<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB


(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1998
                               -------------


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

For the transition period ______________  to  _______________

Commission file number 0-5474


              NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
              ---------------------------------------------------
       (Exact name of small business issuer as specified in its charter)
 
 

             Delaware                                            75 - 2571032
             ---------                                          --------------
(State of incorporation or organization)                        (IRS Employer 
                                                             Identification No.)
 
13150 Coit Road, Suite 125, Dallas, Texas                           75240
-----------------------------------------                       --------------
(Address of principal executive offices)                          (Zip Code)
 
Issuer's telephone number, including area code                   (972) 671-1133
                                                                 --------------

Check whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days.

                                              Yes XX No
                                                  --   -- 


Number of shares of common stock, par value $.01 per share, outstanding as of
June 30, 1998: 34,284,822
               ----------

Transitional Small Business Disclosure Format (Check One):     Yes   No XX
                                                                  --    --

                                       1
<PAGE>
 
                         PART 1. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
 
                                                                               30-JUN-98     31-DEC-97
                                                                              ------------  ------------
ASSETS                                                                         UNAUDITED
------
<S>                                                                           <C>           <C>
 
CURRENT ASSETS:
   Cash                                                                       $   136,199   $   428,454
   Restricted cash                                                                      -       187,258
   Accounts receivable                                                            253,601       361,684
   Inventories, at cost                                                           102,773       151,903
   Prepaid Expenses                                                                67,750        94,326
   Notes receivable - current                                                      15,650        16,009
   Current deferred tax asset                                                      19,030        19,030
                                                                              -----------   -----------
        TOTAL CURRENT ASSETS                                                      595,003     1,258,664
                                                                              -----------   -----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION                           750,391     1,351,791
                                                                              -----------   -----------
 
OTHER ASSETS:
   Deposits                                                                       381,822       151,768
   Long-term deferred tax asset                                                   428,948       428,948
   Assets of business that the majority interest
      was transferred under contractual agreement                               1,546,047             -
   Trade name, contract rights and organizational costs, net of
      accumulated amortization                                                    143,931       168,418
   Goodwill and merger costs                                                      793,834       928,512
   Notes Receivable-long-term                                                      15,350        33,523
                                                                              -----------   -----------
                                                                                3,309,932     1,946,562
                                                                              -----------   -----------
        TOTAL ASSETS                                                          $ 4,655,326   $ 4,557,017
                                                                              ===========   ===========
 
LIABILITY AND STOCKHOLDERS' EQUITY
----------------------------------
 
CURRENT LIABILITIES:
   Accounts payable and accrued liabilities                                   $   762,146   $ 1,333,703
   Notes payable - current                                                        896,915     1,341,130
   Income Taxes Payable                                                                 -        10,774
   Preferred stock dividends payable                                              780,000       780,000
                                                                              -----------   -----------
        TOTAL CURRENT LIABILITIES                                               2,439,061     3,465,607
 
LONG-TERM LIABILITIES:
   Liabilities of business that the majority interest
    was transferred under contractual agreement                                 1,533,017             -
   Notes Payable-long-term                                                         17,182       663,249
   Notes Payable to certain stockholders-long-term                              1,292,827     1,288,827
                                                                              -----------   -----------
        TOTAL LONG-TERM LIABILITIES                                             2,843,026     1,952,076
                                                                              -----------   -----------
 
        TOTAL LIABILITIES                                                     $ 5,282,087   $ 5,417,683
 
STOCKHOLDERS' EQUITY:
  Class A preferred stock,$3.00 par value, 10% annual cumulative dividend
     1,600,000 shares authorized, 414,286 and 1,287,000 shares issued,
     at June 30, 1998 and December 31, 1997                                     1,242,858     3,861,000
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
      3,096,000 and 8,000,000 shares of series "B" issued at June 30, 1998         30,960        80,000
       and Dec. 31, 1997
 Common stock, $.01 par value, 100,000,000 shares authorized, 34,284,822
     and 14,709,342 shares issued at June 30, 1998 and December 31, 1997          342,848       200,957
 Additional paid-in-capital (deficit)                                            (731,821)   (3,257,112)
 Retained earnings (deficit)                                                   (1,511,606)   (1,745,511)
                                                                              -----------   -----------
        TOTAL STOCKHOLDERS' EQUITY                                            $  (626,761)  $  (860,666)
                                                                              -----------   -----------
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                      $ 4,655,326   $ 4,557,017
                                                                              ===========   ===========
</TABLE>
    The accompanying notes are an integral part of the financial statements

                                       2
<PAGE>
 
      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
          FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
 
 
                                                         QUARTER ENDED               SIX MONTHS ENDED
                                                  30-JUN-98       30-JUN-97     30-JUN-98     30-JUN-97
                                                --------------  -------------  ------------  -----------
<S>                                             <C>             <C>            <C>           <C>
                                                                
REVENUE:                                                        
 Video Poker Revenue                               $3,956,806     $ 3,840,224  $ 7,935,851   $ 7,626,277
 Truck Stop and Convenience Store                   2,102,850       1,740,284    4,045,437     3,327,010
 Cruise Revenue                                       280,592         471,486      509,151       754,140
                                                   ----------     -----------  -----------   -----------
                                                    6,340,248       6,051,994   12,490,439    11,707,427
                                                                
COST AND EXPENSES:                                              
 Cost of Revenues                                   4,080,650       4,039,557    7,975,546     7,587,502
 General and Administrative Expenses                1,849,364       1,745,453    3,616,525     3,266,484
 Interest Expense                                      62,051         104,328      137,679       174,082
 Depreciation and Amortization                        155,259         161,528      310,353       326,392
                                                   ----------     -----------  -----------   -----------
                                                    6,147,324       6,050,866   12,040,103    11,354,460
                                                   ----------     -----------  -----------   -----------
                                                                
OPERATING INCOME (LOSS)                               192,924           1,128      450,336       352,967
                                                                
OTHER REVENUE (EXPENSE), NET                          (91,042)         16,629     (186,830)       46,109
                                                   ----------     -----------  -----------   -----------
                                                                
INCOME BEFORE PROVISION FOR INCOME TAXES              101,882          17,757      263,506       399,076
                                                                
PROVISION FOR INCOME TAXES                            (17,100)              -      (29,600)     (146,000)
                                                   ----------     -----------  -----------   -----------
                                                                
NET INCOME                                             84,782          17,757  $   233,906   $   253,076
                                                                
LESS: Preferred Stock Dividends                             -               -            -             -
                                                                
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK       $   84,782     $    17,757  $   233,906   $   253,076
                                                   ==========     ===========  ===========   ===========
BASIC EARNINGS PER SHARE                           $     0.00     $      0.00  $      0.01   $      0.01
                                                   ==========     ===========  ===========   ===========
 
</TABLE>


    The accompanying notes are an integral part of the financial statements

                                       3
<PAGE>
 
      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
 
 
                                                                   30-JUN-98   30-JUN-97
                                                                   ----------  ----------
<S>                                                                <C>         <C>
 
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income                                                         $ 233,906   $ 253,076
 
Adjustments to reconcile net income to net cash:
Depreciation and amortization                                        310,353     326,392
 
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable                            81,395    (168,026)
(Increase) decrease in inventories                                    22,434     (20,466)
(Increase) decrease in prepaid expenses                              (17,860)     36,005
(Increase) decrease in deposits                                     (262,422)    (13,560)
Increase (decrease) in income taxes payable                                -      13,447
Increase (decrease) in accounts payable and accrued liabilities      183,864     143,444
                                                                               ---------

Net cash provided (used) by operating activities                     551,670     570,312
                                                                   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment                           (70,929)   (113,853)
Proceeds to borrowers                                                  7,746      48,087
Repayment by borrowers                                                (7,500)     (8,473)
                                                                   ---------   ---------
 
Net cash provided (used) by investing activities                      70,683     (74,239)
                                                                   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable                                (319,460)   (429,811)
                                                                   ---------   ---------
 
Net cash provided (used) by financing activities                    (319,460)   (429,811)
                                                                   ---------   ---------
 
NET INCREASE (DECREASE) IN CASH                                      161,527      66,262
 
CASH - beginning of period                                           615,712     548,494
                                                                   ---------   ---------
 
CASH - ending of period                                            $ 777,239   $ 614,756
  ($641,040 of which is included in                                =========   =========
 "Assets of business that the majority       
 interest was transferred under contractual  
 agreement")                                 
                                             
</TABLE>



    The accompanying notes are an integral part of the financial statements
                                        

                                       4
<PAGE>
 
      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

    FOR THE YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 1998
                                        
<TABLE> 
<CAPTION> 
                                                                                  
Total
                               Class A      Preferred                   Additional          Retained    Stockholders'
                              Preferred      Stock        Common          Paid-in           Earnings       Equity
                                Stock       Series "B"     Stock      Capital (Deficit)     (Deficit)     (Deficit)
                              ----------------------------------------------------------------------------------------
<S>                           <C>          <C>           <C>          <C>                  <C>          <C>    
BALANCE, December 31, 1996    $ 3,861,000  $  80,000     $200,957       $(3,257,112)       $(1,682,133)    $(797,288)

NET INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997                 -          -            -                 -            (63,378)      (63,378)
                              -----------  ---------     --------       -----------        -----------     --------- 
BALANCE, December 31, 1997    $ 3,861,000  $  80,000     $200,957       $(3,257,112)       $(1,745,511)    $(860,666)
                              -----------  ---------     --------       -----------        -----------     ---------  

CONVERSION OF SERIES "B"
 PREFERRED STOCK                        -    (49,040)      49,040                 -                  -             -

CONVERSION OF CLASS A
 PREFERRED STOCK               (2,618,142)         -       55,875         2,562,267                  -             -

ISSUANCE OF ADDITIONAL
COMMON STOCK                            -          -       36,976           (36,976)                 -             -

NET INCOME FOR SIX MONTHS
ENDED JUNE 30, 1998                     -          -            -                 -            233,905       233,905
                              -----------  ---------     --------       -----------        -----------     ---------  
BALANCE, JUNE 30, 1998        $ 1,242,858  $  30,960     $342,848       $  (731,821)       $(1,511,606)    $(626,761)
                              ===========  =========     ========       ===========        ===========     =========  
</TABLE> 

    The accompanying notes are an integral part of the financial statements

                                       5
<PAGE>
 
      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
      --------------------------------------------------------------------
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------
                                  (UNAUDITED)
                                  -----------
                            JUNE 30, 1998 AND 1997
                            ----------------------

NOTE 1. OPINION OF MANAGEMENT

        The preceding financial information has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of the Company, includes all normal and recurring
adjustments necessary for a fair statement of the results of each period shown.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations.  The
Company believes that the disclosures made are adequate to make the information
presented not misleading.  It is suggested that these financial statements be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.

NOTE 2. ACCOUNTING TREATMENT - RESTRUCTURE AND ASSIGNMENT OF OWNERSHIP  OF OM
        OPERATING, LLC

        The Company and Operator have responded to various concerns of the
Louisiana Gaming Control Board and the Louisiana Video Gaming Division, of the
Gaming Enforcement Section of the Office of the State Police, discussed in  Note
9,  the Company and Williams restructured Operator effective April 15, 1998.
The restructure included an assignment of ownership interests by the Company
which does not qualify for sale treatment under applicable accounting rules
until Williams' share of distributions of cash flow result in sufficient
payments on the note to make significant reductions thereof.   Until that time,
the Company will continue to consolidate the operations of Operator.

The assets and liabilities of operator as June 30, 1998 are as follows:
<TABLE>
<CAPTION>
                     ASSETS
<S>                                          <C>
 
     Cash                                    $  641,040
     Accounts Receivable                         44,973
     Inventory                                   26,696
                                             ----------
          Total Current Assets                  712,709
     Property, Plant and Equipment, net         546,820
     Prepaid Expenses                            44,436
     Intangibles and other, net                 242,081
                                             ----------
     TOTAL ASSETS                            $1,546,046
                                             ==========
 
               LIABILITIES
 
     Accounts Payable/Accrued Liabilities    $  775,601
     Notes Payable - Current                    235,566
                                             ----------
          Total Current Liabilities           1,011,167
     Notes Payable - Long-term                  521,850
                                             ----------
     TOTAL LIABILITIES                       $1,533,017
                                             ==========
</TABLE>

NOTE 3. ACQUISITION OF ASSETS

        In January of 1997 the Company formed a subsidiary called "River Port
Truck Stop, Inc." ("RPTS") and entered into an agreement with S.W. Day and T.
Joe Callaway ("Lessor") to lease property in Port Allen, LA for a period of 50
years. The terms of the lease call for a monthly base rent payment of $7,000
plus Additional Rent of 10% of Net Revenue as defined in the lease agreement.
Lessor further agreed that for the first 24 months after the commencement of
video poker operations the Additional Rent would be 5% (rather than 10%) and
that commencing with the 25th month of video poker operations that the
Additional Rent would be 10% of Net Revenue. RPTS assigned the lease to River
Port Truck Stop, LLC ("River Port LLC") on May 19, 1998. River Port LLC is a
Louisiana limited liability company formed on April 13, 1998, by the Company and
Donald I Williams (who own 49.9% and 50.1%, respectively, of the currently
outstanding membership interests) to build and operate a video poker casino,
restaurant, truck stop and convenience store on the leased property. See Note 9,
below. A convenience store and fuel facility is currently in operation, and
effective June 1, 1997 the Company, through its subsidiary RPTS, began
operations, and effective July 21, 1998 the operations were taken over by River
Port LLC. River Port LLC has completed the facility design process and has made
application and has secured the proper permits to build the convenience store,
fuel facility and parking lot. Construction is underway on the convenience store
and it is expected that this portion of the project will be completed by the
middle of the fourth quarter of 1998. The video poker casino is in the final
design and permitting phase and construction will commence during September 1998
with completion targeted for December 1, 1998.

                                       6
<PAGE>
 
        On June 10, 1996, the Company acquired 100% of the issued and
outstanding capital stock of GalaxSea Cruises and Tours, Inc. ("GalaxSea") and
100% of the issued and outstanding capital stock of I.T. Cruise, Inc. ("I.T.
Cruise") from International Tours, Inc. ("International"). Both corporations
were wholly owned subsidiaries of International.

        GalaxSea was acquired by virtue of a merger with a newly created wholly
owned subsidiary of the Company under the terms of which the Company issued
4,934,106 shares of Common Stock and 8,000,000 shares of a newly designated
series of the Company's preferred stock, par value $.01 per share, designated as
Series B Convertible Preferred Stock ("Series B Preferred Stock").  The
8,000,000 shares of Series B Preferred Stock are entitled to one vote for each
share issued and will vote together with the Common Stock as one class, and not
as a separate class (except as mandated by law); International has converted
4,904,000 shares of Series B Preferred Stock into Common Stock, leaving
3,096,000 shares of Series B Preferred Stock outstanding.  As a result of this
acquisition, International is the largest stockholder of the Company, owning
approximately 44% of the voting stock.  Simultaneously with the closing of the
merger with GalaxSea, the Company also restructured its existing, outstanding
Class A Preferred Stock by redeeming 313,000 of the 1,600,000 outstanding shares
for a $939,000 subordinated debenture, placing an agreed moratorium on the
accrual of dividends for two years and obtaining from the holders of Class A
Preferred stock the right to force conversion of the remaining 1,287,000 shares
of Class A Preferred Stock into 8,240,000 shares of Common Stock at any time
within the next two years.  In the event of any such forced conversion, as part
of the merger transaction, International was granted anti-dilution protection
and was entitled, upon the issuance of such shares of Common Stock to the former
holders of Class A Preferred Stock, to an additional 5,452,854 shares of Common
Stock without further consideration, in order to maintain its percentage
ownership of voting stock at 44%.  On May 4, 1998, the Company delivered notice
to all holders of Class A Preferred Stock that the Class A Preferred Stock would
be converted into Common Stock, subject to approval at the annual meeting of
stockholders to be held on June 4, 1998 of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 100 million shares.  This amendment was approved at the
Company's annual meeting of the stockholders and 872,714 shares of Class A
Preferred Stock converted into 5,587,544 shares of Common Stock effective June
4, 1998 and the remaining 414,286 shares of Class A Preferred Stock converted
into 2,652,456 shares of Common Stock effective July 3, 1998. International was
issued 3,697,580 and 1,755,274 shares of Common Stock on June 4, 1998 and July
3, 1998, respectively, in compliance with its anti-dilution agreement respecting
the conversion of Class A Preferred Stock. The $780,000 of dividends on the
Class A Preferred Stock accumulated and accrued through May 31, 1996 continues
to exist as accrued dividends payable.

        I.T. Cruise was acquired in exchange for $100,000 cash and a promissory
note in the principal amount of $1,400,000 payable by the Company to
International.  The promissory note bears interest at nine percent per annum, is
payable in 31 equal monthly installments of $50,000 each and one final
installment of $27,414.22, and is secured by a pledge of the outstanding capital
stock of GalaxSea and I.T. Cruise owned by the Company.

NOTE 4. PRESENT CASH SHORTFALL

        As of July 1, 1998, the Company was twenty principal payments in
arrears, at regular principal and interest payments of $50,000 per month (a
total of $720,255 of principal and $67,816 in interest payable; interest has not
been paid since November 1, 1997), in payments to International on the
promissory note issued to International by the Company as partial consideration
for the I.T. Cruise acquisition. The note had an original principal balance of
$1,400,000, requires monthly payments of principal and interest of $50,000, had
an unpaid principal balance of $1,120,854 at June 30, 1998, and is secured by a
pledge of the outstanding capital stock of I.T. Cruise and GalaxSea owned by the
Company. On April 1, 1998, International agreed to allow the $638,071 then
accrued and owed to it to continue to remain outstanding (with interest accruing
thereon) until the earlier of January 1, 1999 or the time that excess cash flow
is available to pay such amount (or any portion thereof) and, further, granted
relief to the Company to allow it to pay the lesser of $50,000 per month or
excess available cash flow, until January 1, 1999, at which time any accrued
amounts will be due and payable and the regular $50,000 scheduled monthly
payments will recommence. Until such time as the regular scheduled payments on
the International note recommence and the International note is current, all
payments are suspended on the subordinated debentures issued by the Company in
connection with the redemption of 313,000 shares of Class A Preferred Stock,
which have aggregate remaining principal balances of $896,346 and accrued
interest of $100,839 at July 1, 1998, and require aggregate payments of
principal and interest of $11,250 per month until July 1, 1997 and $31,114 per
month thereafter. As of July 1, 1998, 15 monthly payments, for a total of
$386,950, have not been made pursuant to the subordinated debentures. The
subordinated debentures and the amounts unpaid are expressly made subordinate to
the International note as well as other senior debt of the Company. Until the
International note is paid in full and the subordinated debentures are paid in
full, the Company is prohibited from paying dividends on its Common Stock. See,
also, the discussion of the Company's default under certain debt instruments
described in Item 2 - "Management's Discussion and Analysis or Plan of 
Operation - Liquidity and Capital Resources - Present Cash Shortfall."

                                       7
<PAGE>
 
NOTE 5. LEASE TERMINATION

        In T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, L.L.C., 27th Judicial District
Court, St. Landry Parish, Louisiana, the preliminary question to be decided by
the court was whether the option to renew the term of the contract of lease on
King's Lucky Lady Truck Stop was in compliance with the requirements of the
Louisiana Civil Code governing the validity of such options.  The validity of
the option was assailed on grounds that the alleged failure of the option to
stipulate a price rendered it invalid.  On March 3, 1998, the court rendered
judgment against the Company and OM Operating, L.L.C. ("Operator") on the
grounds that the failure to stipulate a price rendered the option invalid, and
the Company and Operator were ordered to vacate the premises effective April 30,
1997.  The Company and Operator have filed an appeal of this judgment, which
appeal is pending.  The Company and Operator intend to vigorously pursue this
appeal, but there can be no assurance that the Company and Operator will
prevail.  If the judgment is not set aside, the Company and Operator will lose
the right to operate King's Lucky Lady effective April 30, 1997, unless some
other arrangement can be arranged with Guillory.  During the course of the
litigation, Operator was ordered by the court to escrow 50% of the monthly
operating profit generated by King's Lucky Lady, and effective from the date of
the judgment on March 3, 1998 Operator is required to escrow 100% of the
operating profit, unless Operator and the Company are able to negotiate a
different arrangement with Guillory or convince the court to modify such
arrangement.  As of  July 1, 1998, Operator had placed in escrow $388,821 for
the period from May 1997 through June 1998.  Operator and the Company  plan to
petition the court in September 1998 to grant a management fee for services from
April 30, 1997 through the date the appeal is completely concluded.  Presently,
the Company and Operator plan to also assert a claim for damages for unjust
enrichment against Guillory if they do not prevail on the appeal.  There can be
no assurance whether the Company will prevail on appeal or otherwise be able to
negotiate a different arrangement with Guillory or be granted relief from the
court to modify any relief granted.

NOTE 6. EARNINGS PER SHARE

        In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
which establishes standards for computing and presenting earnings per share
("eps"). Under SFAS No. 128, primary eps is replaced with basic eps. Basic eps
is computed by dividing income available to common shareholders by the weighted
average shares outstanding; no dilution for any potentially convertible shares
is included in the calculation. Fully diluted eps, now called diluted eps, is
still required; however, when applying the treasury stock method, the average
stock price is used rather than the greater of the average or closing stock
price for the period. The adoption of this statement had no material impact on
the Company's calculation of earnings per share. SFAS No. 128 was effective for
financial statements issued for periods ending after December 15, 1997.

NOTE 7. COMPREHENSIVE INCOME

        In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income".  SFAS No. 130 establishes standards for reporting and display of
comprehensive income in the financial statements.  Comprehensive income is the
total of net income and all other non-owner changes in equity.  SFAS No. 130 is
effective for 1998.  Adoption of this standard did not have an effect on the
Company's financial statements, financial position or results of operations in
1998.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

        In June 1998, the FASB issued SFAS 133 "According for Derivative
Instruments and Hedging Activity," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value.  SFAS 133 is
effective for fiscal years beginning after June 15, 1999 with earlier
application permitted beginning as early as July 1, 1998.  As the Company does
not currently have any derivative instruments adoption of this standard would
not have any impact on its financial statements, financial position or results
of operations.

NOTE 9. RESTRUCTURE OF OM OPERATING, L.L.C. AND RELATED MATTERS

        RESTRUCTURE OF OM OPERATING, L.L.C. Effective April 15, 1998, the
Company and Donald I. Williams ("Williams") entered into Amendment No. One (the
"Amendment") to the Operating Agreement (the "Operating Agreement") of Operator
to effect a restructuring of Operator which the Company believes effectively
addresses certain preliminary questions and concerns raised by the Louisiana
Gaming Control Board ("Gaming Control Board") and the Video Gaming Division of
the Gaming Enforcement Section of the Office of State Police within the
Department of Public Safety and Corrections (the "Division") in their review of
Operator's application for renewal of its license to operate video poker
casinos. The Company elected to voluntarily effect the restructure of Operator
even though the Gaming Control Board has not made a final determination whether
Operator's existing structure satisfied the Louisiana residency requirements of
the Louisiana Video Draw Poker Devices Control Law and the Rules and Regulations
promulgated thereunder (the "Louisiana Act"). The Company believed its existing
structure satisfied such residency requirements, but believes the restructure of
Operator will make an even stronger case that Operator satisfies such
requirements and will allay any concerns and questions which the Gaming Control
Board or Division may have in this regard. The Company has submitted to the
Division and Gaming Control Board the Amendment and related documents effecting
the restructure of 

                                       8
<PAGE>
 
Operator for their review in connection with their review of Operator's license
renewal request. There can be no assurance that the Gaming Control Board will
agree with the Company's conclusion that Operator, as restructured, complies
with the residency requirements of the Louisiana Act, but the Company believes
the Gaming Control Board will agree with the restructure and with the Company's
conclusion.

     The Amendment deleted several provisions of, and added several new
provisions to, the Operating Agreement, and certain related transactions were
agreed upon to effect the restructure of Operator.  Among these provisions and
transactions are the ones discussed in the following paragraphs.

     The Company contributed to Operator the Company's right to a 20% special
gross income allocation and distribution in exchange for 99% of the ownership
interests in Operator, and then immediately and simultaneously assigned 50% of
the ownership interests in Operator to Williams in exchange for a $4,000,000
nonrecourse note (the "Note") payable by Williams to the Company, so that
immediately thereafter Williams owns 51% and the Company owns 49% of the
ownership interests in Operator, the Company no longer has a 20% gross income
allocation and distribution right, and Williams owes the Company $4,000,000
pursuant to the Note.  The Note is payable solely from cash flow distributions
made by Operator to Williams from the existing five video poker casinos operated
by Operator (less an amount to allow Williams to pay his federal and state
income taxes on Operator's net taxable income attributable to such casinos), and
is secured by his 51% ownership interest and all cash flow distributions made to
him with respect to the five existing video poker casinos.  The principal
balance of the Note is automatically reduced pro-rata (at percentages agreed
upon based on 1997 net operating income of each casino) if Operator loses the
right to operate any of the five existing video poker casinos.

     Williams and the Company agreed to appoint  George J. Akmon, who is the
Executive Vice President and Chief Financial Officer of the Company, as the
Manager of Operator, to replace Williams, the previous Manager.  The Manager is
responsible for all routine, daily operational decisions.  Decisions such as
incurring debt, selling or buying devices, entering into additional agreements
to operate video poker devices, amending existing agreements, and other
material, nonroutine decisions require the approval of 65% of the ownership
interests in Operator.  Until the Note is paid in full, the Company has the
right to remove and appoint a new manager with the concurrence of Williams, and
must at the request of Williams remove and replace any manager who fails to
satisfactorily perform his duties.  Once the Note has been paid in full,
managers will be elected by the owners of at least 65% of the ownership
interests in Operator.

     On April 15, 1998, the Company and Operator entered into a Consulting and
Administrative Agreement (the "Consulting Agreement") pursuant to which the
Company has agreed to provide consulting and administrative services relating to
the daily management of each of Operator's video poker casinos.  The Company
will receive a fee of $400,000 per year for rendering such services, reduced by
$50,000 for each existing video poker casino Operator loses the right to
operate, and increased by $50,000 for each new video poker casino operated by
Operator during the term of the Consulting Agreement.  The Consulting Agreement
expires on the later of April 15, 2002 or the date the Note is paid in full,
provided the Company has an option to extend the Consulting Agreement for an
additional six years, unless the Note was not paid in full within six years, in
which case the extension is reduced so the maximum term of such extension, when
added to the original term, does not exceed 12 years.  The fee payable during
any extension term is to be agreed upon by the Company and Operator (acting at
the direction of Williams), and if they cannot reach agreement, they have agreed
to submit the issue to binding arbitration so that a reasonable fee will be
determined by binding arbitration.

     Williams and Operator also entered into an Employment Agreement on April
15, 1998 pursuant to which Williams will receive an annual salary of $250,000,
will be eligible to participate in any employee benefit plans of Operator, will
be furnished the use of a Company automobile and will be reimbursed for expenses
incurred on behalf of Operator during the course of his employment.  The
Employment Agreement terminates on the later of April 15, 2002 or the date the
Note is paid in full.

     The Company agreed to lease to Operator the land and buildings constituting
The Gold Rush Truck Stop.  The lease will be effective April 15, 1998 and will
be a triple-net lease pursuant to which Operator will be responsible for
property taxes, insurance and all repairs and maintenance, except for the
foundation, outer walls and roof, for which the Company will be responsible.
The lease will require annual rental payments of $400,000 and will be for a term
commencing April 15, 1998 and expiring April 15, 2008, subject to a five year
renewal option if elected by Williams, on behalf of Operator, at which time the
rent will be adjusted based on the change in the Consumer Price Index.  The
Company also granted Williams a right of first refusal to purchase the land and
buildings constituting The Gold Rush Truck Stop, or any portion thereof, if the
Company proposes to sell them to a third party.  Williams will have the prior
right to purchase the land and buildings, or such portion thereof, upon the same
terms and conditions and at the same price as offered by such third party.

     Pursuant to the Amendment, each of Williams (and certain related parties)
and the Company (and certain affiliates) agreed that all video poker gaming
opportunities within Louisiana that either party desires to pursue must first be
presented to Operator for its review and determination whether it desires to
pursue such opportunity.  If Operator elects not to purse the opportunity, then
the presenting party will be free to pursue it for a certain specified period
upon terms and conditions substantially equivalent to those presented to
Operator.  Williams is also entitled to receive a finder's fee of $50,000 for
each opportunity brought by him to Operator which is consummated by Operator.

     The Company and Williams terminated the various rights of first refusal and
purchase options which the Company previously had with regard to the 51%
ownership interest of Williams.  Pursuant to the Amendment, if either the
Company or Williams fails to maintain the 

                                       9
<PAGE>
 
suitability requirements of the Louisiana Act, his or its ownership interests
may be sold to a third party, with the consent of the other party (which consent
may not be unreasonably withheld), upon such terms and conditions as he or it
may negotiate with such third party; provided, if such sale is not accomplished
within specified time periods, the other party has the right to locate a
purchaser (or buy the interest himself or itself) for a purchase price equal to
the allocable share of Operator's net operating income for the preceding
calendar year multiplied by a factor of two. For the period April 14, 1998
through June 30, 1998, operating profits were $173,097, of which 51% were
assignable to Williams.

     As long as the suitability standards are being maintained by each party,
each of Williams and the Company is given the right under the Amendment to sell
his or its ownership interests at any time to any third party with the consent
of the other person, which consent may not be unreasonably withheld.  If the
Company is selling its ownership interests, it is also entitled to assign the
Consulting Agreement to the purchaser with the consent of Williams, which
consent may not be unreasonably withheld, if such purchaser has expertise to
perform the services being performed by the Company under the Consulting
Agreement.

     RIVER PORT TRUCK STOP - PORT ALLEN, LOUISIANA.  As part of the Amendment,
the Company and Williams agreed to form  River Port LLC to pursue development,
construction, ownership and operation of the River Port Truck Stop in Port
Allen, Louisiana.  Initially, River Port LLC will be owned 49.9%  by the Company
and 50.1% by Williams, but it is contemplated that additional equity partners
may be admitted so that the ownership interest of each of the Company and
Williams would be reduced pro-rata (after an initial reduction of 0.2% of
Williams' interest) down to 40% each, with other equity partners owning 20%.

     On July 21, 1998, the Company and Williams entered into an Operating
Agreement to govern the operations of River Port LLC. Williams and the Company
agreed to appoint  George J. Akmon as the Manager of  River Port LLC.  The
Manager is responsible for all routine, daily operational decisions.
Decisions such as incurring debt, selling or buying devices, entering into
additional agreements to operate video poker devices, amending existing
agreements, and other material, non routine decisions require the approval of
65% of the ownership interests in River Port LLC.  Until the Note is paid in
full, the Company has the right to remove and appoint a new manager with the
concurrence of Williams, and must at the request of Williams remove and replace
any manager who fails to satisfactorily perform his duties.  Once the Note has
been paid in full, managers will be elected by the owners of at least 65% of the
ownership interests in River Port LLC.

     On July 21, 1998, the Company and River Port LLC entered into a Consulting
and Administrative Agreement (the "Consulting Agreement") pursuant to which the
Company has agreed to provide consulting and administrative services relating to
the daily management of River Port LLC's video poker casino.  The Company will
receive a fee of $50,000 per year for rendering such services.  The Consulting
Agreement expires on the later of April 15, 2002 or the date the Note is paid in
full, provided the Company has an option to extend the Consulting Agreement for
an additional six years, unless the Note was not paid in full within six years,
in which case the extension is reduced so the maximum term of such extension,
when added to the original term, does not exceed 12 years.  The fee payable
during any extension term is to be agreed upon by the Company and River Port LLC
(acting at the direction of Williams), and if they cannot reach agreement, they
have agreed to submit the issue to binding arbitration so that a reasonable fee
will be determined by binding arbitration.

     Williams, River Port LLC and Operator also entered into an Amendment to
Employment Agreement on July 21, 1998 pursuant to which Williams agreed to
perform the same services for River Port LLC as he is performing for Operator
under the Employment Agreement between him and Operator, and pursuant to which
Operator and River Port LLC agreed to split his annual salary of $250,000 pro
rata based on the number of truck stop video poker casinos operated by each of
them.  He will also be reimbursed for expenses incurred on behalf of River Port
LLC during the course of his employment.  The Employment Agreement terminates on
the later of April 15, 2002 or the date the Note is paid in full.

     Pursuant to the Operating Agreement, if either the Company or Williams
fails to maintain the suitability requirements of the Louisiana Act, his or its
ownership interests may be sold to a third party, with the consent of the other
party (which consent may not be unreasonably withheld), upon such terms and
conditions as he or it may negotiate with such third party; provided, if such
sale is not accomplished within specified time periods, the other party has the
right to locate a purchaser (or buy the interest himself or itself) for a
purchase price equal to the allocable share of River Port LLC's net operating
income for the preceding calendar year multiplied by a factor of two.

     As long as the suitability standards are being maintained by each party,
each of Williams and the Company is given the right under the Operating
Agreement to sell his or its ownership interests at any time to any third party
with the consent of the other person, which consent may not be unreasonably
withheld.  If the Company is selling its ownership interests, it is also
entitled to assign the Consulting Agreement to the purchaser with the consent of
Williams, which consent may not be unreasonably withheld, if such purchaser has
expertise to perform the services being performed by the Company under the
Consulting Agreement.

     Effective July 17, 1998, River Port LLC borrowed $1,750,030 from Cottonport
Bank (the "Bank") for purposes of funding construction of the truck stop and
video poker casino to be owned and operated by River Port LLC.  This note bears
interest at an annual rate of 10.25% until December 31, 1998, at which time all
interest must be paid and the Bank has agreed to renew the loan for a five year
term, 

                                       10
<PAGE>
 
with monthly payments of principal and interest at an interest rate equal of 2%
above the prime rate of Chase. The full amount of the loan is guaranteed by the
company and Operator; $1,000,000 of the loan is guaranteed by Williams and his
spouse; and $750,000 is guaranteed by E.H. Hawes, II, the President and Chief
Executive Officer of the Company, and an unaffiliated individual. The lease of
the property upon which the truck stop and video poker casino is being
constructed has been pledged as collateral for the loan, and the improvements
being constructed thereon have been also pledged as collateral for the loan.

NOTE 10. INCOME TAX AUDIT

         Currently, the Internal Revenue Service is challenging the Company's
position with regard to utilization of the Net Operating Loss Carry Forward
originally incurred by the Company's predecessor.  The outcome of this challenge
is uncertain and an unfavorable ruling could have a material affect on the
Company's earnings.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

LIQUIDITY AND CAPITAL RESOURCES

         PRESENT CASH SHORTFALL.  As of July 1, 1998, the Company was twenty
months in arrears (a total of $720,255 of principal and $67,816 in interest
payable) in payments to International on the promissory note issued to
International by the Company as partial consideration for the I.T. Cruise
acquisition. The note had an original principal balance of $1,400,000, requires
monthly payments of principal and interest of $50,000, had an unpaid principal
balance of $1,120,854 at July 1, 1998, and is secured by a pledge of the
outstanding capital stock of I.T. Cruise and GalaxSea owned by the Company.

         The cash flow currently being generated by the Company is presently not
sufficient to allow it to make the required payments on the International note
and to continue to remain current on its other indebtedness and payables.
Consequently, International has agreed to allow the $638,071 accrued and owed at
April 1, 1998 to it to continue to remain outstanding (with interest accruing
thereon) until the earlier of January 1, 1999  or the time that excess cash flow
is available to pay such amount (or any portion thereof) and, further, has
granted relief to the Company to allow it to pay the lesser of $50,000 per month
or excess available cash flow, until January 1, 1999, at which time any accrued
amounts will be due and payable and the regular $50,000 scheduled monthly
payments will recommence.  Until such time as the regular scheduled payments on
the International note recommence and the International note is current, all
payments will be suspended on the subordinated debentures issued by the Company
in connection with the redemption of 313,000 shares of Class A Preferred Stock,
which have aggregate remaining principal balances of $896,346 and accrued
interest of $100,839 at July 1, 1998.  These debentures require aggregate
payments of principal and interest of $11,250 per month until July 1, 1997 and
$31,114 per month thereafter, and are expressly made subordinate to the
International note as well as other senior debt of the Company.  The Company
believes that the relief granted by International will allow it to meet its cash
flow obligations during 1998.  Further, the Company plans to enter into
negotiations with International and the holders of the subordinated debentures
to attempt to negotiate a revised payment schedule for all of the Company's
indebtedness to such persons which will accommodate the Company's expected cash
flow.  Any such revised schedule will need to be flexible enough to anticipate
revenue fluctuations due to seasonal changes in revenue and to anticipate the
loss of the King's Lucky Lady truck stop and video poker casino and the
restructuring of the Company's revenue and profits interests in Operator, and
any loss of additional video poker devices at any of the Company's video poker
casinos as a result of reduced fuel sales.  The Company believes it will be able
to negotiate a satisfactory revised payment schedule by the middle of the fourth
quarter of 1998, but there can be no assurance.  If not, it is possible that the
Company might continue to experience certain cash shortfalls in 1998, depending
on the level of revenues generated from the Company's operations.  It is not
possible to predict whether such cash shortfalls might be experienced, but the
Company believes its cruise operations will contribute positive cash flow as it
continues to mature and it is possible that no cash shortfalls will be
experienced even if no revised payment schedule is negotiated, although there
can be no assurance.
 
         As noted previously, the structure of Operator and the various
interests (including revenue and profits interests) of the Company in Operator
are being reviewed by the Louisiana Gaming Control Board. Any adverse ruling by
the Louisiana Gaming Control Board could further compound the Company's cash
flow situation and possibly result in the inability to meet its scheduled debt
payments, even as revised. The Company does not believe the review will result
in material adverse changes in Operator's structure, but it cannot predict the
results of the review until the review is completed. Strict enforcement of the
Louisiana Act and the perceived anti-gaming sentiment in Louisiana within
certain segments of the population and with certain politicians may also impact
the review of Operator and any possible restructuring of Operator, or even a
possible loss of Operator's license to Operate the video poker casinos.

         As also noted previously, the Company has been involved in litigation
respecting its continued right to operate King's Lucky Lady Truck Stop, and the
ultimate resolution of such case against the Company and Operator would have an
adverse affect on the Company's cash flow.  During the course of the litigation,
Operator was ordered by the court to escrow 50% of the monthly operating profit
generated by King's Lucky Lady, and effective from the date of the judgment on
March 3, 1998 Operator is required to escrow 100% of the operating profit. This
escrow amounted to $249,161 for the six months ended June 30, 1998, the total
escrow amounts to  $388,821 for the period from May 1997 through June 30, 1998.

                                       11
<PAGE>
 
     The Company has funded a portion of the construction of the River Port
Truck Stop and Casino through cash flow from operations for a total of $306,610
for the six months ended June 30, 1998, the total  amount of operating cash flow
applied to this project is $346,610 for the period from November 1997 through
June 30, 1998.  The Company received reimbursement of this amount from the
proceeds of the loan from Cottonport Bank on August 6, 1998.

     The Company will seek to meet its long-term liquidity needs primarily
through cash flow from operations, restructuring its payment obligations on
certain debt described above, additional borrowings from the Company's
traditional lending sources and possible sales of equity or debt securities.
While the Company believes it will be able to generate and obtain the necessary
capital to meet such needs if it is able to satisfactorily restructure its
payment obligations as described above, there can be no assurance that all of
such capital will be available on terms acceptable to the Company, which could
delay or cause the Company to postpone certain planned activities.

     General Condition. For comparison purposes the following is presented on a
consolidated basis which  includes Operator as presented prior to the
restructure of Operator discussed above.  The Company ended the second quarter
of 1998 with $777,239 in cash and other current assets amounting to $574,910,
including accounts receivable of $280,289, inventories and prepaid expenses of
$260,685 and current notes receivable of $33,936. The Company's total
liabilities were $5,282,087 at June 30, 1998, including accounts payable and
accrued liabilities of $1,528,341, current notes payable of $1,141,887, long-
term notes payable of $1,831,859 and preferred stock dividends payable of
$780,000.  The Company's liabilities decreased $135,596 from $5,417,683 at
December 31, 1997 to $5,282,087 at June 30, 1998. This variance was comprised of
an increase in accounts payable and accrued liabilities of $183,864 and
reductions in liabilities from other notes payable totaling $32,561, payments on
long and short-term debt to banks totaling $107,822 and payments on the Ozdon
notes issued for the stock purchase of the Gold Rush of $179,077.

     Accounts payable and accrued liabilities of $1,528,341 included $741,792 in
trade payables, state franchise taxes of $188,693, casino distributions of
$227,504, payroll and payroll taxes of $184,188, income tax payable of $10,774
and accrued interest of $175,390.

     The current portion of other notes payable totaling $1,141,887 includes
$536,261 related to the acquisition of I.T. Cruise and GalaxSea; the stock
purchase note from the Gold Rush acquisition amounting to $155,481; $220,982
payable to a bank for the construction of the Pelican Palace and the purchase of
the Lucky Longhorn; $203,762 payable to Class A Preferred shareholders; and
$25,401 in equipment leases and other notes.

     Long-term debt of $1,831,859 includes $499,821 payable to a bank for the
construction of the Pelican Palace and the purchase of the Lucky Longhorn;
$692,584 payable to Class A Preferred shareholders; $615,593 related to the
acquisition of I.T. Cruise and GalaxSea; and $23,861 in equipment leases and
other notes.

     Effective August 4, 1998, Operator and NOVP agreed to expend approximately
$170,000 to buy out the current truck stop operating lease, renovate,
rehabilitate and improve the fuel operations at Stan's Truck Stop and Restaurant
which functions as the qualified truck stop to meet the requirements of
operating video poker devices at the Diamond Jubilee.  The landlord agreed to a
reduction in rental payments equal to $85,000 to participate in the funding of
this effort.

     Effective July 17, 1998, River Port LLC borrowed $1,750,000 from the Bank,
which loan is guaranteed by the Company and Operator.  The loan bears interest
at an annual rate of 10.25% until December 31, 1998, at which time all interest
must be paid and the Bank has agreed to renew the loan for a five year term,
with monthly payments of principal and interest at an interest rate equal to 2%
above the prime rate of Chase.

     Effective July 1, 1996 the Company entered into a sublease agreement with
New Orleans Video Poker, Inc. ("NOVP") to sublease and manage The Diamond
Jubilee video poker casino and truck stop in New Orleans, Louisiana.  This
sublease provides for a 50/50 split between the Company and NOVP of the net cash
flow generated by the Diamond Jubilee.  The sublease further provides for the
Company to assume the outstanding liabilities of NOVP, exclusive of notes
payable to the principals of NOVP, as the purchase price for 50 video poker
devices and an automated teller machine.   The Company has the option to
purchase NOVP's 50% share of the cash flow.  The transaction also included the
issuance of 450,000 shares of common stock in the Company to NOVP.

     At June 30, 1998, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,297,211.
 
     Effective June 10, 1996, the Company acquired GalaxSea and I.T. Cruise,
companies engaged in the cruise travel industry.  Cruise revenue as reported is
presented on an accrual basis, and is estimated based on the receipt of
quarterly cash payments of previous years actual revenue; adjusted for seasonal
variations.  Cruise revenue is comprised of overrides and commissions on cruise
sales generated by I.T. Cruise from the International network and GalaxSea's
franchise system.  The Cruise lines make payments of overrides and commissions
on a quarterly basis which are received 30-45 days following the end of each
quarter.  Bonus overrides and commissions are paid by the cruise lines on an
annual basis, which are received 30-45 days into the next calendar year.
GalaxSea franchisees are billed monthly for license fees.

                                       12
<PAGE>
 
     Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 1997.  It
is expected that the profit margins may continue to be adversely affected, and
that various gaming establishments may be forced to close because they cannot
compete effectively at such reduced margins.  The Company believes it will be
able to maintain a competitive position by carefully managing expenses and cash
flow, but there can be no assurance.

     At the general election held on November 5, 1996, all parishes in which the
Company operates video poker casinos voted to continue truck stop video poker.
The local option initiative gave the voters in each parish the right to decide
what forms of gaming they want to continue in their parish.  More recently,
certain parishes, which had previously approved truck stop video poker, have
elected to discontinue this form of gaming.  If this were to happen in any of
the parishes where the Company operates video poker, it would have a materially
adverse impact on operations.

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation."  This statement provides accounting and reporting standards for
stock-based employee compensation plans and also applies to equity instruments
issued to acquire goods and services from nonemployees.  SFAS No. 123 defines a
fair value based method of accounting for employee stock option and similar
equity instruments.  Entities may either adopt that accounting method or may
elect to continue the accounting treatment outlined in APB Opinion No. 25,
"Accounting for Stock Issued to Employees."  Entities electing to continue
following Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value based method had been
adopted.  SFAS No. 123 is effective for fiscal years beginning after December
15, 1995.  The Company will follow Opinion No. 25.  Adoption of this statement
will not have a material impact on the consolidated financial statements of the
Company.

RESULTS OF OPERATIONS

NET INCOME FOR THE SIX MONTHS ENDED ENDED JUNE 30, 1998.

     Company operations resulted in net income before income taxes of $263,506
for the six months ended June 30, 1998, a decrease of $135,570, or 34%, from
1997's $399,076.  On June 1, 1997 the Company began recording retail revenues as
a result of operating the existing convenience store and fuel facility at the
River Port Truck Stop in Port Allen, LA., with a resulting operating loss of
$21,943 through June 30,1998.  During 1997 the Company and Operator were subject
to a court order which declared that 50% of the operating profit from King's
Lucky Lady Casino and Truck Stop must be placed in an escrow account effective
May 1, 1997 through March 2, 1998, and 100% from March 3, 1998 until a judgement
is made on the Company's and Operator's appeal.  This escrow requirement,
recorded as an expense entitled as a "litigation reserve", amounted to $139,660
through December 31, 1997, with a total of $249,161 added as a result of
operations for the six months ended June 30, 1998.  This escrow amounted to
$36,740 for the six months ended June 30, 1997.  Excluding the litigation
reserve, net income was $435,816 and $512,667 for the six months ended June 30,
1997 and 1998, respectively, representing an increase of 18% in 1998.

REVENUES TOTALED $12,490,439 THROUGH JUNE 30, 1998 COMPARED TO $11,707,427 FOR
1997, UP 10%.

     VIDEO POKER REVENUES totaled $7,935,851 through June 30, 1998, up $309,573,
or 4% from 1997's $7,626,278.  Gains were achieved at the Pelican Palace -
$224,900;  King's Lucky Lady - $151,935, the Lucky Longhorn $129,073; the Gold
Rush - $85,150 and the Diamond Jubilee - $2,071.  These gains were partially
offset by  the closure of Stelly's Southern Gold - $183,852 and the reduction of
Route Operations - $99,703 from 1997 to 1998.  Video poker revenue production by
location for 1998 and 1997 was as follows:

     Pelican Palace, Toomey, LA - $1,748,316 in 1998 and $1,523,416 in 1997, up
15%; resulting in average daily revenue per device (50 devices) of $193 through
June 30, 1998 compared to 1997's $168.

     King's Lucky Lady, Port Barre, LA - $1,303,950 in 1998 and $1,152,014 in
1997, up 13%; resulting in average daily revenue per device (50 devices) of $144
through June 30, 1998 compared to 1997's $127.

     Lucky Longhorn, Vinton, LA - $1,895,649 in 1998 and $1,766,577 in 1997, up
7%; resulting in average daily revenue per device (50 devices) of $209 through
June 30, 1998 compared to 1997's $195.

     Gold Rush, Opelousas, LA - $1,626,887 in 1998 and $1,541,737 in 1997, up
6%; resulting in average daily revenue per device (50 devices) of $180 through
June 30, 1998 compared to $170 for 1997.

     Diamond Jubilee, New Orleans, LA - $1,253,144 in 1998 and $1,251,073  in
1997, up 2%; resulting in average daily revenue per device (40 devices) of $173
through June 30, 1998 compared to $166 for 1997( on an average of 41.7 devices).

     Route Operations - South LA - $107,906 in 1998 and $207,608 in 1997, down
48%; resulting in average daily revenue per device (13 devices) of $46 through
June 30, 1998 compared to average daily revenue per device (22 devices) of $52
in 1997.

                                       13
<PAGE>
 
     Stelly's-LeBeau, LA - closed May 28, 1997; six months ended 1997 production
amounted to $183,853, resulting in average daily revenue per device (16 devices)
of $78.

     RETAIL REVENUES from fuel and convenience store, food and beverage
operations amounted to $4,045,437 for the six months ended June 30,1998 compared
to 1997's $3,327,010, an increase of 22%.

     Combined fuel and convenience store sales for the six months ended June
30,1998 increased $579,586, or 23%, to $3,144,598 compared to $2,565,012 in
1997.  Fuel sales for 1998 amounted to $2,560,643, making up 63.3% of the
Company's retail sales, compared to 1997's fuel sales of $2,157,070,
contributing 64.8% of the Company's retail sales.  Convenience store retail
sales totaling $583,955 were up 43% for 1998 versus 1997's $407,942.  Growth
occurred at the Gold Rush, which reported $1,646,873 in revenue for the six
months ended June 30, 1998 compared to 1997's $1,468,611, up 12%;  King's Lucky
Lady generated $1,025,446, down 1% from 1997's $1,034,000; and the River Port
Truck Stop posted sales totaling $472,279 for the six months ended June 30,1998
compared to one month of operation in 1997 totaling $62,401.

     Six months ended June 30, 1998 food and beverage sales increased $138,841,
or 18%, to $900,839, compared to  $761,998 in 1997. Food and beverage sales for
each location were as follows:  King's Lucky Lady $439,587 in 1998 compared to
1997's $406,496, up 8%; Gold Rush - $231,664 in 1998 compared to $198,637 in
1997, up 17%;  Pelican Palace - $183,587 in 1998 versus $119,289 in 1997, up
54%;  and the Diamond Jubilee - $46,003 in 1998 compared to $37,576 for 1997, up
22%.


     CRUISE REVENUES accrued for I.T. Cruise and GalaxSea totaled $509,151 for
the six months ended June 30,1998 compared to 1997's $754,140.  I.T. Cruise
revenue resulting from its contracts with International Tours, Inc. amounted to
accrued overrides and commissions of  $120,000 for 1998 compared to 1997's
$152,105.  The accrual of GalaxSea's franchise system revenues was comprised of
overrides and commissions of $91,045 in 1998 versus $118,030 in 1997;  monthly
license fees of  $100,505 in 1998 compared to $87,450 in 1997; franchise sales
fees of $2,500 in 1998 compared to $2,650 in 1997; marketing fees totaling
$182,082 in 1998 compared to 1997's $383,162; and convention and training fees
of $13,020 in 1998 compared to $10,743 in 1997.

CASINO AND TRUCK STOP OPERATIONS

     CASINO AND TRUCK STOP OPERATIONS recorded direct operating profit of
$1,630,585 for the six months ended June 30, 1998 , an increase of $43,864, or
3%, from 1997's $1,586,721.

     The Gold Rush's casino and truck stop operations produced operating profit
of approximately $617,280 in 1998 compared to $581,058 in 1997, up 6%.  Fuel
sales averaged approximately 207,000 gallons per month.

     The Lucky Longhorn's operating profit was approximately $330,146 in 1998
compared to $353,463 in 1997, down 7%.  Operating margins suffered as strong
promotional efforts were implemented to recover market share for the property.
The Lucky Longhorn has fourteen competitors in its market area, including a Las
Vegas style Native American casino and four river boats, one of which was added
in 1997. The raising of the legal drinking age statewide  from 18 to 21 years of
age particularly affected the Lucky Longhorn because it drew many of its
customers from the neighboring Longhorn Club entertainment facility and overall
customer traffic was reduced at both locations. The Longhorn Club (owed and
operated by lessor) was destroyed by fire on May 10, 1998.   Thus far,  the
Company has realized a reduction in the video poker revenue as a result of a
slight decline in the number of customers at the Lucky Longhorn.   During the
month of January 1997, operations were suspended for 3 days due to an ice storm.
Fuel sales averaged approximately 270,000 gallons per month during 1998.

     The Pelican Palace generated operating profit of approximately $321,159 in
1998 compared to 1997's $280,540, an increase of 14%.  Strong promotional
efforts were implemented to gain market share in casino and fuel sales. The
Pelican has fourteen competitors in its market area, including a Las Vegas style
Native American casino and four river boats, one of which was added in 1997.
During the month of January 1997, operations were suspended for 3 days due to an
ice storm.  In 1997, a portion of the income was applied to the reduction of a
note receivable,  which was satisfied in May of 1997.  Fuel sales averaged
approximately 160,000 gallons per month during 1998.

     King's Lucky Lady's operating profit for 1998 was approximately $315,844
compared to operating profit for 1997 of approximately $247,938, up 27%.  Strong
promotional efforts were implemented to gain market share in casino and fuel
sales.  See Part II, Item 1 -- Legal Proceedings" for a discussion of the
judgement rendered against Company regarding the validity of its option to renew
the lease on King's Lucky Lady.  The Company has filed a suspensive appeal in an
effort to reverse this decision.  Fuel sales averaged approximately 131,000
gallons per month during 1998.

     The Diamond Jubilee generated operating profit of approximately $52,890 in
1998, compared to 1997's $78,505, down 33%.  Two competitors with a total of 80
video poker devices came into the market during 1998 thus diluting The Diamond
Jubilee's market share.  The Diamond Jubilee also lost 10 devices after December
31, 1997 due to failure to maintain required fuel sales, and is expected to lose
an additional five devices during the third quarter of 1998, until increased
fuel sales are maintained.  Fuel sales averaged approximately 61,000 

                                       14
<PAGE>
 
gallons per month during the six months ended June 30,1998 compared to 84,000
gallons per month in 1997. Increased price competition has affected sales, which
resulted in less than the required minimum for the fourth quarter of 1997
(100,000 gallons per month is necessary for 50 devices), so the Company operated
50 devices from July of 1996 through January of 1997, but has only operated 40
devices since of February 1, 1997. In order to increase fuel sales
substantially, the Company will be required to make a substantial investment to
include a convenience store and additional gasoline pumps. The Operator and NOVP
have entered into an agreement with the landlord to expend approximately
$170,000 to gain control of the fuel operation and to pay for such improvements.
The landlord has agreed to a reduction in rental payments equal to $85,000 to
assist in this effort. The Company and NOVP will aggressively market the fuel
operation to increase the level of sales in order to maintain the minimum level
to operate 50 devices, 40 devices or even 35 devices. There can be no assurance
that such improvements will result in fuel sales being increased to achieve the
minimum level, or that such sales can be maintained if they reach such levels.
From March 30, 1998 to July 20, 1998 U.S. Highway 11 connecting with U.S. 90
(the highway on which the Diamond Jubilee is located), was closed to commercial
and non-residential traffic, which affected business volume in the casino and
truck stop operation.

     Route Operations generated operating profit for 1998 of approximately
$15,209 compared to operating profit for 1997 of approximately $30,058, down
49%.  During the six months ended June 30,1998, the Company had 13 devices
operating within 6 locations, compared to 1997, when the Company operated 22
devices within 10 locations.  The reduction in the number of route locations is
the result of the expiration of the initial five year operating leases with
tavern owners who have elected to purchase and operate their own video poker
devices.  The original operating leases had no provision for renewal.

     Stelly's Southern Gold was closed May 28, 1997.  Operating profit for the
six months ended June 30, 1997 amounted to $10,347. Stelly's did not have
sufficient fuel sales necessary to operate 16 video poker devices under
Louisiana regulations for the previous three quarters, therefore the Louisiana
State Police suspended the license to operate video poker devices at this
facility on May 28, 1997.
 
     River Port Truck Stop posted an operating loss of $22,791 for the six
months ended June 30, 1998 compared to 1997's recorded operating profit  of
$4,812 for one month of operation.  The loss was due to a full charge of rent
expense totaling $42,000 for the six months ended June 30,1998.  Construction of
a complete truck stop and casino complex  is currently in progress on this
leased property.  Fuel sales averaged approximately 52,000 gallons per month
during 1998.


CRUISE OPERATIONS

     Combined Cruise Operations recorded an operating loss which amounted to
$19,668 for the six months ended June 30,1998, on revenues totaling $509,151,
while 1997's operating loss of $31,804 was recorded based on revenues of
$754,140.  The loss in revenue was due to a major promotion for the film "Out-
to-Sea" which generated promotional revenue of approximatley $111,747 during the
second quarter of 1997  and a restructuring of contracts by certain cruise
lines.  Marketing fees accrued are the result of a broad based program
coordinated by GalaxSea to produce cruise industry publications and promotions
subscribed to by the cruise lines.  The GalaxSea franchise system included 73
franchisees at June 30, 1998 compared to 64 at June 30,1997.
 
     GalaxSea's six months ended June 30, 1998 revenues amounted to $389,151,
with an operating loss of approximately $87,510; revenues recorded for I.T.
Cruise were $120,000, with an operating profit of approximately $67,842 for the
six months ended June 30,1998.


EXPENSES TOTALED $12,040,103 THROUGH JUNE 30, 1998 COMPARED TO $11,354,360 FOR
1997, UP 6%.

     VIDEO POKER operations recorded a direct cost of revenue amounting to
$4,488,749 in 1998 and $4,421,678 in 1997, an increase of 1.5%.  This includes
fees paid to the State of Louisiana of $2,685,419 (33.8% of video poker revenue)
in 1998 and $2,598,051 (34.1% of video poker revenue) in 1997, and profit
sharing payments as defined in operating and management contracts of $1,803,331
(22.7% of video poker revenue) in 1998 and $1,823,628  (23.9% of video poker
revenue) in 1997.

     RETAIL operations recorded an increase of $495,166, or 18%,  in the cost
of revenue related to fuel, convenience store, food and beverage operations. The
total for the six months ended June 30, 1998 amounted to $3,262,749 (80.7% cost
margin on retail sales) compared to $2,767,583 (83.2% cost margin on retail
sales) in 1997.  Inclued is the River Port Truck Stop's cost of revenue related
to fuel and convenience store of $393,794 (83.4% cost margin on retail sales)
for 1998 compared to $48,396 for June of 1997.  Improvements in the cost of
revenue were mainly due to margin improvements on fuel sales which achieved a
92.3% margin in 1998 versus 93.8% in 1997, and food and beverage cost of revenue
improvements from 48.9% in 1997 to 45.7% in 1998.

     Fuel cost of goods sold for 1998 amounted to $2,363,843, representing a
cost margin of 92.3%, compared to 1997's fuel cost of goods sold totaling
$2,022,733, with a cost margin of 93.8%.  In order to comply with State
regulations governing truck stops, the Company continued to be very competitive
in its marketing and pricing of fuel during the six months ended June 30, 1998,
in order to maintain and/or increase fuel sales.  The regulations require a
minimum sales level of 100,000 gallons per month per location, in order to
maintain a complement of 50 video poker machines.

                                       15
<PAGE>
 
     Convenience store retail cost of goods sold totaling $487,106 (83.4% of
sales) increased  31% in 1998 on growth in sales of 43%. 1997's retail cost of
goods sold totaled $372,580 (91.3% of sales).

     Food and beverage cost of goods sold totaled $411,801, up 11% in 1998, with
a margin on sales of 45.7% compared to 1997's $372,270, with a margin on sales
of 48.9%.  The need to remain competitive at all locations requires the setting
of lower price points, which in turn results in a significant number of sales at
a low dollar value.  The State regulations governing truck stops require
operation of 50 seat (minimum) restaurants on a 24-hour basis in order to
operate 19 or more video poker machines.  The Company presently operates three
of these low volume restaurants.

     CRUISE operations recorded a direct cost of revenue amounting to $224,048
for the six months ended June 30, 1998 compared to 1997's $398,241, a decrease
of 44%.  The reduction in cost  was mainly due to a major promotion for the film
"Out-to-Sea" for which approximatley $118,779 was recorded during the second
quarter of 1997.   1998's marketing, training and promotional expenses totaled
$181,110 and royalty fees were $42,938.  1997's marketing, training and
promotional expenses amounted to $250,147 with royalty fees of $29,313.

     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $3,616,525 in 1998 and
$3,266,484 in 1997 increased 11% and represented 29.0% and 27.9% of total
revenue for 1998 and 1997, respectively.

     DEPRECIATION AND AMORTIZATION amounted to $310,353 for the six months ended
June 30, 1998 and $326,392 in 1997, a 5% decrease.  Interest expense was
$137,679 in 1998 and $174,082 in 1997, a 20% decrease.  Net other
revenue/(expense) was ($186,830) in 1998, compared to $46,109 in 1997.   The
majority of this expense was due to a total of $249,161 added to the litigation
reserve for the six months ended June, 1998.


COMPARISON OF 1998 TO 1997

     VIDEO POKER revenues increased to $7,935,851 in the six months ended June
30, 1998 from $7,626,277 in 1997, up $309,574, or 4%.  The Pelican Palace
produced $1,748,316 in 1998 versus $1,523,416 in 1997, an increase of $224,900,
or 15%.  King's Lucky Lady recorded video poker revenues of $1,303,950 in 1998
versus $1,152,014 in 1997, up $151,936, or 13%.  The Lucky Longhorn generated
$1,895,649 in 1998 compared to $1,766,577 in 1997, up $129,072, or 7%.  The Gold
Rush posted $1,626,887 in 1998 compared with $1,541,737 in 1997, up $85,150, or
6%.  The Diamond Jubilee produced $1,253,144 in 1998 versus $1,251,073 in 1997,
an increase of $2,071, or 2%.  Declines in video poker revenue were experienced
mainly due to the closure of Stelly's Southern Gold on May 28, 1997-six months
ended June 30, 1997 production was $183,853; and the reduction of Route
Operations resulting in $107,906 in 1998 down from $207,608 in 1997, down
$99,702, or 48%.

     RETAIL  revenues from fuel and convenience store, food and beverage
operations amounted to $4,045,437 for the six months ended June 30,1998 compared
to 1997's $3,327,010, an increase of 22%. The cost of revenue related to fuel,
convenience store, food and beverage operations increased $495,166, or 18%  from
$2,767,583 in 1997 to $3,262,749  in 1998, including $393,794 for the River Port
Truck Stop. The cost of revenue excluding the River Port Truck Stop increased
$149,768, or 5.5%.

     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES totaled $3,616,525 in 1998
and $3,266,484 for 1997, an increase of $350,041, or 11%.  This overall increase
resulted primarily from payroll, contract and professional services, truck stop
and casino promotional expenses and new operations.
 
     Payroll related expenses increased $87,394, or 6%, from $1,545,287 in 1997
to $1,632,681 for the six months ended June 30,1998: including an increase due
to the Employment Agreement with Williams as outlined above, equal to $34,583
from April 14 through June 30, 1998; operating the River Port Truck Stop of
$29,682 for six months in 1998 versus one month in 1997; and a decrease from
Cruise Operations of $80,134;  all other payroll expenses were up $103,263, an
increase of 7%, which now reflects the full impact of the overall 18.4% increase
in the Federal Minimum Wage from $4.35 per hour to $4.75 per hour (October 1,
1996) and $4.75 per hour to $5.15 per hour (September 1, 1997).  This increase
was also passed through by vendors and contractors which raised the Company's
overall level of direct operating expenses.

     Contract and professional services (outside services) expenses increased
$61,820, or 14%, from $433,161 in 1997 to $494,981 for the six months ended June
30, 1998; which included legal and accounting fees totaling $212,341 in 1998 and
$143,273 for 1997, an increase of $69,068, or 48%, resulting from regulatory and
licensing issues as discussed above; casino security costs of $157,011 in 1998
and $144,223 for 1997, an increase of $12,788, or 9%, resulting from the
increase in the Federal Minimum Wage; and contract services totaling $125,629 in
1998 and $145,665 for 1997, a decrease of $20,036, or 14%.

     Truck stop and casino promotional expenses amounted to $248,407 in 1998, up
53%, or $85,581  from 1997's $162,826, consisting of 4.2% and 3.0% of combined
truck stop and casino revenue for 1998 and 1997 respectively.  This increase in
promotional expense was 

                                       16
<PAGE>
 
the result of targeted marketing programs to maintain and/or to increase fuel
sales and to increase the length of time customers spend in the casino.
Complimentary food and beverage was the majority of the increase amounting to
$72,754; the direct cost of revenue being approximately 45%.

     Incremental operating expenses, excluding payroll expenses for the River
Port Truck Stop, amounted to $31,813 for the six months ended June 30,1998.
Combined Cruise Operations recorded a decrease of $33,234, or 17%, in other
operating expenses from 1997's $85,022 to $51,788 for the six months ended June
30,1998.

     All other expenses totaled $339,836 in 1998 compared to $331,822, a
decrease of $8,014, or 2.4%.

     DEPRECIATION AND AMORTIZATION amounted to  $155,094 for the six months
ended June 30,1998 and $164,864 in 1997, a decrease of $9,770, or 6%.
Depreciation and amortization on video poker operations, which includes video
poker machines, leasehold improvements and revenue interest rights, amounted to
$55,075 in 1998 compared to $76,410 for 1997.  Depreciation and amortization on
truck stop and convenience store operations totaled $14,292 in 1998 and $14,400
for 1997;   on cruise operations amounted to $82,847 in 1998 compared to $71,354
for 1997; and $2,880 in 1998 versus 1997's $2,700 on corporate assets.  Interest
expense was $75,628 in 1998 and $69,754 for 1997, an increase of $5,875, or 8%.
Net other revenue/(expense) totaled ($95,788) in 1998 compared to 1997's
$29,482.  This line item includes rental income, interest income, ATM
commissions and miscellaneous gains and losses on the disposal of assets.  In
addition, during 1997 the Company and Operator were subject to court orders
which declared that 50% of the operating profit from King's Lucky Lady Casino
and Truck Stop must be placed in an escrow account effective May 1, 1997 through
March 2, 1998, and 100% from March 3, 1998 until a judgement is made on the
Company's and Operator's appeal.  This escrow requirement, recorded as an
expense entitled as a "litigation reserve", amounted to $139,660 through
December 31, 1997, with a total of $249,161  added as a result of six months
ended June 30, 1998 operations and is recorded in the category of other expense.

     INCOME TAX EXPENSE amount to $29,600 for the six months ended June, 1998.
This is lower than the Company's statutory rate of 34% as the Company expects to
realize the Net Operating Loss Carry Forward, a portion of which were reserved
and thus not included as a deferred tax asset.

YEAR 2000 ISSUES

     The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches.  The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the digit value to 00. The risk is that computer systems
will not properly recognize sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail, resulting in business interruption.

     The Company is conducting a review of its computer systems and is taking
steps to correct Year 2000 compliance issues.  The Company benefits from having
relatively new computer systems in most locations and management believes the
Year 2000 issues can be mitigated without a significant potential effect on the
Company's financial position.  However, given the complexity of the Year 2000
issue, there can be no assurance that the Company will be able to address the
problem without costs and uncertainties that might affect the future financial
results or cause reported financial information to not be necessarily indicative
of future operating results or future financial condition.

FORWARD LOOKING STATEMENTS

     Statements that are not historical facts included in this Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, debt restructuring, the possible effects of anti-gaming sentiment, the
restructuring of Operator, maintaining or increasing fuel sales, compliance with
other gaming law requirements, maintaining a competitive position in the
Company's markets, pending legal proceedings, business strategies, expansion and
growth of the Company's operations, and cash flow. Factors that could cause
actual results to differ materially ("Cautionary Disclosures") are described
throughout this Form 10-QSB. Cautionary Disclosures include, among others:
general economic conditions, the Company's ability to find, acquire, market,
develop and produce new properties, the strength and financial resources of the
Company's competitors, anti-gaming sentiment, labor relations, availability and
cost of material and equipment, the results of debt restructuring efforts,
regulatory developments and compliance, and pending legal proceedings.  All
written and oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by the Cautionary Disclosures. The Company
disclaims any obligation to update or revise any forward-looking statement to
reflect events or circumstances occurring hereafter or to reflect the occurrence
of anticipated or unanticipated events.

                                       17
<PAGE>
 
                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On August 25, 1995, the Company filed a petition for declaratory
judgment in the 14th Judicial District Court, Calcasieu Parish, Louisiana,
seeking the court's interpretation of the Act of Contract and Agreement (the
"Contract") under which Operator operates the Lucky Longhorn video poker casino.
At issue is whether Operator deducts the full 32.5% net device revenue tax, or
only 22.5% (which was the statutory rate prior to the amendment of the statute
effective July 1, 1994), in calculating net revenues for distribution under the
Contract. Longhorn, the other party to the Contract, filed an answer to the
Company's suit on November 28, 1995 claiming that only the old rate of 22.5%
should be deducted, and claiming that Operator was in default for deducting the
higher rate and that the Contract should therefore be terminated. A settlement
was reached effective July 1, 1998 with the Longhorn, whereby the Company would
assume 100% of the cost of casino security and the Longhorn would provide
standard retail value from convenience store, restaurant, motel and beverage
products and services, for casino marketing, equal to 50% of the amount paid by
the Company for casino security. In addition, the Company agreed to reimburse
the Longhorn $60,000 for parking lot paving completed in 1995, payable at $3,000
per month with no interest applied thereon.

        T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, L.L.C., 27th Judicial District
Court, St. Landry Parish, Louisiana.  The preliminary question to be decided by
the court was whether the option to renew the term of the contract of lease on
King's Lucky Lady Truck Stop was in compliance with the requirements of the
Louisiana Civil Code governing the validity of such options.  The validity of
the option was assailed on grounds that the alleged failure of the option to
stipulate a price rendered it invalid.  On March 3, 1998, the court rendered
judgment against the Company and Operator on the grounds that the failure to
stipulate a price rendered the option invalid, and the Company and Operator were
ordered to vacate the premises effective April 30, 1997.  The Company and
Operator have filed an appeal of this judgment, which appeal is pending.  The
Company and Operator intend to vigorously pursue this appeal, but there can be
no assurance that the Company and Operator will prevail.  If the judgment is not
set aside, the Company and Operator will lose the right to operate King's Lucky
Lady effective April 30, 1997, unless some other arrangement can be arranged
with Guillory. During the course of the litigation, Operator was ordered by the
court to escrow 50% of the monthly operating profit generated by King's Lucky
Lady, and effective from the date of the judgment on March 3, 1998 Operator will
be required to escrow 100% of the operating profit, unless Operator and the
Company are able to negotiate a different arrangement with Guillory or convince
the court to modify such arrangement.  As of July 1, 1998, Operator had placed
in escrow $388,821 for the period from May 1997 through June 30, 1998.  Operator
and the Company  plan to petition the court in September 1998 to grant a
management fee for services from April 30, 1997 through the date the appeal is
completely concluded.  Presently, the Company and Operator plan to also assert a
claim for damages for unjust enrichment against Guillory if they do not prevail
on the appeal.  There can be no assurance whether the Company will prevail on
appeal or otherwise be able to negotiate a different arrangement with Guillory
or be granted relief from the court to modify any relief granted.

        Harry Woodall, et al v. North American Gaming and Entertainment
Corporation, 2nd Judicial District Court, Claiborne Parish, Louisiana.  This
suit represents a suit for declaratory judgment by former holders of Class A
Preferred Stock seeking to have the court order that accrued dividends thereon
must be paid.  The Company is legally prevented from paying dividends at this
time under provisions of the Delaware General Corporation Law, and is also
contractually prohibited from paying dividends while certain indebtedness is
outstanding.  The Company plans to seek removal of this case to federal court
and a dismissal of this action.  The Company believes it will prevail, but there
can be no assurance.

ITEM 2. CHANGES IN SECURITIES.

        The Company issued 5,587,544 shares of Common Stock to former holders of
Class A Preferred Stock effective June 4, 1998, and 2,652,456 shares of Common
Stock to former holders of Class A Preferred Stock effective July 3, 1998, as a
result of the forced conversion discussed in Item 3, below, and issued 3,697,580
shares and 1,755,274 shares of Common Stock to International on June 4, 1998 and
July 3, 1998, respectively, pursuant to International's anti-dilution agreement
respecting the conversion of Class A Preferred Stock.  The Company relied on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
for all of the stock issuances.

                                       18
<PAGE>
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Simultaneously with the acquisition of GalaxSea and I.T. Cruise, the
Company also restructured its existing, outstanding Class A Preferred Stock by
redeeming 313,000 of the 1,600,000 outstanding shares for a $939,000
subordinated debenture, placing an agreed moratorium on the accrual of dividends
for two years and obtaining from the holders of Class A Preferred stock the
right to force conversion of the remaining 1,287,000 shares of Class A Preferred
Stock into 8,240,000 shares of Common Stock at any time within the next two
years.  In the event of any such forced conversion, as part of the merger
transaction, International was granted anti-dilution protection and will, upon
the issuance of such shares of Common Stock to the former holders of Class A
Preferred Stock, be entitled to an additional 5,452,854 shares of Common Stock
without further consideration, in order to maintain its percentage ownership of
voting stock at 44%.  On May 4, 1998, the Company delivered notice to all
holders of Class A Preferred Stock that the Class A Preferred Stock would be
converted into Common Stock, subject to approval at the annual meeting of
stockholders to be held on June 4, 1998 of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 100 million shares.  This Amendment was approved at the
Company's annual meeting of stockholders resulting in the issuance of shares of
Common Stock described in Item 2. above.   The $780,000 of dividends on the
Class A Preferred Stock accumulated and accrued through May 31, 1996 continues
to exist as accrued dividends payable, and will continue to exist as accrued
dividends payable after conversion of the Class A Preferred Stock into Common
Stock.

See, also, the discussion of the Company's default under certain debt
instruments described in Item 2 - "Management's Discussion and Analysis or Plan
of Operation - Liquidity and Capital Resources - Present Cash Shortfall."

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

        On June 4, 1998, the Company held its Annual Meeting of Stockholders, at
which the following matters were approved (with holders of Common Stock, Class A
Preferred and Series B Preferred Stock voting as one class on both items, and
holders of Common Stock voting separately as a class on item (2)):

          (1) Each of the three nominated directors, E.H. Hawes, II, Daryl N.
              Snadon and Richard P. Crane, Jr. were reelected to the Board of
              Directors. The following number of shares were voted for, against
              or withheld with respect to each of such directors:
<TABLE>
<CAPTION>
 
               Name                     Votes For   Votes Against  Votes Withheld
               ----                     ----------  -------------  --------------
<S>                                     <C>         <C>            <C>
 
               E. H. Hawes, II          20,111,733            105             564
               Daryl N. Snadon          20,111,733            105             564
               Richard P. Crane, Jr.    20,111,733            105             564
</TABLE>
          (2) An amendment to the Certificate of Incorporation to increase the
              number of authorized shares of Common Stock to 100 million shares
              was approved with 20,091,044 shares voted for, 3,652,638 shares
              voted against, 603 shares withheld and no broker non-votes with
              regard to Common Stock, Class A Preferred Stock and Series B
              Preferred Stock voting as one class, and 16,746,045 shares for,
              3,238,352 shares voted against, 603 shares withheld and no broker
              non-votes with regard to Common Stock voting separately as a
              class.

ITEM 5. OTHER INFORMATION.

        The Company may exercise its discretionary authority to vote proxies on
any matter raised at next year's annual meeting of stockholders which is not
described in the Company's proxy statement unless the Company has received
notice of such matter from a stockholder on or before April 6, 1999.

                                       19
<PAGE>
 
Item 6. Exhibits and Reports on Form 8-K

(a) The following documents are filed as part of this Quarterly Report on Form
  10-QSB:


Exhibit
Number  Description of Exhibits
------  -----------------------


3.1.1   Certificate of Incorporation of the Company, as amended, filed as
        Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
        year ended December 31, 1986 (the "1986 Form 10-K"), and incorporated
        herein by reference.

3.1.2   Certificate of Amendment of Certificate of Incorporation of the Company
        dated April 18, 1994, filed as Exhibit 3.1.8 to the Company's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1993 (the
        "1993 Form 10-K"), and incorporated herein by reference.

3.1.3   Certificate of Amendment of Certificate of Incorporation of the Company
        effecting one-for-three reverse stock split filed as Exhibit 3.1 to the
        Company's Current Report on Form 8-K dated October 17, 1994, and
        incorporated herein by reference.

3.1.4   Certificate of Amendment of Certificate of Incorporation of the Company
        effecting name change, increase of authorized shares, authorization of
        Class A preferred stock and stock ownership limitations filed as Exhibit
        3.2 to the Company's Current Report on Form 8-K dated October 17, 1994,
        and incorporated herein by reference.

3.1.5   Form of "Certificate of Designation, Preferences and Rights of Series B
        Convertible Preferred Stock" creating the Series B Preferred Stock filed
        as Exhibit 10.1.4 to the Company's Current Report on Form 8-K dated June
        10, 1996, and incorporated herein by reference.

*3.1.6  Certificate of Amendment of Certificate of Incorporation of the Company
        increasing the number of authorized shares of Common Stock to
        100,000,000 shares.

3.2     Amended and Restated Bylaws of the Company filed as Exhibit 3.3 to the
        Company's Current Report on Form 8-K dated October 17, 1994, and
        incorporated herein by reference.

*10.1   Operating Agreement of River Port Truck Stop, LLC between the Company
        and Donald I. Williams ("Williams").

*10.2   Amendment to Employment Agreement between River Port Truck Stop, LLC,
        O.M. Operating, L.L.C. and Williams.

*10.3   Consulting and Administrative Agreement between the Company and River
        Port Truck Stop, LLC.

*10.4   Letter Agreement between the Company and Williams relating to River Port
        Truck Stop, LLC.

*10.5   Assignment and Assumption of Lease dated May 19, 1998, by and between
        River Port Truck Stop, Inc. and River Port Truck Stop, LLC.

*27.1   Financial Data Schedule required by Item 601 of Regulation S-B.


______________________

* Filed herewith.

                                       20
<PAGE>
 
In accordance with the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                    NORTH AMERICAN GAMING AND
                                    -------------------------
                                    ENTERTAINMENT CORPORATION
                                    -------------------------
                                    (Registrant)


Date: August 14, 1998               By:  /s/ George J. Akmon
                                       --------------------------------
                                       Executive Vice-President &
                                       Chief Financial Officer (Principal
                                       Financial and Chief Accounting
                                       Officer)

                                       21