................................           88,789           110,151            98,040
                                                                                    ---------         ---------         ---------
              Net cash provided by operating activities ....................           76,692           104,955           111,803
                                                                                    ---------         ---------         ---------
Cash flows from investing activities:
    Capital expenditures ...................................................          (96,482)         (130,853)         (505,735)
    Proceeds from sale of property and equipment ...........................            5,998             4,925             8,900
    (Decrease) increase in construction contracts payable ..................             (135)          (84,301)           66,956
    Preopening expenses ....................................................             --              (8,551)          (31,820)
    Other, net .............................................................           (3,152)             (627)          (17,309)
                                                                                    ---------         ---------         ---------
              Net cash used in investing activities ........................          (93,771)         (219,407)         (479,008)
                                                                                    ---------         ---------         ---------
Cash flows from financing activities:
    Borrowings under bank facility, net ....................................           55,000            47,000           277,000
    Borrowings (payments) under the Sunset loan agreement ..................             --             (46,000)           46,000
    Proceeds from notes payable ............................................             --              16,239             2,250
    Principal payments on notes payable ....................................          (11,780)          (27,030)          (30,444)
    Proceeds from the issuance of senior subordinated notes ................          199,900           144,287              --
    Proceeds from the issuance of preferred stock ..........................             --                --              13,095
    Dividends paid on preferred stock ......................................           (5,434)           (7,245)           (6,985)
    Debt issuance costs and other, net .....................................           (9,342)           (5,163)           (6,057)
                                                                                    ---------         ---------         ---------
              Net cash provided by financing activities ....................          228,344           122,088           294,859
                                                                                    ---------         ---------         ---------
Cash and cash equivalents:
    Increase (decrease) in cash and cash equivalents .......................          211,265             7,636           (72,346)
    Balance, beginning of year .............................................           50,158            42,522           114,868
                                                                                    ---------         ---------         ---------
    Balance, end of year ...................................................        $ 261,423         $  50,158         $  42,522
                                                                                    ---------         ---------         ---------
                                                                                    ---------         ---------         ---------
Supplemental cash flow disclosures:
    Cash paid for interest, net of amounts capitalized .....................        $  65,275         $  66,691         $  28,577
    Cash paid for income taxes, net ........................................        $     519         $      92         $   9,250
    Property and equipment purchases financed by debt ......................        $   2,978         $   3,532         $     361
    Assets sold for note receivable ........................................        $    --           $    --           $   1,550


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


                                      43



                              STATION CASINOS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

         BASIS OF PRESENTATION AND ORGANIZATION

         Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdictional gaming and entertainment enterprise that
currently owns and operates four major hotel/casino properties and two smaller
casino properties in Las Vegas, Nevada, a gaming and entertainment complex in
St. Charles, Missouri and a gaming and entertainment complex in Kansas City,
Missouri. The Company also owns and provides slot route management services in
southern Nevada.

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Palace Station Hotel & Casino, Inc.
("Palace Station"), Boulder Station, Inc. ("Boulder Station"), Texas Station,
Inc. ("Texas Station"), Sunset Station, Inc. ("Sunset Station"), St. Charles
Riverfront Station, Inc. ("Station Casino St. Charles"), Kansas City Station
Corporation ("Station Casino Kansas City"), Southwest Gaming Services, Inc.
("SGSI") and Tropicana Station, Inc., the operator of the Wild Wild West
Gambling Hall & Hotel ("Wild Wild West"), which opened in July 1998. The Company
also owns a 50% interest in Town Center Amusements, Inc. d.b.a. Barley's Casino
& Brewing Company ("Barley's"). The Company accounts for this investment in
Barley's using the equity method of accounting. All significant intercompany
balances and transactions have been eliminated.

         CHANGE IN FISCAL YEAR

         On November 6, 1998, the Company filed a Form 8-K announcing its change
in fiscal year end from March 31 of each year to December 31 of each year. This
change is effective for the nine month period ended December 31, 1998 (the
"Transition Period 1998"). Selected consolidated financial data for the nine
months ended December 31, 1997 is presented below, for comparison purposes only
(amounts in thousands, unaudited).

                                                        
 Net revenues...........................................   $     564,809
 Operating income.......................................   $      56,502
 Loss before income taxes...............................   $      (3,892)
 Income tax benefit.....................................   $       1,384
 Net loss...............................................   $      (2,508)
 Net loss applicable to common stock....................   $      (7,942)
 Loss per common share applicable to common stock.......   $       (0.22)



         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.

         CASH AND CASH EQUIVALENTS

         Cash and cash equivalents include investments purchased with an
original maturity of 90 days or less.

         INVENTORIES

         Inventories are stated at the lower of cost or market; cost being
determined on a first-in, first-out basis.


                                      44



         PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or the terms of the capitalized lease, whichever is
less. Costs of major improvements are capitalized, while costs of normal repairs
and maintenance are charged to expense as incurred.

         CAPITALIZATION OF INTEREST

         The Company capitalizes interest costs associated with debt incurred in
connection with major construction projects. Interest capitalization ceases once
the project is substantially complete or no longer undergoing construction
activities to prepare it for its intended use. When no debt is specifically
identified as being incurred in connection with such construction projects, the
Company capitalizes interest on amounts expended on the project at the Company's
weighted average cost of borrowed money. Interest capitalized for the Transition
Period 1998 was approximately $1.2 million and for the fiscal years ended March
31, 1998 and 1997 was approximately $12.8 million and $21.1 million,
respectively.

         DEBT ISSUANCE COSTS

         Debt issuance costs incurred in connection with the issuance of
long-term debt are capitalized and amortized to interest expense over the terms
of the related debt agreements.

         PREOPENING EXPENSES

         During the construction of and prior to the opening of a facility, all
operating expenses, including incremental salaries and wages directly related
thereto, were capitalized as preopening expenses. The construction phase
typically covers a period of 12 to 24 months. The majority of preopening costs
are incurred in the three months prior to opening. The Company expenses
preopening expenses immediately upon the opening of the related facility. During
the fiscal year ended March 31, 1997, the Company incurred preopening expenses
of $31.8 million, substantially related to the opening of Station Casino Kansas
City. During the fiscal year ended March 31, 1998, the Company incurred
preopening expenses of $10.9 million, substantially related to the opening of
Sunset Station. During the Transition Period 1998, the Company had no preopening
expenses. Effective January 1, 1999, Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities", will change the manner in which the Company
accounts for preopening expenses. See "Recently Issued Accounting Standards" in
this Note 1.

         REVENUES AND PROMOTIONAL ALLOWANCES

         In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. All other revenues are recognized as the service is
provided. Revenues include the retail value of accommodations and food and
beverage provided on a complimentary basis to customers. The estimated
departmental costs of providing such promotional allowances are included in
casino costs and expenses and consist of the following (amounts in thousands):



                                                                               TRANSITION                FOR THE YEARS ENDED
                                                                                 PERIOD                       MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                  1998                 1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
       Food and beverage...............................................     $         38,816     $        40,573    $       27,418
       Room............................................................                1,877               3,027             1,439
       Other...........................................................                1,932               2,828             1,263
                                                                            ----------------     ---------------    --------------
         Total.........................................................     $         42,625     $        46,428    $       30,120
                                                                            ----------------     ---------------    --------------
                                                                            ----------------     ---------------    --------------



                                      45



         EARNINGS (LOSS) APPLICABLE TO COMMON STOCK

         In the fiscal year ended March 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
statement replaces previously reported earnings per share ("EPS") with basic EPS
and diluted EPS. Basic EPS is computed by dividing net income (loss) applicable
to common stock by the weighted average common shares outstanding during the
period. Diluted EPS reflects the additional dilution for all potentially
dilutive securities such as stock options and convertible preferred stock.
Diluted EPS is not presented separately because the exercise of stock options
and the conversion of the convertible preferred stock does not have a dilutive
effect on the per share amounts.

         RECENTLY ISSUED ACCOUNTING STANDARDS

         The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," both of which became effective in the
Transition Period 1998. These SFAS's had no impact on the Company's results of
operations or financial position.

         The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position No. 98-5,
"Reporting on the Costs of Start-up Activities." The provisions of SOP 98-5 are
effective for fiscal years beginning after December 15, 1998 and require that
the costs associated with start-up activities (including preopening costs of
casinos) be expensed as incurred.

         RECLASSIFICATIONS

         Certain amounts in the March 31, 1998 and 1997 consolidated financial
statements have been reclassified to conform to the December 31, 1998
presentation. These reclassifications had no effect on the Company's net income.

2.  ACCOUNTS AND NOTES RECEIVABLE

         Components of accounts and notes receivable are as follows (amounts in
thousands):



                                                                                        DECEMBER 31,          MARCH 31,
                                                                                            1998                 1998    
                                                                                      ---------------       -------------
                                                                                                      
         Casino.................................................................      $         6,238       $      6,407
         Hotel..................................................................                1,743              1,525
         Insurance Proceeds (see Note 3)........................................                7,239             -
         Other..................................................................                5,187              6,117
                                                                                      ---------------       ------------
                                                                                               20,407             14,049
         Allowance for doubtful accounts........................................               (2,035)            (1,761)
                                                                                      ----------------      -------------
              Accounts and notes receivable, net................................      $        18,372       $     12,288 
                                                                                      ----------------      -------------
                                                                                      ----------------      -------------


3.  PROPERTY AND EQUIPMENT

         Property and equipment  consists of the  following as of December 
31, 1998 and March 31,  1998 (amounts in thousands):



                                                                                               DECEMBER 31,        MARCH 31,
                                                                ESTIMATED LIFE (YEARS)            1998               1998      
                                                                ----------------------       ---------------   ----------------
                                                                                                      
         Land ................................................               -               $       37,864    $        37,856
         Land leases acquired.................................             48-52                      4,685              4,685
         Buildings and leasehold improvements.................             31-45                    728,642            706,519
         Boats and barges.....................................             20-45                    100,086            123,774
         Furniture, fixtures and equipment....................              3-7                     251,681            237,518
         Construction in progress.............................               -                      224,572            185,865
                                                                                             ---------------   ---------------
                                                                                                  1,347,530          1,296,217
         Accumulated depreciation and amortization............                                     (199,640)          (163,498)
                                                                                             ---------------   ---------------
              Property and equipment, net.....................                               $     1,147,890   $     1,132,719
                                                                                             ---------------   ---------------
                                                                                             ---------------   ---------------



                                      46



         At December 31, 1998 and March 31, 1998, substantially all property and
equipment of the Company is pledged as collateral for long-term debt.

         CONSTRUCTION IN PROGRESS

         In the fall of 1996, the Company commenced an expansion project at
Station Casino St. Charles which included the building of a backwater basin
containing two new gaming vessels and a new retail and entertainment complex.
Since March 31, 1998, construction on the Station Casino St. Charles expansion
project has been halted.

         The Company currently believes the Station Casino St. Charles expansion
project as originally contemplated fulfills a strategic need in the St. Louis,
Missouri market. While the Company desires to complete and operate these new
facilities, circumstances may arise in the future, including the lack of
available financing, a downturn in the demand for gaming facilities, increased
regulatory requirements unique to the state of Missouri or more attractive uses
of available capital, which may prevent the expansion project from being
completed as originally designed, if at all. In this event, certain costs
incurred to date may be deemed to possess little or no value necessitating the
recognition of an impairment loss in the period such a determination is made.
The impairment loss could include substantially all of the amount invested by
the Company in the Station Casino St. Charles expansion project.

         Included in construction in progress at December 31, 1998 is
approximately $169.0 million related to the Station Casino St. Charles expansion
project. Management does not anticipate that any major construction activity on
the expansion project will resume in the near term. Additionally, there is $39.2
million included in construction in progress at December 31, 1998 related to an
expansion project at Texas Station. This expansion was completed in February
1999.

         PALACE STATION FIRE AND FLOOD

         On July 20, 1998, Palace Station suffered damage to its casino and
hotel tower as a result of a thunderstorm in the Las Vegas Valley. In November
1998, repairs were completed to the casino and all of the rooms in the 21-story
hotel tower became fully functional. Losses associated with the property damage
and business interruption are covered under the Company's insurance policies. As
of December 31, 1998, the Company has recorded $6.8 million in other revenues in
the Consolidated Statement of Operations for the Transition Period 1998 related
to the business interruption claim.

4.  LAND HELD FOR DEVELOPMENT

         The Company has acquired several parcels of land in various
jurisdictions as part of the Company's development activities. The Company's
decision on whether to proceed with any new gaming opportunity is dependent upon
future economic and regulatory factors, the availability of financing and
competitive and strategic considerations. As many of these considerations are
beyond the Company's control, no assurances can be made that the Company will be
able to obtain appropriate licensing or be able to secure additional, acceptable
financing in order to proceed with any particular project. Included in land held
for development at December 31, 1998 and March 31, 1998 is approximately $17.0
million and $20.6 million, respectively, related to land which had been acquired
for potential gaming projects in jurisdictions where gaming has been approved.
In June 1997, $5.0 million of certain expired option payments to lease or
acquire land for future development, which had previously been capitalized, were
expensed.

         In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
recorded an impairment loss of $30.0 million to adjust the carrying value of its
fixed assets and land held for development to their estimated fair value in
1998. The impairment loss principally involves assets at the Station Casino St.
Charles facility, including a riverboat formerly used in the Missouri
operations, capitalized project costs associated with various parcels of land
determined to have no value, and several parcels of land within close proximity
to the St. Charles, Missouri site that were being held for future development.
The fair value of the impaired assets was primarily determined through the
current market's interest in riverboats and barges, and on the current
comparable sales prices on parcels of land in the St. Charles area. The total
amount of the impairment loss related to this category of assets was
approximately $23.4 million. In addition to the assets described above, the most
significant portion of the remaining 


                                      47



impairment loss relates to several parcels of land in Nevada and Texas that 
the Company had acquired in the past for either defensive or expansion 
purposes. The value of these parcels was determined based on current sales 
prices for comparable parcels of land on the market. The following two 
circumstances led to the Company's decision to write-down these assets to 
their fair market value: (1) the passage, in Nevada, of legislation which 
places significantly higher requirements on land to be zoned for gaming 
purposes, and (2) the termination of the Plan of Merger with Crescent Real 
Estate Equities Company (see Note 13).

         Included in other assets, net on the accompanying consolidated balance
sheet as of December 31, 1998, is $6.7 million related to these assets held for
sale. The Company is actively attempting to dispose of these non-strategic
assets and expects to complete the sale of certain of these assets in the first
half of calendar year 1999.

5.  LONG-TERM DEBT

         Long-term debt consists of the following (amounts in thousands):



                                                                                                  DECEMBER 31,        MARCH 31,
                                                                                                      1998               1998    
                                                                                                ---------------    ---------------
                                                                                                             
Amended and restated reducing revolving credit facility and term loan (the "Amended Bank
   Facility"), secured by substantially all of the assets of Palace Station, Boulder
   Station, Texas Station, Sunset Station, Station Casino St. Charles and Station Casino
   Kansas  City, $350.0 million limit at December 31, 1998 on the revolving facility,
   reducing quarterly by varying amounts until September 2003 when the remaining principal
   balance is due, interest at a margin above the bank's prime rate or the Eurodollar Rate
   (7.37% at December 31, 1998), $75.0 million limit at December 31, 1998 on the term
   loan, amortizing quarterly by $187,500 through December 2004, then by $17.8 million
   each quarter thereafter until maturity on December 31, 2005, interest at 3.25% above
   the Eurodollar Rate (8.33% at December 31, 1998) .......................................      $  379,000           $     -
Reducing revolving credit facility, secured by substantially all of the assets of Palace
   Station, Boulder Station, Texas Station, Sunset Station, Station Casino St. Charles and
   Station Casino Kansas City, repaid in November 1998.....................................         -                     324,000
8 7/8% senior subordinated notes, payable interest only semi-annually, principal due
   December 1, 2008........................................................................         199,900                 -
9 3/4% senior subordinated notes, payable interest only semi-annually, principal due
   April 15, 2007, net of unamortized discount of $5.1 million at December 31, 1998........         144,914               144,629
10 1/8% senior subordinated notes, payable interest only semi-annually, principal due
   March 15, 2006, net of unamortized discount of $1.0 million at December 31, 1998........         196,981               196,908
Other long-term debt, collateralized by various assets, including slot machines, furniture
   and equipment, and land, monthly installments including interest ranging from 7.25% to
   11.25% at December 31, 1998.............................................................          38,836                47,638
                                                                                            -------------------   -----------------
   Total long-term debt....................................................................         959,631               713,175
Current portion of long-term debt..........................................................         (13,323)              (97,931)
                                                                                            -------------------   -----------------
   Total long-term debt, less current portion..............................................         946,308               615,244

9 5/8% senior subordinated notes, payable interest only semi-annually, principal
   due June 1, 2003, net of unamortized discount of $5.4 million at December 31,
   1998, defeased January 4, 1999..........................................................         187,635               187,051
                                                                                            -------------------   -----------------
   Total...................................................................................      $1,133,943           $   802,295
                                                                                            -------------------   -----------------
                                                                                            -------------------   -----------------


         In June 1993, the Company completed an offering at par of $110 million
in 9 5/8% senior subordinated notes due in June 2003. In May 1994, the Company
completed an offering of $83 million in senior subordinated notes that have
equal priority with the existing $110 million senior subordinated notes, and
have identical maturities and covenants as the original issue. The 


                                      48



$83 million senior subordinated notes have a coupon rate of 9 5/8% and were 
priced to yield 11.5% to maturity. The discount on the $83 million senior 
subordinated notes has been recorded as a reduction to long-term debt in the 
accompanying consolidated balance sheets.

         In March 1996, the Company completed an offering of $198 million of
senior subordinated notes due in March 2006, that have equal priority with the
other senior subordinated notes. The $198 million senior subordinated notes have
a coupon rate of 10 1/8% and were priced to yield 10.24% to maturity. The
discount on the $198 million senior subordinated notes has been recorded as a
reduction to long-term debt in the accompanying consolidated balance sheets.

         In April 1997, the Company completed an offering of $150 million of 
senior subordinated notes due in April 2007, that have equal priority with 
the other senior subordinated notes. The $150 million senior subordinated 
notes have a coupon rate of 9 3/4% and were priced to yield 10.37% to 
maturity. The discount on the $150 million senior subordinated notes has been 
recorded as a reduction to long-term debt in the accompanying consolidated 
balance sheets.

         In December 1998, the Company completed an offering of $199.9 
million of senior subordinated notes due in December 2008, that have equal 
priority with the other senior subordinated notes. The $199.9 million senior 
subordinated notes have a coupon rate of 8 7/8%. At December 31, 1998, the 
Company had deposited the net proceeds from the sale of the 8 7/8% Notes and 
a portion of the funds borrowed under the Amended Bank Facility in a separate 
trust account with the trustee under the indenture relating to the 9 5/8% 
Notes to redeem and to pay accrued interest and redemption premiums related 
to the 9 5/8% Notes on the redemption date. The redemption occurred on 
January 4, 1999. During the first quarter of calendar year 1999, the Company 
will record an extraordinary charge of $10.3 million (net of applicable tax 
benefit) to reflect the write-off of the unamortized debt discount, 
unamortized loan costs and the premium to redeem the notes.

         The indentures governing the Company's senior subordinated notes ("the
Indentures") contain certain customary financial and other covenants, which
among other things, govern the Company's and certain of its subsidiaries'
ability to incur indebtedness (except, as specifically allowed) unless after
giving effect thereto, a 2.0 to 1.0 pro forma Consolidated Coverage Ratio (as
defined in the Indentures) has been met. As of December 31, 1998, the Company's
Consolidated Coverage Ratio was 1.98 to 1.00.

         In November 1998, the Company secured a $425.0 million bank credit
facility which amended the Company's existing reducing revolving credit facility
and repaid a supplemental facility which had been obtained in September 1998.
The Amended Bank Facility consists of three secured tranches. Two revolving
tranches constitute a reducing revolving credit facility (the "Revolving
Facility") which provides for borrowings up to an aggregate principal amount of
$350.0 million and the third tranche constitutes a $75.0 million term loan (the
"Term Loan"). The Revolving Facility includes a swing line facility with a
sub-limit on borrowing of $15.0 million. The borrowers under the Amended Bank
Facility are Palace Station, Boulder Station, Texas Station, Sunset Station,
Station Casino Kansas City and Station Casino St. Charles (collectively, the
"Borrowers"). The Amended Bank Facility is secured by substantially all of the
assets of the Borrowers. The Company, Southwest Gaming Services, Inc. and
certain other subsidiaries guarantee the borrowings under the Amended Bank
Facility (collectively the "Guarantors"). The maturity date for the Revolving
Facility is September 30, 2003. The availability under the Revolving Facility
will reduce by $7.0 million on September 30, 1999; by $12.25 million on each of
December 31, 1999, March 31, 2000 and June 30, 2000; by $14.0 million on
September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001; and by
$17.5 million on each fiscal quarter end thereafter. The Term Loan matures on
December 31, 2005 and amortizes in installments of $187,500 on each fiscal
quarter end from March 31, 2000 until and including December 31, 2004 and of
$17.8 million on each fiscal quarter end thereafter. Borrowings under the
Revolving Facility bear interest at a margin above the Alternate Base Rate or
the Eurodollar Rate (each, as defined in the Amended Bank Facility), as selected
by the Company. The margin above such rates, and the fee on the unfunded
portions of the Revolving Facility, will vary quarterly based on the Company's
combined consolidated ratio of average quarterly adjusted funded debt to net
income before interest, taxes, depreciation and amortization adjusted for
non-recurring gains and losses and preopening expenses, if any ("Adjusted
EBITDA"). As of December 31, 1998, the Borrowers' margin above the Eurodollar
Rate on borrowings under the Revolving Facility was 2.25%. The maximum margin
for Eurodollar Rate borrowings is 2.75%. The maximum margin for alternate base
rate borrowings is 1.50%. The maximum fee for the unfunded portion of the
Revolving Facility is 0.50% multiplied by the average of the unfunded portion of
the Revolving Facility. The interest rate on the Term Loan is 3.25% 


                                      49



above the Eurodollar Rate. The Company recognized an extraordinary loss of 
$3.1 million, net of the applicable income tax benefit, as a result of the 
early retirement of debt, as described above.

         The Amended Bank Facility contains certain financial and other
covenants. These include a maximum funded debt to Adjusted EBITDA ratio for the
Borrowers combined of 2.50 to 1.00 for each fiscal quarter, a minimum fixed
charge coverage ratio for the preceding four quarters for the Borrowers combined
of 1.40 to 1.00 until and including March 31, 1999 and for each quarter
thereafter, 1.50 to 1.00, limitations on indebtedness, limitations on asset
dispositions, limitations on investments, limitations on prepayments of
indebtedness and rent and limitations on capital expenditures. As of December
31, 1998, the Borrowers combined funded debt to Adjusted EBITDA ratio was 2.13
to 1.00 and their combined fixed charge coverage ratio for the preceding four
quarters ended December 31, 1998 was 1.86 to 1.00. A tranche of the Revolving
Facility contains a minimum tangible net worth requirement for Palace Station
($10 million plus 95% of net income determined as of the end of each fiscal
quarter with no reduction for net losses) and certain restrictions on
distributions of cash from Palace Station to the Company. As of December 31,
1998, Palace Station's tangible net worth exceeded the requirement by
approximately $8.5 million. These covenants limit Palace Station's ability to
make payments to the Company, a significant source of anticipated cash for the
Company.

         In addition, the Amended Bank Facility has financial and other
covenants relating to the Company. These include a tangible net worth covenant
of $265.0 million (adjusted upward for 95% of cumulative net income (without
deduction for any net loss) and 100% of capital stock issuances and downward for
certain capital stock repurchases, preferred stock dividends, or certain
permissible asset dispositions, required write down of assets and preopening
expense, if any) and a consolidated funded debt to Adjusted EBITDA ratio of no
more than 5.50 to 1.00 on December 31, 1998 and reducing quarterly to 4.00 to
1.00 on September 30, 2001. Other covenants limit prepayments of indebtedness or
rent (including, subordinated debt other than refinancings meeting certain
criteria), limitations on asset dispositions, limitation on dividends,
limitations on indebtedness, limitations on investments and limitations on
capital expenditures. The Amended Bank Facility also prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and preferred stock, the amounts necessary to fund casino
bankroll in the ordinary course of business, any amount required to be held by
the Company or any restricted subsidiary by any gaming boards, and $2.0 million.
The Company has pledged the stock of all of its subsidiaries except Kansas City
Station Corporation and St. Charles Riverfront Station, Inc. and has agreed to
pledge the stock of the latter two subsidiaries upon regulatory approval (which
is expected to be obtained). The Company and the Guarantors waive certain
defenses and rights including rights of subrogation and reimbursement. The
Amended Bank Facility contains customary events of default and remedies and is
cross-defaulted to the Company's senior subordinated notes and a change of
control default (which definition is substantially similar to the definition of
Change of Control Triggering Event in the indentures governing the senior
subordinated notes).

         On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the
Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan
Agreement") with Bank of America National Trust and Savings Association, Bank of
Scotland, Societe Generale and each of the other lenders party to such
agreement, pursuant to which Sunset Station received a commitment for $110
million to finance the remaining development and construction costs of Sunset
Station. The Company also entered into an operating lease for certain furniture,
fixtures and equipment with a cost of up to $40 million to be subleased to
Sunset Station as part of the Sunset Station project (See Note 6).

         The Sunset Loan Agreement included a first mortgage term note in the
amount of $110 million (the "Sunset Note") which was non-recourse to the
Company, except as to certain construction matters pursuant to a completion
guarantee dated as of September 25, 1996, executed by the Company on behalf of
Sunset Station and except that the Company had pledged all of the stock of
Sunset Station as security for the Sunset Loan Agreement. As of March 31, 1998,
the Sunset Note had been repaid. The early retirement resulted in an
extraordinary loss of $2.0 million, net of the applicable income tax benefit.

         In order to manage the interest rate risk associated with the Sunset
Note, Sunset Station entered into an interest rate swap agreement with Bank of
America National Trust and Savings Association. This agreement swapped the
variable rate interest pursuant to the Sunset Note to a fixed rate of 9.58%
(5.83% fixed plus the Sunset Note margin), on $35 million notional amount as of
January 1997 increasing to $60 million at March 1997, $90 million at June 1997,
$100 million at September 1997 and then decreasing to $95 million at June 1998.
The agreement expired in December 1998. The difference paid or received 


                                      50



pursuant to the swap agreement is accrued as interest rates change and 
recognized as an adjustment to interest expense on the Sunset Note. At the 
time of the early retirement of the Sunset Note, the Borrowers under the Bank 
Facility accepted the interest rate swap on substantially identical terms to 
those of the Sunset Note.

         The estimated fair value of the Company's long-term debt at December
31, 1998, was approximately $1,174.2 million, compared to its book value of
approximately $1,147.3 million. The estimated fair value amounts were based on
quoted market prices on or about December 31, 1998, for the Company's debt
securities that are publicly traded. For debt securities that are not publicly
traded, fair value was estimated based on the quoted market prices for similar
issues or the current rates offered to the Company for debt having the same
remaining maturities.

         Scheduled maturities of long-term debt are as follows (amounts in
thousands):




YEAR ENDING DECEMBER 31,
- ------------------------
                                                            
1999......................................................           $13,323
2000......................................................            36,888
2001......................................................            74,373
2002......................................................            72,008
2003......................................................           336,547
Thereafter................................................           614,127
                                                               --------------
   Total..................................................        $1,147,266
                                                               --------------
                                                               --------------


         Included in maturities for the year ending December 31, 2003 is $187.6
million of debt which was repaid on January 4, 1999.

6.  COMMITMENTS AND CONTINGENCIES

         BOULDER STATION LEASE

         The Company entered into a ground lease for 27 acres of land on which
Boulder Station is located. The Company leases this land from a trust pursuant
to a long-term ground lease. The trustee of this trust is Bank of America NT&SA,
the beneficiary of which is KB Enterprises, an affiliated company owned by Frank
J. Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the parents of
Frank J. Fertitta III, Chairman of the Board and Chief Executive Officer of the
Company. The lease has a maximum term of 65 years, ending in June 2058. The
lease provides for monthly payments of $135,525 through June 2008. In July 2008,
and every ten years thereafter, the rent will be adjusted by a cost of living
factor. In July 2003, and every ten years thereafter, the rent will be adjusted
to the product of the fair market value of the land and the greater of (i) the
then prevailing annual rate of return for comparably situated property or (ii)
8% per year. In no event will the rent for any period be less than the
immediately prior period. Pursuant to the ground lease, the Company has an
option, exercisable at five-year intervals beginning in June 1998, to purchase
the land at fair market value. The Company's leasehold interest in the property
is subject to a lien to secure borrowings under the Amended Bank Facility.

         TEXAS STATION LEASE

         The Company entered into a ground lease for 47 acres of land on which
Texas Station is located. The Company leases this land from a trust pursuant to
a long-term ground lease. The trustee of this trust is Bank of America NT&SA,
the beneficiary of which is Texas Gambling Hall & Hotel, Inc. an affiliate
company of the Related Lessor. The lease has a maximum term of 65 years, ending
in July 2000. The lease provides for monthly rental payments of $150,000 through
June 2000. In July 2000, and every ten years thereafter, the rent will be
adjusted to the product of the fair market value of the land and the greater of
(i) the then prevailing annual rate of return being realized for owners of
comparable land in Clark County or (ii) 8% per year. The rent will be further
adjusted by a cost of living factor after the first ten years and every ten
years thereafter. In no event will the rent for any period be less than the
immediately prior period. Pursuant to the ground lease, the Company will have an
option, exercisable at five-year intervals beginning in May 2000, to purchase
the land at fair market value. The Company's leasehold interest in the property
is subject to a lien to secure borrowings under the Amended Bank Facility.


                                      51



         SUNSET STATION LEASE

         In June 1994, the Company entered into a lease agreement for 
approximately 47.5 acres of land on which Sunset Station is located. The 
lease has a term of 65 years with monthly rental payments of $120,000, 
adjusted on each subsequent five-year anniversary by a cost of living factor. 
On the seventh anniversary of the lease, the Company has an option to 
purchase this land for $23.8 million. Additionally, on the seventh 
anniversary of the lease, the lessor has an option to sell this land to the 
Company for $21.8 million.

         STATION CASINO KANSAS CITY LEASE

         The Company has entered into a joint venture which owns the land on 
which Station Casino Kansas City is located. At December 31, 1998, $3.0 
million related to this investment is included in other assets, net in the 
accompanying consolidated balance sheets.

         In April 1994, Station Casino Kansas City entered into an agreement 
with the joint venture to lease this land. The agreement requires monthly 
payments of $85,000 through March 31, 1998, and $91,800 through the remainder 
of the lease term. The lease expires March 31, 2006, with an option to extend 
the lease for up to eight renewal periods of ten years each, plus one 
additional seven year period. Commencing April 1, 1998 and every anniversary 
thereafter, the rent shall be adjusted by a cost of living factor. In 
connection with the joint venture agreement, the Company received an option 
providing for the right to acquire the joint venture partner's interest in 
this joint venture. The Company has the option to acquire this interest at 
any time after April 1, 2002 through April 1, 2011, for $11.7 million, 
however, commencing April 1, 1998, the purchase price will be adjusted by a 
cost of living factor of not more than 5% or less than 2% per annum. At 
December 31, 1998, $2.6 million paid by the Company in consideration for this 
option is included in other assets, net in the accompanying consolidated 
balance sheets.

         SOUTHERN FLORIDA

         In October 1994, the Company entered into an agreement to form a 
limited partnership with the existing operator of a pari-mutuel facility in 
southern Florida. In the event casino gaming is approved by the voters of 
Florida by October 2000 and in the event the site is licensed by the state, 
the Company will be obligated to make capital contributions to the 
partnership totaling $35 million, reduced by credits for amounts previously 
contributed to any Florida gaming referendum campaign.

         EQUIPMENT LEASE

         In connection with the Sunset Loan Agreement, the Company entered 
into an operating lease for furniture, fixtures and equipment (the 
"Equipment") with a cost of up to $40 million, dated as of September 25, 
1996, (the "Sunset Operating Lease") with First Security Trust Company of 
Nevada. The Sunset Operating Lease expires in October 2000 and carries a 
lease rate of 225 basis points above the Eurodollar Rate. As of December 31, 
1998, $35.7 million of this facility had been drawn and no further draws 
pursuant to the lease will be made. The Company has entered into a sublease 
with Sunset Station for the Equipment pursuant to an operating lease with 
financial terms substantially similar to the Sunset Operating Lease. The 
Company has an option to purchase the equipment for $30.5 million at December 
31, 1998. This amount reduces throughout the term of the lease to $21.4 
million at October 2000.

         In connection with the Sunset Operating Lease, the Company also 
entered into a participation agreement, dated as of September 25, 1996, (the 
"Participation Agreement") with the trustee, as lessor under the Sunset 
Operating Lease, and holders of beneficial interests in the Lessor Trust (the 
"Holders"). Pursuant to the Participation Agreement, the Holders advanced 
funds to the trustee for the purchase by the trustee of, or to reimburse the 
Company for, the purchase of the Equipment, which is being leased to the 
Company, and in turn subleased to Sunset Station. Pursuant to the 
Participation Agreement, the Company also agreed to indemnify the Lessor and 
the Holders against certain liabilities.

         OPERATING LEASES

         The Company leases several parcels of land and equipment used in its
operations at Palace Station, Boulder Station, Texas Station, Sunset Station,
Station Casino St. Charles, Station Casino Kansas City and Wild Wild West.
Leases on various

                                     52



parcels ranging from 13 acres to 171 acres have terms expiring between March 
2006 and July 2063. Future minimum lease payments required under these 
operating leases and other noncancelable operating leases are as follows 
(amounts in thousands):




YEAR ENDING DECEMBER 31,
- ------------------------
                                                                 
1999.............................................................   $   15,881
2000.............................................................       37,642
2001.............................................................        8,744
2002.............................................................        9,594
2003.............................................................        9,594
Thereafter.......................................................      437,361
                                                                   -----------
     Total.......................................................    $ 518,816
                                                                   -----------
                                                                   -----------


         Rent expense totaled approximately $11.9 million, $12.4 million and 
$5.4 million for the Transition Period 1998 and the fiscal years ended March 
31, 1998 and 1997, respectively. Rents of $0.3 million and $2.2 million were 
capitalized in connection with the construction of Sunset Station and Station 
Casino Kansas City for the fiscal years ended March 31, 1998 and 1997, 
respectively.

         LEGAL MATTERS  (See also Note 13)

         MISSOURI REFERENDUM

         On January 16, 1997, the Company's gaming license in Kansas City was 
formally issued for its facility, which is located in a man-made basin filled 
with water piped in from the surface of the Missouri River. In reliance on 
numerous approvals from the Missouri Gaming Commission specific to the 
configuration and granted prior to the formal issuance of its gaming license, 
the Company built and opened the Station Casino Kansas City ("KCSC") 
facility. The license issued to the Company and the resolutions related 
thereto specifically acknowledge that the Missouri Gaming Commission had 
reviewed and approved this configuration. On November 25, 1997, the Supreme 
Court of Missouri, in a case challenging the gaming licenses of certain 
competitors of Station Casino St. Charles located in Maryland Heights, 
Missouri, ruled that gaming may occur only in artificial spaces that are 
contiguous to the surface stream of the Missouri and Mississippi Rivers. On 
November 3, 1998, the citizens of the State of Missouri approved a 
Constitutional amendment which was proposed by initiative petition, that 
retroactively legalized lotteries, gift enterprises and games of chance 
aboard excursion gambling boats and floating facilities, like the Company's, 
that are located within artificial spaces containing water that are within 
1,000 feet of the closest edge of the main channel of the Mississippi or 
Missouri Rivers. This amendment to the Constitution became effective on 
November 23, 1998. The Missouri Gaming Commission has stayed its preliminary 
orders of disciplinary action against licensees that operate within 
artificial basins, and has dismissed the preliminary orders for disciplinary 
action with respect to all applicable licensees except KCSC. The Missouri 
Gaming Commission has not dismissed the disciplinary proceeding against KCSC 
because it is investigating an alleged violation by KCSC that is related to 
the placement of the Company's gaming facilities in an artificial basin. 
While the Company anticipates that the disciplinary action with respect to 
KCSC will be dismissed, the Company cannot be sure that the Missouri Gaming 
Commission will take such action or that the Missouri Gaming Commission will 
not impose a fine or other penalty against the Company in connection with 
such dismissal.

         LOW WATER LEVEL AT STATION CASINO ST. CHARLES; EPA INVESTIGATION

         During December 1998 and January 1999, the water level of the 
Missouri River was well below normal. In addition, over time silt and debris 
flowing downstream have built up under the gaming barges and other ancillary 
barges at Station Casino St. Charles. These circumstances have caused a 
portion of these barges, at times, to touch the river bottom. Because these 
barges have touched the river bottom, the American Bureau of Shipping 
decertified the barges on January 8, 1999. As a result of the 
decertification, the Missouri Gaming Commission expressed concern regarding 
the effect of the low water level on the barges. However, based upon recent 
improvement in the water level and the Company's agreement to work with the 
American Bureau of Shipping to re-certify all of the barges at a time when 
the river levels permit, the Missouri Gaming Commission has allowed the 
gaming facility to remain open. The Company continues to monitor the 
situation very carefully and believes that the facility should remain in 
operation. However, there can be no assurance that the Company's

                                      53



assessment will not change or that the relevant authorities will continue to 
permit the operation of the facility. A prolonged closure of the facility as 
a result of the low water level would have a material adverse effect on the 
Company's business, financial position and results of operations.

         The Company has taken steps and intends to take further steps to 
remedy the problems caused by the low water level. These further steps 
include dredging material from under the barges and constructing a sheet 
metal wall to divert silt and debris and keep it from building up under the 
barges. The Company does not expect the cost of these remedial activities to 
be material, although there can be no assurance that such costs will not 
exceed the Company's expectations. Dredging and construction activities 
generally require permits from the United States Army Corps of Engineers. The 
Company is currently in the process of applying for the required permits. 
There can be no assurance that the United States Army Corps of Engineers will 
grant such permits or that they will be granted on a timely basis. If there 
is a significant delay in the Company receiving the required permits and the 
low water level returns, the Company could be forced to close the facility. 
The Company's ability to receive the required permits could be adversely 
affected by the investigation described below.

         On February 3, 1999, the Company received a subpoena issued by the 
EPA requesting that documentation relating to the Company's dredging 
activities at the facility be furnished to the Grand Jury in the United 
States District Court for the Eastern District of Missouri. Several employees 
and persons who contracted to work for the Company received similar 
subpoenas. The Company believes that the EPA is investigating allegations 
that the Company or the Company's contractors dredged and disposed of silt 
and debris from the area of the facility either without proper permits or 
without complying with such permits. The Company is in the process of 
investigating the substance of the allegations and intends to cooperate fully 
with the EPA's investigation. The investigation could lead to further 
proceedings against the Company which could result in significant fines and 
other penalties imposed on the Company. Based on the initial results of the 
Company's own investigation, the Company believes that any fines or other 
penalties, if imposed, would not have a material adverse effect on the 
Company's business, financial position or results of operations.

         In addition, the Company is a litigant in legal matters arising in 
the normal course of business. In the opinion of management, all pending 
legal matters are either adequately covered by insurance or, if not insured, 
will not have a material adverse effect on the financial position or the 
results of operations of the Company.

7.  STOCKHOLDERS' EQUITY

         In March 1996, the Company completed a public offering of 1,800,000 
shares of convertible preferred stock (the "Convertible Preferred Stock") at 
$50.00 per share generating net proceeds of approximately $87.3 million, 
before deducting $0.6 million of offering costs paid by the Company. In April 
1996, the underwriters exercised their option to purchase an additional 
270,000 shares of the Convertible Preferred Stock generating net proceeds to 
the Company of approximately $13.1 million. The Convertible Preferred Stock 
is convertible at an initial conversion rate of 3.2573 shares of common stock 
for each share of Convertible Preferred Stock. The Convertible Preferred 
Stock is redeemable, at the option of the Company in whole or in part, for 
shares of the Company's common stock at any time after March 15, 1999, 
initially at a redemption price of $52.45 per share and thereafter at prices 
decreasing annually to $50.00 per share of Convertible Preferred Stock on and 
after March 15, 2006, plus accrued and unpaid dividends. The common shares to 
be issued is determined by dividing the redemption price by the lower of the 
average daily closing price for the Company's common stock for the preceding 
20 trading days or the closing price of the Company's common stock on the 
first business day preceding the date of the redemption notice. Any 
fractional shares would be paid in cash. Dividends on the Convertible 
Preferred Stock of $3.50 per share annually, accrue and are cumulative from 
the date of issuance. The Convertible Preferred Stock has a liquidation 
preference of $50.00 per share, plus accrued and unpaid dividends.

         RIGHTS PLAN

         On October 6, 1997, the Company declared a dividend of one preferred 
share purchase right (a "Right") for each outstanding share of Common Stock. 
The dividend was paid on October 21, 1997. Each Right entitles the registered 
holder to purchase from the Company one one-hundredth of a share of Series A 
Preferred Stock, par value $0.01 per share ("Preferred Shares") of the 
Company at a price of $40.00 per one one-hundredth of a Preferred Share, 
subject to adjustment. The Rights

                                      54



are not exercisable until the earlier of 10 days following a public 
announcement that a person or group of affiliated or associated persons have 
acquired beneficial ownership of 15% or more of the outstanding Common Stock 
("Acquiring Person") or 10 business days (or such later date as may be 
determined by action of the Board of Directors prior to such time as any 
person or group of affiliated persons becomes an Acquiring Person) following 
the commencement of, or announcement of an intention to make, a tender offer 
or exchange offer, the consummation of which would result in the beneficial 
ownership by a person or group of 15% or more of the outstanding Common Stock.

         The Rights will expire on October 21, 2007. Acquiring Persons do not 
have the same rights to receive Common Stock as other holders upon exercise 
of the Rights. Because of the nature of the Preferred Shares' dividend, 
liquidation and voting rights, the value of one one-hundredth interest in a 
Preferred Share purchasable upon exercise of each Right should approximate 
the value of one Common Share. In the event that any person or group of 
affiliated or associated persons becomes an Acquiring Person, the proper 
provisions will be made so that each holder of a Right, other than Rights 
beneficially owned by the Acquiring Person (which will thereafter become 
void), will thereafter have the rights to receive upon exercise that number 
of Common Shares having a market value of two times the exercise price of the 
Right. In the event that the Company is acquired in a merger or other 
business combination transaction or 50% or more of its consolidated assets or 
earning power are sold after a person or group has become an Acquiring 
Person, proper provision will be made so that each holder of a Right will 
thereafter have the right to receive, upon exercise thereof, that number of 
shares of common stock of the acquiring company which at the time of such 
transaction will have a market value of two times the exercise price of the 
Right. Because of the characteristics of the Rights in connection with a 
person or group of affiliated or associated persons becoming an Acquiring 
Person, the Rights may have the effect of making an acquisition of the 
Company more difficult and may discourage such an acquisition.

8.  RELATED PARTIES

         The Company has employed McNabb/McNabb/DeSoto/Salter & Co. ("MMDS") 
to provide advertising and marketing research services. Certain stockholders 
of the Company owned a 50% interest in MMDS. During the fiscal year ended 
March 31, 1997, the Company paid MMDS $27.2 million for advertising, market 
research and other costs related to these activities, a significant portion 
of which was passed on to vendors of MMDS. In April 1997, the Company 
purchased the assets of MMDS for approximately $0.8 million. In management's 
opinion, these transactions were conducted with terms as fair to the Company 
as could have been obtained from unaffiliated companies.

9.  BENEFIT PLANS

         STOCK COMPENSATION PROGRAM

         The Company has adopted a Stock Compensation Program (the "Program") 
which includes (i) an Incentive Stock Option Plan for the grant of incentive 
stock options, (ii) a Compensatory Stock Option Plan providing for the grant 
of non-qualified stock options, and (iii) a Restricted Shares Plan providing 
for the grant of restricted shares of common stock. Officers, key employees, 
directors (whether employee directors or non-employee directors) and 
independent contractors or agents of the Company and its subsidiaries are 
eligible to participate in the program. However, only employees of the 
Company and its subsidiaries are eligible to receive incentive stock options.

         A maximum of 6,307,000 shares of common stock have been reserved for 
issuance under the Program. Options are granted at the current market price 
at the date of grant. The plan provides for a variety of vesting schedules, 
ranging from immediate to twenty percent a year for five years, to be 
determined at the time of grant. All options have an exercise period of ten 
years from the date of grant.

                                      55



         The Program will  terminate ten years from the date of adoption,  
unless  terminated  earlier by the Board of  Directors,  and no options or 
restricted  shares may be granted  under the Program after such date.  
Summarized information for the Program is as follows:




                                                   TRANSITION PERIOD                     FOR THE YEARS ENDED MARCH 31,        
                                               ---------------------------     --------------------     -------------------
                                                          1998                         1998                    1997        
                                               ---------------------------     --------------------     -------------------
                                                             WEIGHTED                      WEIGHTED               WEIGHTED
                                                              AVERAGE                       AVERAGE                AVERAGE
                                                             EXERCISE                      EXERCISE               EXERCISE
                                               OPTIONS         PRICE            OPTIONS      PRICE      OPTIONS     PRICE 
                                               ---------------------------     --------------------     -------------------
                                                                                                  
         Outstanding Beginning of the Year      5,067,452    $  13.30          4,432,182   $  15.22    2,697,012    $ 16.24
                    Granted                     1,038,306    $   7.69          1,799,742   $   7.50    2,160,822    $ 14.01
                    Exercised                      (1,123)   $  12.00             (4,012)  $  12.24      (14,711)   $ 12.16
                    Canceled                     (101,305)   $   7.91         (1,160,460)  $  11.59     (410,941)   $ 15.70
                                              -----------                      ---------               ---------
         Outstanding End of the Year            6,003,330    $  12.43          5,067,452   $  13.30    4,432,182    $ 15.22
                                              -----------                      ---------               ---------
                                              -----------                      ---------               ---------
         Exercisable at End of Year             1,951,594    $  16.60          1,485,971   $  17.28    1,408,893    $ 16.50
                                              -----------                      ---------               ---------
                                              -----------                      ---------               ---------
                                              
         Options Available for Grant              113,278                      1,050,279               1,689,561
                                              -----------                      ---------               ---------
                                              -----------                      ---------               ---------


The following table summarizes information about the options outstanding at
December 31, 1998:



                                  OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                     ------------------------------------------          --------------------------------
                                         WEIGHTED
                          NUMBER         AVERAGE       WEIGHTED               NUMBER            WEIGHTED
     RANGE OF           OUTSTANDING     REMAINING       AVERAGE             EXERCISABLE          AVERAGE
     EXERCISE               AT         CONTRACTUAL     EXERCISE                 AT              EXERCISE
      PRICES       DECEMBER 31, 1998       LIFE         PRICE             DECEMBER 31, 1998       PRICE  
- ----------------------------------------------------------------         --------------------------------
                                                                                
 $ 5.38 - $ 7.88       2,506,548          9.2          $ 7.57                118,161           $ 7.50
 $ 8.56 - $12.25         543,067          6.5          $11.78                483,306           $11.96
 $13.00 - $18.00       1,939,715          7.1          $14.85                336,127           $15.69
 $20.00 - $22.00       1,014,000          4.4          $20.18              1,014,000           $20.18
                       ---------                                           ---------
                       6,003,330          7.5          $12.43              1,951,594           $16.60
                       ---------                                           ---------
                       ---------                                           ---------



         Restricted stock grants in the amount of 170,500 shares were issued 
during the fiscal year ended March 31, 1995. The effect of these grants is to 
increase the issued and outstanding shares of the Company's common stock and 
decrease the number of shares available for grant in the plan. Deferred 
compensation is recorded for the restricted stock grants equal to the market 
value of the Company's common stock on the date of grant. The deferred 
compensation is amortized over the period the restricted stock vests and is 
recorded as compensation expense in selling, general, and administrative 
expense in the accompanying consolidated statements of operations.

                                      56



         The Company applies APB Opinion No. 25 and related interpretations 
in accounting for the Program. Accordingly, compensation expense recognized 
was different than what would have been otherwise recognized under the fair 
value based method defined in SFAS No. 123, "Accounting for Stock-Based 
Compensation". Had compensation expense for the plans been determined in 
accordance with SFAS No. 123, the effect on the Company's net income (loss) 
applicable to common stock and basic earnings (loss) per common share would 
have been as follows (amounts in thousands, except per share data):



                                                                               TRANSITION                FOR THE YEARS ENDED
                                                                                 PERIOD                       MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                  1998                 1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
    Net income (loss) applicable to common stock:
       As reported.....................................................     $    (17,531)        $   (12,441)         $   6,518
       Proforma........................................................     $    (19,201)        $   (14,455)         $   3,640

    Basic and diluted earnings (loss) per common share:                                                           
       As reported.....................................................     $      (0.50)        $     (0.35)         $    0.18
       Proforma........................................................     $      (0.54)        $     (0.41)         $    0.10


         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing method with the following assumptions:



                                                                               TRANSITION                FOR THE YEARS ENDED
                                                                                 PERIOD                       MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                  1998                 1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
    Expected dividend yield............................................           ---                  ---               ---
    Expected stock price volatility....................................          51.90%               46.20%           45.50%
    Risk-free interest rate............................................           4.51%                6.03%            6.46%
    Expected average life of options (years)...........................           3.87                 4.84             3.92
    Expected fair value of options granted.............................          $3.34                $3.38            $5.64


         Because the SFAS No. 123 method of accounting has not been applied 
to options granted prior to April 1, 1995, the resulting pro forma net income 
may not be representative of that to be expected in future years.

         In May 1995, the Board of Directors of the Company authorized the 
repricing of 1,156,900 options with option prices ranging from $13.00 to 
$20.00. Options held by certain members of the Company's Board of Directors, 
including the Chairman and Chief Executive Officer of the Company were not 
repriced. The effect of the repricing of all the subject options was the 
cancellation of 1,116,500 options and the reissuance of 872,680 options 
("replacement options") with a price of $12.00 (market value at date of the 
repricing) which are included in granted and canceled options in the table 
above. The number of replacement options was determined, based upon a 
valuation model, so that the value of the replacement options was equivalent 
to the value of the options originally granted.

         401(k) PLANS

         The Company has a defined contribution 401(k) plan, which covers all 
employees who meet certain age and length of service requirements and allows 
an employer contribution up to 25 percent of the first four percent of each 
participating employee's compensation. Effective October 1, 1998, the 
employer contribution was increased to 50 percent of the first four percent 
of each participating employee's compensation. Plan participants can elect to 
defer before tax compensation through payroll deductions. These deferrals are 
regulated under Section 401(k) of the Internal Revenue Code. The Company's 
matching contribution was approximately $678,000, $499,000 and $442,000 for 
the Transition Period 1998 and the fiscal years ended March 31, 1998 and 
1997, respectively.

                                      57



10.  EXECUTIVE COMPENSATION PLANS

         The Company has employment agreements with certain of its executive 
officers. These contracts provide for, among other things, an annual base 
salary with annual adjustments and supplemental long-term disability and 
supplemental life insurance benefits in excess of the Company's normal 
coverage for employees. The Company elected to self-insure with respect to 
the long-term disability benefits. In addition, the Company has adopted a 
Supplemental Executive Retirement Plan for its Chief Executive Officer and a 
Supplemental Management Retirement Plan for certain key executives as 
selected by the Human Resources Committee of the Company's Board of 
Directors. Other executive plans include a Deferred Compensation Plan and a 
Long-Term Stay-On Performance Incentive Plan. The expenses related to these 
plans are included in corporate expenses in the accompanying consolidated 
statements of operations.

11.  RESTRUCTURING CHARGE

         In March 1997, the Company introduced a plan designed to reduce 
costs and improve efficiency of operations. This plan resulted in a one-time 
charge to earnings in the fourth quarter of fiscal 1997 totaling $2,016,000, 
primarily related to employee severance payments.

12.  INCOME TAXES

         The Company files a consolidated federal income tax return. The 
(provision) benefit for income taxes for financial reporting purposes 
consists of the following (amounts in thousands):



                                                                               TRANSITION                FOR THE YEARS ENDED
                                                                                 PERIOD                       MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                  1998                 1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
    Income tax (provision) benefit from continuing operations..........     $            871     $           966      $   (7,615)
    Tax benefit from extraordinary loss on early retirement of debt....                1,671                 626               -
                                                                            ----------------     ---------------    --------------
                                                                            $          2,542     $         1,592      $   (7,615)
                                                                            ----------------     ---------------    --------------
                                                                            ----------------     ---------------    --------------


         The (provision) benefit for income taxes attributable to income 
(loss) from continuing operations consists of the following (amounts in 
thousands):



                                                                              TRANSITION                FOR THE YEARS ENDED
                                                                                PERIOD                        MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                 1998                  1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
Current:
       Federal.........................................................     $          3,953     $        18,083    $      (7,708)
       State...........................................................                    -                   -            1,834
                                                                            ----------------     ---------------    --------------
                                                                                       3,953              18,083           (5,874)
Deferred...............................................................               (1,411)            (16,491)          (1,741)
                                                                            ----------------     ----------------   --------------
       Total income taxes..............................................     $          2,542     $         1,592    $      (7,615)
                                                                            ----------------     ---------------    --------------
                                                                            ----------------     ---------------    --------------


                                      58



         The income tax (provision) benefit differs from that computed at the
federal statutory corporate tax rate as follows:



                                                                               TRANSITION               FOR THE YEARS ENDED
                                                                                 PERIOD                       MARCH 31,           
                                                                            ----------------     ---------------------------------
                                                                                  1998                 1998              1997     
                                                                            ----------------     ---------------    --------------
                                                                                                           
Federal statutory rate.................................................              35.0%                35.0%            (35.0)%
State income taxes, net of federal benefit.............................               -                    -                 5.5
Lobbying and political.................................................             (16.8)                (7.0)             (1.5)
Meals and entertainment................................................              (1.2)                (3.7)             (0.3)
Credits earned, net....................................................               2.5                  3.6               1.4
Other, net.............................................................              (2.1)                (4.5)             (5.7) 
                                                                            ----------------     ---------------    --------------
Effective tax rate.....................................................              17.4%                23.4%            (35.6)%
                                                                            ----------------     ---------------    --------------
                                                                            ----------------     ---------------    --------------


         The tax effects of significant temporary differences representing net
deferred tax assets and liabilities are as follows (amounts in thousands):



                                                                                           DECEMBER 31,            MARCH 31,
                                                                                               1998                  1998      
                                                                                         ----------------      ----------------
                                                                                                         
     Deferred tax assets:
         Current:
             Accrued vacation, bonuses and group insurance..........................     $          5,691      $          5,279
             Prepaid gaming taxes...................................................               (1,910)               (1,437)
             Other..................................................................                1,200      $          2,882 
                                                                                         ----------------      -----------------
         Total current..............................................................                4,981                 6,724 
                                                                                         ----------------      -----------------
         Long-term:
             Preopening and other costs, net of amortization........................               12,759                15,182
             State deferred taxes...................................................                2,023                 2,010
             Net operating loss.....................................................               14,208                15,361
             Alternative minimum tax credits........................................               18,891                 8,453 
                                                                                         ----------------      -----------------
         Total long-term............................................................               47,881                41,006 
                                                                                         ----------------      -----------------
         Total deferred tax assets..................................................               52,862                47,730 
                                                                                         ----------------      -----------------
     Deferred tax liabilities:
         Long-term:
             Temporary differences related to property and equipment................              (62,660)              (53,605)
             Other..................................................................                9,407                  (926)
                                                                                         ----------------      -----------------
         Total deferred tax liabilities.............................................              (53,253)              (54,531)
                                                                                         ----------------      -----------------
         Net ......................................................................      $           (391)     $         (6,801)
                                                                                         ----------------      -----------------
                                                                                         ----------------      -----------------


         The Company currently has a net operating loss carryforward ("NOL") 
of $41.4 million. This NOL begins to expire in years 2013 through years 2018. 
The excess of the alternative minimum tax over the regular federal income tax 
is a tax credit which can be carried forward indefinitely to reduce future 
regular federal income tax liabilities. The Company did not record a 
valuation allowance at December 31, 1998 or March 31, 1998 relating to 
recorded tax benefits because all benefits are more likely than not to be 
realized.

13.  MERGER AGREEMENT

         On January 16, 1998, the Company entered into an Agreement and Plan 
of Merger, as amended (the "Merger Agreement") with Crescent Real Estate 
Equities Company, a Texas real estate investment trust ("Crescent"). The 
Merger Agreement provided for the merger (the "Merger") of the Company and 
Crescent at the time of effectiveness of the Merger in accordance with the 
Merger Agreement (the "Effective Time"). The Merger Agreement is currently 
the subject of litigation between Crescent and the Company. The Company wrote 
off $2.9 million of costs incurred related to the Merger (which are included 
in other expense in the accompanying consolidated statements of operations 
for the Transition Period 1998). The Company also expects to incur ongoing 
litigation costs associated with the current lawsuits involving the Merger 
Agreement.

                                      59



         On July 27, 1998, the Company and Crescent announced the 
postponement of the previously announced joint annual and special meeting of 
the Company's stockholders. The meeting was postponed to address concerns 
related to the Merger expressed by holders of the Company's preferred stock. 
The Company subsequently requested that Crescent purchase $20 million of the 
Company's $100 Redeemable Preferred Stock issuable under the Merger Agreement 
(the "Redeemable Preferred Stock"). The Merger Agreement provides that, if 
the Company is not in material breach of its covenants, representations or 
warranties under the Merger Agreement, Crescent is required to fund up to 
$115 million of Redeemable Preferred Stock even if the Merger Agreement has 
been terminated. Crescent advised the Company that Crescent took the position 
that the Company's postponing of the meeting was a breach of the Merger 
Agreement.

         On July 30, 1998, the Company filed suit against Crescent in Clark 
County District Court, State of Nevada, seeking declaratory relief. The suit 
asserts, among other things, that postponement of the meeting did not breach 
the Merger Agreement, that the Company had received Crescent's consent to 
postponement of the meeting and was otherwise in full compliance with its 
obligations under the Merger Agreement.

         On August 11, 1998, the Company requested that Crescent purchase the 
additional $95 million of Redeemable Preferred Stock. Also on August 11, 
1998, the Company amended its complaint in Nevada state court to include 
claims regarding Crescent's breaches of the Merger Agreement. The Company's 
lawsuit against Crescent seeks damages for Crescent's breaches and specific 
performance requiring Crescent to fulfill its obligation under the Merger 
Agreement to purchase $115 million of Redeemable Preferred Stock.

         On December 22, 1998, Crescent filed its answer and counterclaims to 
the Company's suit pending in the Nevada state court. The answer generally 
denied the Company's claims, and the counterclaims sought damages and 
declaratory relief alleging that the Company breached the Merger Agreement by 
canceling and failing to reschedule the August 4, 1998 stockholders' meeting. 
The suit sought declaratory judgment that the Company's actions with respect 
to the meeting, together with certain alleged misrepresentations in the 
Merger Agreement, relieve Crescent of its obligation under the Merger 
Agreement to purchase an aggregate $115 million of the Redeemable Preferred 
Stock. For the same reasons, Crescent alleged that it was excused from 
further performance under the Merger Agreement. Crescent did not specify the 
amount of damages it sought. On January 11, 1999, the Company filed its reply 
to Crescent's counterclaims in which the Company denied the allegations of 
Crescent's counterclaims. Discovery is ongoing in this action.

         The Company anticipates that Crescent will seek the $54 million 
break-up fee as part of its counterclaims. On August 12, 1998, Crescent had 
announced that it intended to assert a claim for damages for the $54 million 
break-up fee under the Merger Agreement or its equivalent and for expenses.

         On August 7, 1998, Crescent filed suit against the Company in the 
United States District Court, Northern District of Texas, seeking damages and 
declaratory relief. The suit alleged that the Company breached the Merger 
Agreement by canceling and failing to reschedule the August 4, 1998 
stockholders' meeting. The suit sought a declaratory judgment that the 
Company's actions with respect to the meeting, together with certain alleged 
misrepresentations in the Merger Agreement, relieve Crescent of its 
obligation under the Merger Agreement to purchase an aggregate $115 million 
of the Redeemable Preferred Stock. For the same reasons, Crescent alleged 
that it was excused from further performance under the Merger Agreement. 
Crescent did not specify the amount of damages it sought. Simultaneously with 
the filing of its suit, Crescent sent notice of termination of the Merger 
Agreement to the Company. The Company believes that Crescent, and not the 
Company, breached the Merger Agreement.

         On December 15, 1998, Crescent's suit against the Company pending in 
the United States District Court for the Northern District of Texas was 
dismissed for lack of jurisdiction. On December 21, 1998, Crescent served the 
Company with a notice of appeal of the dismissal.

         While the Company believes that Crescent has breached the Merger 
Agreement and that Crescent's allegations are without merit, as with any 
litigation, no assurance as to the outcome of such litigation can be made at 
this time.

                                      60



         A suit seeking status as a class action and a derivative action was 
filed by plaintiff, Crandon Capital Partners, on August 7, 1998, in Clark 
County District Court, State of Nevada, naming the Company and its Board of 
Directors as defendants. The lawsuit, which was filed as a result of the 
failed merger between the Company and Crescent, alleges, among other things, 
a breach of fiduciary duty owed to the shareholders/class members. The 
lawsuit seeks damages allegedly suffered by the shareholders/class members as 
a result of the transactions with Crescent, as well as all costs and 
disbursements of the lawsuit. The Company and the Board of Directors do not 
believe the suit has merit and intend to defend themselves vigorously.

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)



                                                                                          INCOME
                                                                                          (LOSS)           NET
                                                                                          BEFORE          INCOME       BASIC
                                                                                          INCOME          (LOSS)      EARNINGS
                                                                                           TAXES        APPLICABLE     (LOSS)
                                                                        OPERATING           AND             TO          PER
                                                            NET          INCOME        EXTRAORDINARY      COMMON       COMMON
                                                         REVENUES        (LOSS)            ITEM            STOCK        SHARE
                                                       -----------    ------------   --------------   ------------    ---------
                                                                 (amounts in thousands, except per common share amounts)
                                                                                                             
TRANSITION PERIOD 1998
First quarter....................................      $   206,250    $   29,179     $      5,528     $    1,488      $  0.04
Second quarter...................................      $   213,448    $   31,622     $      5,090     $    1,033      $  0.03
Third quarter....................................      $   222,516    $    3,895     $    (20,482)    $  (20,052)     $ (0.57)
YEAR ENDED MARCH 31, 1998                                                                                            
First quarter....................................      $   173,516    $    8,178     $    (12,846)    $  (10,101)     $ (0.29)
Second quarter...................................      $   194,097    $   23,340     $      3,655     $      546      $  0.02
Third quarter....................................      $   197,196    $   24,984     $      5,299     $    1,613      $  0.05
Fourth quarter...................................      $   204,801    $   27,684     $       (228)    $   (4,499)     $ (0.13)
YEAR ENDED MARCH 31, 1997                                                                                            
First quarter....................................      $   135,440    $   22,813     $     14,581     $    7,648      $  0.22
Second quarter...................................      $   138,034    $   23,809     $     15,847     $    8,307      $  0.24
Third quarter....................................      $   133,767    $   21,536     $     13,789     $    6,944      $  0.20
Fourth quarter...................................      $   176,274    $  (10,035)    $    (22,839)    $  (16,381)     $ (0.46)


                                       61



ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE
              None.

                                   PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
              There is incorporated by reference the information appearing
              in the section entitled "Directors and Executive Officers" in
              the Registrant's definitive Proxy Statement to be made
              publicly available with the Securities and Exchange
              Commission.

ITEM 11.      EXECUTIVE COMPENSATION
              There is incorporated by reference the information appearing
              in the section entitled "Executive Compensation" in the
              Registrant's definitive Proxy Statement to be made publicly
              available with the Securities and Exchange Commission.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              There is incorporated by reference the information appearing
              in the section entitled "Security Ownership of Certain
              Beneficial Owners and Management" in the Registrant's
              definitive Proxy Statement to be made publicly available with
              the Securities and Exchange Commission.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
              There is incorporated by reference the information appearing
              in the sections entitled "Certain Relationships and Related
              Transactions" in the Registrant's definitive Proxy Statement
              to be made publicly available with the Securities and Exchange
              Commission.



                                      62



                                   PART IV


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

(a)  1. Financial Statements (including related notes to Consolidated Financial
Statements) filed in Part II of this report are listed below:

         Report of Independent Public Accountants

         Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998

         Nine Months Ended December 31, 1998 and Years Ended March 31, 1998
         and 1997

                 Consolidated Statements of Operations

                 Consolidated Statements of Stockholders' Equity

                 Consolidated Statements of Cash Flows

         Notes to Consolidated Financial Statements

(a)  2. None
(a)  3. Exhibits




Exhibit
Number                          Description
- -------                         -----------
      

2.1      Agreement and Plan of Reorganization dated as of February 1, 1993 
         among Frank J. Fertitta, Jr., as Trustee of the Frank J. Fertitta 
         and Victoria K. Fertitta Revocable Family Trust dated June 17, 1989, 
         Frank J. Fertitta III, Blake L. Sartini, Delise F. Sartini and 
         Lorenzo J. Fertitta. (Incorporated herein by reference to 
         Registration Statement No. 33-59302)

2.2      Agreement and Plan of Merger, dated as of January 16, 1998 among 
         Crescent Real Estate Equities Company and Station Casinos, Inc. 
         (Incorporated herein by reference to the Company's Form 8-K dated 
         January 27, 1998)

2.3      Amendment No. 1 dated as of February 17, 1998 to Agreement and Plan 
         of Merger. (Incorporated herein by reference to the Company's Form 
         10-K for the fiscal year ended March 31, 1998)

2.4      Amendment No. 2 dated as of June 14, 1998, to Agreement and Plan of 
         Merger. (Incorporated herein by reference to the Company's Form 8-K 
         dated June 17, 1998)

3.1      Amended and Restated Articles of Incorporation of the Registrant. 
         (Incorporated herein by reference to Registration Statement No. 
         33-76156)

3.2      Restated Bylaws of the Registrant. (Incorporated herein by reference to
         Registration Statement No. 33-76156)

4.1      Form of Subordinated Note of the Registrant. (1998 Issue) (included in
         Exhibit 4.5)


                                       63


      

4.2      Form of Subordinated Note of the Registrant (1997 Issue). (Incorporated
         herein by reference to the Company's Form 8-K dated April 3, 1997)

4.3      Form of Subordinated Note of the Registrant (1996 Issue). (Incorporated
         herein by reference to the Company's Form 8-K dated March 25, 1996)

4.4      Form of Subordinated Note of the Registrant (1994 Issue). (Incorporated
         herein by reference to Registration Statement No. 33-76156)

4.5      Indenture dated as of December 3, 1998 between the Registrant and First
         Union National Bank as Trustee. (Incorporated herein by reference to 
         the Company's Registration Statement on Form S-4 dated January 27, 
         1999)

4.6      Indenture dated as of April 3, 1997 between Registrant and First Union
         National Bank as Trustee. (Incorporated by reference to the Company's
         Form 8-K dated April 3, 1997)

4.7      Indenture dated as of March 29, 1996 between the Registrant and 
         First Union National Bank, as Trustee. (Incorporated herein by 
         reference to the Company's Form 8-K dated March 25, 1996)

4.8      Indenture dated as of May 11, 1994 between the Registrant and First 
         Union National Bank (f.k.a. First Fidelity Bank, National 
         Association) as Trustee. (Incorporated herein by reference to the 
         Company's Annual Report on Form 10-K for the period ended March 31, 
         1994)

4.9      First Supplemental Indenture dated as of March 25, 1996 between 
         Registrant and First Union National Bank, (f.k.a. First Fidelity 
         Bank, National Association), as Trustee with respect to the 
         Indenture dated as of May 11, 1994. (Incorporated herein by 
         reference to the Company's Form 8-K dated March 25, 1996)

4.10     Second Amended and Restated Reducing Revolving Loan Agreement dated 
         as of November 6, 1998. (Incorporated herein by reference to the 
         Company's Form 8-K dated November 6, 1998)

4.11     Amendment No. 1 to Second Amended and Restated Reducing Revolving 
         Loan Agreement dated as of November 30, 1998. (Incorporated herein by 
         reference to the Company's Form 8-K dated November 6, 1998)

4.12     Certificate of Resolutions of Convertible Preferred Stock of the 
         Registrant. (Incorporated herein by reference to the Company's Form 
         8-K dated March 25, 1996)

4.13     Form of Convertible Preferred Stock of the Registrant. (Incorporated 
         herein by reference to the Company's Form 8-K dated March 25, 1996)

4.14     Rights Agreement dated October 6, 1997 between the Company and 
         Continental Stock Transfer and Trust Company, as Rights Agent. 
         (Incorporated herein by reference to the Company's Form 8-K dated 
         October 9, 1997).

4.15     Amendment to Rights Agreement, dated as of January 16, 1998, between 
         Station Casinos, Inc. and Continental Stock Transfer & Trust 
         Company, as Rights Agent. ( Incorporated herein by reference to the 
         Company's Form 8-K dated January 27, 1998).

4.16     Amendment No. 2 to Rights Agreement, dated as of December 1, 1998, 
         between Station Casinos, Inc. and Continental Stock Transfer & Trust 
         Company, as Rights Agent. ( Incorporated herein by reference to the 
         Company's Form 8-K dated November 6, 1998).



                                      64


      

4.17     Certificate of Resolutions of $100 Redeemable Preferred Stock 
         (Incorporated herein by reference to the Company's Form 10-K for the 
         fiscal year ended March 31, 1998)

10.1     Lease dated as of December 17, 1974 between Teddy Rich Enterprises 
         and Townefood, Inc. (Incorporated herein by reference to 
         Registration Statement No. 33-59302)

10.2     Lease dated as of May 8, 1973 between Teddy Rich Enterprises and 
         Mini-Price Motor Inn., including Addendum dated May 8, 1973; Lease 
         Addendum dated June 10, 1974 amending lease dated May 8, 1973 
         between Teddy Rich Enterprises and Mini-Price Motor Inn, Inc. 
         (Incorporated herein by reference to Registration Statement No. 
         33-59302).

10.3     Lease dated as of February 16, 1976 between Richfield Development 
         Co. and Mini-Price Motor Inn. (Incorporated herein by reference to 
         Registration Statement No. 33-59302)

10.4     Lease dated as of September 6, 1977 between Richard Tam and 
         Mini-Price Motor Inn Joint Venture (Parcel B1). (Incorporated herein 
         by reference to Registration Statement No. 33-59302)

10.5     Lease dated as of September 6, 1977 between Richard Tam and 
         Mini-Price Motor Inn Joint Venture (Parcel B2). (Incorporated herein 
         by reference to Registration Statement No. 33-59302)

10.6     Amended and Restated Employment Agreement between Frank J. Fertitta 
         III and the Registrant dated as of December 22, 1997. (Incorporated 
         herein by reference to the Company's Form 8-K dated January 27, 1998)

10.7     Amended and Restated Employment Agreement between Glenn C. 
         Christenson and the Registrant dated as of December 22, 1997. 
         (Incorporated herein by reference to the Company's on Form 8-K dated 
         January 27, 1998).

10.8     Amended and Restated Employment Agreement between Scott M Nielson 
         and the Registrant dated as of December 22, 1997. (Incorporated 
         herein by reference to the Company's Report on Form 8-K dated 
         January 27, 1998)

10.9     Amended and Restated Employment Agreement between Blake L. Sartini 
         and the Registrant dated as of December 22, 1997. (Incorporated 
         herein by reference to the Company's Report on Form 8-K dated 
         January 27, 1998)

10.10    Stock Compensation Program of the Registrant. (Incorporated herein 
         by reference to the Company's Quarterly Report on Form 10-Q for the 
         period ended June 30, 1993)

10.11    Amendment dated as of August 22, 1995 to the Stock Compensation 
         Program. (Incorporated herein by reference to the Company's 
         Quarterly Report on Form 10-Q for the period ended September 30, 
         1995)

10.12    Supplemental Executive Retirement Plan of the Registrant dated as of 
         November 30, 1994. (Incorporated herein by reference to the 
         Company's Quarterly Report on Form 10-Q for the period ended 
         December 31, 1994)

10.13    Supplemental Management Retirement Plan of the Registrant dated as 
         of November 30, 1994. (Incorporated herein by reference to the 
         Company's Quarterly Report on Form 10-Q for the period ended 
         December 31, 1994)

10.14    Long-Term Stay-On Performance Incentive Plan between the Registrant 
         and Joseph J. Canfora, Glenn C. Christenson, Scott M Nielson and 
         Blake L. Sartini. (Incorporated herein by reference to the Company's 
         Quarterly Report on Form 10-Q for the period ended December 31, 1994)



                                      65


      

10.15    Amended and Restated Deferred Compensation Plan of the Registrant 
         effective as of November 30, 1994. (Incorporated herein by reference 
         to the Company's Quarterly Report on Form 10-Q for the period ended 
         December 31, 1994)

10.16    Special Long-Term Disability Plan of the Registrant dated as of 
         November 30, 1994. (Incorporated herein by reference to the 
         Company's Quarterly Report on Form 10-Q for the period ended 
         December 31, 1994)

10.17    Ground Lease between Boulder Station, Inc. and KB Enterprises dated 
         as of June 1, 1993. (Incorporated herein by reference to the 
         Company's Quarterly Report on Form 10-Q for the period ended June 
         30, 1993)

10.18    Option to Lease or Purchase dated as of June 1, 1993 between Boulder 
         Station, Inc. and KB Enterprises. (Incorporated herein by reference 
         to the Company's Quarterly Report on Form 10-Q for the period ended 
         June 30, 1993)

10.19    Option to Acquire Interest Under Purchase Contract dated as of June 
         1, 1993 between Boulder Station, Inc. and KB Enterprises. 
         (Incorporated herein by reference to the Company's Quarterly Report 
         on Form 10-Q for the period ended June 30, 1993)

10.20    First Amendment to Ground Lease and Sublease, dated as of June 30, 
         1995, by and between KB Enterprises, as landlord and Boulder 
         Station, Inc. (Incorporated herein by reference to the Company's 
         Form 8-K dated July 5, 1995)

10.21    Ground Lease between Registrant and Texas Gambling Hall & Hotel, 
         Inc. dated as of June 1, 1995. (Incorporated herein by reference to 
         the Company's Form 8-K dated July 5, 1995)

10.22    First Amendment to Ground Lease dated as of June 30, 1995 between 
         Registrant and Texas Gambling Hall & Hotel, Inc. (Incorporated 
         herein by reference to the Company's Form 8-K dated July 5, 1995)

10.23    Assignment, Assumption and Consent Agreement (Ground Lease) dated as 
         of July 6, 1995 between Registrant and Texas Station, Inc. 
         (Incorporated herein by reference to the Company's Form 8-K dated 
         July 5, 1995)

10.24    Sublease Agreement dated as of November 30, 1992 between the City of 
         St. Charles and St. Charles Riverfront Station, Inc. (Incorporated 
         herein by reference to Registrant Statement No. 33-59302)

10.25    Lease between Navillus Investment Co.; Jerome D. Mack as trustee of 
         the Center Trust; Peter Trust Limited Partnership; and Third 
         Generation Limited Partnership and Registrant. (Incorporated herein 
         by reference to the Company's Annual Report on Form 10-K for the 
         period ended March 31, 1994)

10.26    Joint Venture Agreement dated as of September 25, 1993, between 
         First Holdings Company and the Registrant. (Incorporated herein by 
         reference to the Company's Form 8-K dated July 5, 1995)

10.27    Assignment and Assumption Agreement (Joint Venture Agreement) dated 
         as of March 25, 1996 between the Registrant and Kansas City Station 
         Corporation (Incorporated herein by reference to the Company's 
         Annual Report on Form 10-K for the period ended March 31, 1996).

10.28    Amendment to Joint Venture Agreement dated as of November 15, 1993, 
         between First Holdings Company and the Registrant (Incorporated 
         herein by reference to the Company's Annual Report on Form 10-K for 
         the period ended March 31, 1996).



                                      66


      

10.29    Second Amendment to Joint Venture Agreement, dated as of April 22, 
         1996, between First Holdings Company and Kansas City Station 
         Corporation. (Incorporated herein by reference to the Company's 
         Quarterly Report on Form 10-Q for the period ended June 30, 1996)

10.30    Development Agreement dated as of April 24, 1995, between Kansas 
         City Station Corporation and the Port Authority of Kansas City. 
         (Incorporated herein by reference to the Company's Form 8-K dated 
         July 5, 1995)

10.31    Lease Agreement, dated as of April 1, 1994 between Station/First 
         Joint Venture and Kansas City Station Corporation. (Incorporated 
         herein by reference to the Company's Form 8-K dated July 5, 1995)

10.32    First Amendment to Lease Agreement dated as of March 19, 1996 
         between Station/First Joint Venture and Kansas City Station 
         Corporation. (Incorporated herein by reference to the Company's 
         Annual Report on Form 10-K for the period ended March 31, 1996).

10.33    Second Amendment to Lease Agreement, dated as of April 22, 1996, 
         between Station/First Joint Venture and Kansas City Station 
         Corporation. (Incorporated herein by reference to the Company's 
         Quarterly Report on Form 10-Q for the period ended June 30, 1996)

10.34    Form of Indemnification Agreement for Directors and Executive Officers.
         (Incorporated herein by reference to Registration Statement No.
         33-59302)

10.35    Form of Indemnification Agreement between the Registrant and Frank
         Fertitta, Jr. (Incorporated herein by reference to Registration
         Statement No. 33-59302)

10.36    Participation Agreement dated as of September 25, 1996 among the 
         Registrant, as Lessee, and First Security Trust Company of Nevada, 
         as Lessor and Trustee, and the other Persons that are parties to 
         such agreement. (Incorporated herein by reference to the Company's 
         Form 8-K dated October 29, 1996)

10.37    Lease Agreement dated as of September 25, 1996 between First 
         Security Trust Company of Nevada as Trustee and Lessor and the 
         Registrant, as Lessee. (Incorporated herein by reference to the 
         Company's Form 8-K dated October 29, 1996)

10.38    Sublease Agreement dated as of September 25, 1996 between the 
         Registrant, as Sublessor and Sunset Station as Sublessee. 
         (Incorporated herein by reference to the Company's Form 8-K dated 
         October 29, 1996)

10.39    Sunset Station 1996 Trust Agreement dated as of September 25, 1996 
         between the Registrant, as Grantor, and First Security Trust Company 
         of Nevada, as Trustee. (Incorporated herein by reference to the 
         Company's Form 8-K dated October 29, 1996)

10.40    Consulting Agreement between Lorenzo Fertitta and the Registrant dated
         February 1, 1999

21.1     Subsidiaries of the Registrant

23.1     Consent of Arthur Andersen LLP

27       Financial Data Schedule



                                      67



                                  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.

                                      STATION CASINOS, INC.

Dated:  March 26, 1999                By:
                                         ------------------------------------
                                         Frank J. Fertitta III
                                         Chairman of the Board, President and
                                         Chief Executive Officer (Principal
                                         Executive Officer)


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




          Signature                                   Title                                   Date
          ---------                                   -----                                   -----
                                                                                   

                                     Chairman of the Board, President and Chief          March 26, 1999
- ------------------------------       Executive  Officer (Principal Executive
Frank J. Fertitta III                Officer)

                                     Executive Vice President, Chief Financial           March 26, 1999
- ------------------------------       Officer, Chief Administrative Officer,
Glenn C. Christenson                 Treasurer and Director (Principal
                                     Financial and Accounting Officer)

                                     Executive Vice President, Chief Operating           March 26, 1999
- ------------------------------       Officer and Director
Blake L. Sartini


- ------------------------------       Director                                            March 26, 1999
R. Hal Dean


- ------------------------------       Director                                            March 26, 1999
Lorenzo J. Fertitta


- ------------------------------       Director                                            March 26, 1999
Lowell H. Lebermann, Jr.


- ------------------------------       Director                                            March 26, 1999
Delise F. Sartini


                                     68

EX-10.40

                                 CONSULTING AGREEMENT

          THIS CONSULTING AGREEMENT (this "AGREEMENT"), is made and entered into
as of the 1st day of February, 1999, by and between STATION CASINOS, INC., a
Nevada corporation, with its principal offices located at 2411 West Sahara
Avenue, Las Vegas, Nevada 89102 (the "COMPANY"), and MR. LORENZO J. FERTITTA
(the "CONSULTANT").

          WHEREAS, the Consultant currently serves as a member of the Board of
Directors of the Company and, in addition to his duties as a director, has
provided financial advisory services to the Company;

          WHEREAS, the Company wishes to continue to avail itself of those
financial advisory services; and

          WHEREAS, the Consultant is willing to provide those financial advisory
services, subject to the terms and conditions hereinafter provided;

          NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the Company and
the Consultant (each individually a "PARTY" and together the "PARTIES") agree as
follows:

          1.   DEFINITIONS. In addition to certain terms defined elsewhere in
this Agreement, the following terms shall have the following respective
meanings:

          1.1. "AFFILIATE" shall mean any Person controlling, controlled by or
under common control with the Company.

          1.2. "ANNUAL FEE" shall mean the fee provided for in SECTION 4.

          1.3. "BOARD" shall mean the Board of Directors of the Company.

          1.4.  "CONFIDENTIAL INFORMATION" shall mean all nonpublic information
respecting the Company's business including, but not limited to, its products,
research and development, processes, customer lists, intellectual property,
software, trademarks, marketing plans, and strategies. Confidential Information
does not include information that is, or becomes, available to the public unless
such availability occurs through an unauthorized act on the part of the
Consultant.

          1.5. "PERSON" shall mean any individual, firm, partnership,
association, trust, company, corporation or other entity.



          1.6. "TERM OF ENGAGEMENT" shall mean the period specified in SECTION
2.

          2.   TERM OF ENGAGEMENT. The initial Term of Engagement shall commence
upon the date of this Agreement and, unless terminated earlier pursuant to
SECTION 5 hereof, shall terminate five years from such date; PROVIDED, HOWEVER,
that the initial Term of Engagement shall automatically be extended annually for
successive five year periods if neither Party has advised the other in writing
in accordance with SECTION 9 at least 30 days prior to the first anniversary of
the then current Term of Engagement that such Term of Engagement will not be
extended. In the event that such notice is given, the Term of Engagement shall
terminate upon the close of business on the day immediately preceding the fifth
anniversary of the date notice of termination is given.

          3.   RESPONSIBILITIES: STATUS.

          3.1  During the Term of Engagement, the Consultant shall provide 
financial advisory services to the Company and shall perform such other 
related responsibilities as the Board may reasonably request. Subject to the 
requirements of the Company in the course of any particular project, the 
Consultant shall not be precluded from being employed by, or providing 
services to any other Person in any capacity or from managing investments for 
himself or any other Person.

          3.2. All services provided by the Consultant shall be performed by the
Consultant or any Person(s) employed by the Consultant directly and
independently and not as an agent, employee or representative of the Company.
This Agreement is not intended to and does not constitute, create, or otherwise
give rise to a joint venture, partnership or other type of business association
or organization of any kind by or between the Company and the Consultant. The
rights and obligations of the Company and the Consultant under this Agreement
shall be limited to the express provisions hereof.

          3.3  All Persons employed or utilized by the Consultant in the 
performance of the Consultant's obligations under this Agreement shall be and 
remain the employees of the Consultant and shall not be the employees, 
general, special or otherwise, of the Company, and the Consultant alone shall 
be obligated to pay for and to provide any and all employee compensation and 
benefits owed to said employees, including without limitation, salaries, 
wages, bonuses, retirement contributions, Federal, state and local 
withholdings, and workers' compensation, disability and unemployment benefits.

          4.   REMUNERATION.

          4.1. ANNUAL FEE. During the Term of Engagement, the Consultant shall
be entitled to receive an Annual Fee of $240,000, payable in equal monthly
installments. All amounts paid to the Consultant pursuant hereto shall be
reported to the Internal Revenue Service on a Form 1099, and the Consultant
shall be obligated to pay any taxes due thereon.


                                          2


          4.2. BUSINESS EXPENSE REIMBURSEMENT. During the Term of Engagement,
the Consultant shall be entitled to receive reimbursement from the Company for
all reasonable out-of-pocket expenses incurred by him in performing services
under this Agreement.

          4.3. STOCK OPTIONS. As an inducement for the Consultant's entering
into this Agreement, the Company has granted to the Consultant a non-qualified
option (the "OPTION") to purchase 100,000 shares of the common stock of the
Company pursuant to the Company's Stock Compensation Program. The Option shall
be evidenced by, and the terms of the Option shall be set forth in, a stock
option agreement to be entered into by the Parties concurrent with the execution
of this Agreement.

          4.4. LIFE INSURANCE. During the Term of Engagement, the Company shall
pay on the Consultant's behalf, the monthly premiums necessary to maintain $15
million in life insurance coverage.

          5.   TERMINATION.

          This Agreement may be terminated by either Party for any reason upon
thirty (30) days written notice. In the event of termination by the Consultant,
the Consultant shall be paid his Annual Fee on a pro-rata basis through the end
of the month of termination and shall be reimbursed for all expenses incurred up
to and including the termination date. However, no further payments shall be due
and owing to the Consultant thereafter. In the event of termination by the
Company, the Consultant shall be paid his Annual Fee and shall be reimbursed for
all expenses incurred up to and including the end of the Term of Engagement.

          6.   INDEMNIFICATION.

          6.1. GENERAL. The Company agrees that if the Consultant is made a
party or is threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "PROCEEDING"),
related to or arising out of his services as a consultant pursuant to this
Agreement, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Nevada law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including reasonable
attorneys' fees, judgments, fines, taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by the Consultant in
connection therewith.

          6.2. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in this SECTION 6 shall not be exclusive of any other
right which the Consultant may have or hereafter may acquire under any statute,
provision of the certificate of incorporation or by-laws of the Company,
agreement, vote of stockholders or disinterested directors or otherwise.


                                          3


          7.   COVENANTS TO PROTECT CONFIDENTIAL INFORMATION.

          7.1. GENERAL. The Consultant shall not, during the Term of Engagement
or anytime thereafter, without the prior written consent of the Company,
divulge, disclose or make accessible any Confidential Information to any other
Person except while rendering services to the Company or for the benefit of the
Company or when required to do so by a court of competent jurisdiction.

          7.2. NOTES, MEMORANDA AND OTHER ITEMS. Upon the written request of the
Company, the Consultant shall proffer to an appropriate officer of the Company,
upon the termination of this Agreement, all memoranda, diaries, notes, records,
cost information, customer lists, marketing plans and strategies and any other
documents relating or referring to any Confidential Information made available
to the Consultant by the Company in his possession at such time.

          8.   DISPUTE RESOLUTION.

          8.1. ARBITRABLE CLAIMS. All disputes between the Consultant (and 
his attorneys, successors, and assigns) and the Company (and its trustees, 
beneficiaries, officers, directors, managers, affiliates, employees, agents 
successors, attorneys, and assigns) relating in any manner whatsoever to this 
Agreement ("ARBITRABLE CLAIMS") shall be resolved by binding arbitration. 
Arbitration shall be final and binding upon the Parties and shall be the 
exclusive remedy for all Arbitrable Claims. THE PARTIES HEREBY WAIVE ANY 
RIGHTS THEY MAY HAVE TO TRIAL BY JUDGE OR JURY IN REGARD TO ARBITRABLE CLAIMS.

          8.2. PROCEDURE.  Arbitration of Arbitrable Claims shall be in
accordance with the Commercial Rules of the American Arbitration Association, as
amended, and as augmented in this Agreement. Either Party may bring an action in
court to compel arbitration under this Agreement and to enforce an arbitration
award. Otherwise, neither Party shall initiate or prosecute any lawsuit, appeal
or administrative action in any way related to an Arbitrable Claim. If the Party
initiating arbitration alleges a statutory violation, said Party must file and
serve an arbitration claim within the time limit established by the applicable
statue of limitations for the statute that has allegedly been violated. If the
Party initiating arbitration does not allege a statutory violation, then the
initiating Party must file and serve an arbitration claim within sixty (60) days
of learning the facts giving rise to the alleged claim. All arbitration
proceedings under this Agreement shall be conducted in Las Vegas, Nevada. The
Federal Arbitration Act shall govern the Interpretation and enforcement of this
Agreement. The fees of the arbitrator shall be split between both Parties
equally.

          8.3.  FEES AND DISBURSEMENTS. The Parties agree that in the event that
either Party finds it necessary to initiate arbitration or other legal action to
obtain performance under this Agreement, the prevailing Party shall be
reimbursed by other Party for reasonable attorneys' fees and other related
expenses incurred by such Party.


                                          4


          8.4. CONFIDENTIALITY. All proceedings and all documents prepared in
connection with any Arbitrable Claim shall be confidential and, unless otherwise
required by law, the subject matter thereof shall not be disclosed to any Person
other than the Parties to the proceedings, their counsel, witnesses and experts,
the arbitrator, and, if involved, the court and court staff.

          9.   NOTICES.

          Any notice given to either Party shall be in writing and shall be
deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give notice of:

     If to the Company:       Station Casinos, Inc.
                              2411 West Sahara Avenue
                              Las Vegas, NV 89102
                              Attn: Scott M. Nielson

     With a copy to:          Milbank, Tweed, Hadley & McCloy
                              601 South Figueroa Street, 30th Floor
                              Los Angeles, CA 90017
                              Attn: Kenneth J. Baronsky

     If to the Consultant:    Lorenzo J. Fertitta
                              3360 West Sahara Avenue, Suite 200
                              Las Vegas, NV 89102

          10.  MISCELLANEOUS.

          10.1.     SURVIVORSHIP. The respective rights and obligations of the
Parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this SECTION 10.1 are in addition to the survivorship provisions
of any other section of this Agreement.

          10.2.     REPRESENTATION. The Company represents and warrants that it
is fully authorized and empowered to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between the Company and any other Person.

          10.3.     ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements,

                                          5


understandings, discussions, negotiations and undertakings, whether written or
oral, between the Parties with respect hereto.

          10.4.     ASSIGNABILITY; BINDING NATURE. This Agreement shall be 
binding upon and inure to the benefit of the Parties and their respective 
successors, heirs and assigns. No rights or obligations of one Party under 
this Agreement may be assigned or transferred by the other Party, except that 
such rights or obligations may be assigned or transferred by the Company 
pursuant to a merger or consolidation in which the Company is not the 
continuing entity, or the sale or liquidation of all or substantially all of 
the assets of the Company, provided that the assignee or transferee is the 
successor to all or substantially all of the assets of the Company and such 
assignee or transferee assumes the liabilities, obligations and duties of the 
Company (including the liabilities, obligations and duties of the Company 
under this Agreement), either contractually or as a matter of law.

          10.5.     AMENDMENT OR WAIVER. No provision in this Agreement may be
amended or waived unless such amendment or waiver is agreed to in writing,
signed by the consultant. No waiver by one Party of any breach by the other
Party of any condition or provision of this Agreement to be performed by such
other Party shall be deemed a waiver of a similar or dissimilar condition or
provision at the same or any prior or subsequent time.

          10.6.     SEVERABILITY. In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, in whole or in part, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.

          10.7.     GOVERNING LAW. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of Nevada without
reference to the principles of conflict of laws thereof.

          10.8.     HEADINGS. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.

          10.9.     COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be deemed an original and all of which shall constitute one
and the same agreement with the same effect as if each Party had signed the same
signature page. Any signature page of this Agreement may be detached from any
counterpart of this Agreement and reattached to any other counterpart of this
Agreement identical in form hereto but having attached to it one or more
additional signature pages.


                                          6


          IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.


                                        STATION CASINOS, INC.


                                        /s/ GLENN C. CHRISTENSON
                                        ----------------------------------------
                                        Name:
                                        Title:


                                        /s/ LORENZO J. FERTITTA
                                        ----------------------------------------
                                        Lorenzo J. Fertitta



                                          7

EX-21.1

                                  EXHIBIT 21.1

                      SUBSIDIARIES OF STATION CASINOS, INC.


NEVADA CORPORATIONS

Palace Station Hotel & Casino, Inc.
Texas Station, Inc.
Boulder Station, Inc.
Sunset Station, Inc.
Tropicana Station, Inc.
Southwest Gaming Services, Inc.

MISSOURI CORPORATIONS

Kansas City Station Corporation
St. Charles Riverfront Station, Inc.

EX-23.1

                                      
                                 EXHIBIT 23.1

                 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


     As independent public accountants, we hereby consent to the 
incorporation of our report included in this Form 10-K, into the Company's 
previously filed registration statements on Form S-8 (File No. 33-70342), 
Form S-8 (File No. 33-63752) and Form S-8 (File No. 333-11975).


                                              Arthur Andersen LLP


Las Vegas, Nevada
March 26, 1999

EX-27.1

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 40 AND 41 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             APR-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                         261,423
<SECURITIES>                                         0
<RECEIVABLES>                                   18,372
<ALLOWANCES>                                         0
<INVENTORY>                                      5,466
<CURRENT-ASSETS>                               305,936
<PP&E>                                       1,347,530
<DEPRECIATION>                                 199,640
<TOTAL-ASSETS>                               1,533,931
<CURRENT-LIABILITIES>                          124,855
<BONDS>                                        729,430
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                    103,500
<COMMON>                                           353
<OTHER-SE>                                     165,908
<TOTAL-LIABILITY-AND-EQUITY>                 1,533,931
<SALES>                                              0
<TOTAL-REVENUES>                               642,214
<CGS>                                                0
<TOTAL-COSTS>                                  346,452
<OTHER-EXPENSES>                                52,975
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              66,962
<INCOME-PRETAX>                                (9,864)
<INCOME-TAX>                                       871
<INCOME-CONTINUING>                            (8,993)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                (3,104)
<CHANGES>                                            0
<NET-INCOME>                                  (17,531)
<EPS-PRIMARY>                                    (.50)
<EPS-DILUTED>                                    (.50)