<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 September 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
September 30, 1998: 41,788,552
                    ----------

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
                    SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
 
                                                                                  30-SEPT-98    31-DEC-97
                                                                                 ------------  ------------
ASSETS                                                                            UNAUDITED
<S>                                                                              <C>           <C>
CURRENT ASSETS:
   Cash                                                                          $    27,229   $   428,454
   Restricted cash                                                                         -       187,258
   Accounts receivable                                                               257,040       361,684
   Inventories, at cost                                                              119,837       151,903
   Prepaid Expenses                                                                   25,510        94,326
   Notes receivable - current                                                         15,650        16,009
   Current deferred tax asset                                                         19,030        19,030
                                                                                 -----------   -----------
        TOTAL CURRENT ASSETS                                                         464,296     1,258,664
                                                                                 -----------   -----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION                            1,489,609     1,351,791
                                                                                 -----------   -----------
 
OTHER ASSETS:
   Deposits                                                                          118,968       151,768
   Long-term deferred tax asset                                                      428,948       428,948
   Assets of business that the majority interest
      was transferred under contractual agreement                                  1,683,077             -
   Trade name, contract rights and organizational costs, net of
      accumulated amortization                                                       137,345       168,418
   Goodwill and merger costs                                                         726,265       928,512
   Notes Receivable-long-term                                                         15,350        33,523
                                                                                 -----------   -----------
                                                                                   3,109,953     1,946,562
                                                                                 -----------   -----------
        TOTAL ASSETS                                                             $ 5,063,858   $ 4,557,017
                                                                                 ===========   ===========
 
LIABILITY AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
   Accounts payable and accrued liabilities                                      $   769,116   $ 1,333,703
   Notes payable - current                                                         1,547,474     1,341,130
   Income Taxes Payable                                                                    -        10,774
   Preferred stock dividends payable                                                 780,000       780,000
                                                                                 -----------   -----------
        TOTAL CURRENT LIABILITIES                                                  3,096,590     3,465,607
 
LONG-TERM LIABILITIES:
   Liabilities of business that the majority interest
    was transferred under contractual agreement                                    1,547,851             -
   Notes Payable-long-term                                                            16,099       663,249
   Notes Payable to certain stockholders-long-term                                 1,229,644     1,288,827
                                                                                 -----------   -----------
        TOTAL LONG-TERM LIABILITIES                                                2,793,594     1,952,076
                                                                                 -----------   -----------
 
        TOTAL LIABILITIES                                                        $ 5,890,184   $ 5,417,683
 
STOCKHOLDERS' EQUITY:
  Class A preferred stock,$3.00 par value, 10% annual cumulative dividend
     1,600,000 shares authorized, no shares and 1,287,000 shares issued,
     at September  30, 1998 and December 31, 1997                                          -     3,861,000
  Preferred stock, $.01 par value, 10,000,000 shares authorized,
      no shares and 8,000,000 shares of series "B" issued at September  30, 1998                    80,000
       and December  31, 1997                                                              -
  Common stock, $.01 par value, 100,000,000 shares authorized, 41,788,552
     and 14,709,342 shares issued at September 30, 1998 and December 31, 1997        417,886       200,957
  Additional paid-in-capital (deficit)                                               466,960    (3,257,112)
  Retained earnings (deficit)                                                     (1,711,172)   (1,745,511)
                                                                                 -----------   -----------
        TOTAL STOCKHOLDERS' EQUITY                                               $  (826,326)  $  (860,666)
                                                                                 -----------   -----------
 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                         $ 5,063,858   $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
 
 
                                                         QUARTER ENDED               NINE MONTHS ENDED
                                                  30-SEPT-98      30-SEPT-97      30-SEPT-98    30-SEPT-97
                                                --------------  ---------------  ------------  ------------
<S>                                             <C>             <C>              <C>           <C>
REVENUE:
 Video Poker Revenue                               $3,820,367      $ 3,575,643   $11,756,218   $11,201,920
 Truck Stop and Convenience Store                   2,272,855        2,043,576     6,318,292     5,370,586
 Cruise Revenue                                       209,945          339,043       719,096     1,093,183
                                                   ----------      -----------   -----------   -----------
                                                    6,303,167        5,958,262    18,793,606    17,665,689
 
COST AND EXPENSES:
 Cost of Revenues                                   4,066,703        3,888,136    12,042,249    11,475,638
 General and Administrative Expenses                2,071,737        1,826,740     5,688,262     5,093,224
 Interest Expense                                      77,322          103,158       215,001       277,240
 Depreciation and Amortization                        152,754          198,191       463,107       524,583
                                                   ----------      -----------   -----------   -----------
                                                    6,368,516        6,016,225    18,408,619    17,370,685
                                                   ----------      -----------   -----------   -----------
 
OPERATING INCOME (LOSS)                               (65,349)         (57,963)      384,987       295,004
 
OTHER REVENUE (EXPENSE), NET                          (79,217)         (13,392)     (266,047)       32,717
                                                   ----------      -----------   -----------   -----------
 
INCOME BEFORE PROVISION FOR INCOME TAXES             (144,566)         (71,355)      118,940       327,721
 
PROVISION FOR INCOME TAXES                            (55,000)         (57,772)      (84,600)     (203,772)
                                                   ----------      -----------   -----------   -----------
 
NET INCOME                                         $ (199,566)     $  (129,127)  $    34,340   $   123,949
 
LESS: Preferred Stock Dividends                             -                -             -             -
 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK       $ (199,566)     $  (129,127)  $    34,340   $   123,949
                                                   ==========      ===========   ===========   ===========
BASIC EARNINGS PER SHARE                           $    (0.01)     $     (0.01)  $      0.00   $      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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
 
 
                                                                   30-SEPT-98   30-SEPT-97
                                                                   -----------  -----------
<S>                                                                <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income                                                          $  34,340    $ 123,949
 
Adjustments to reconcile net income to net cash:
Depreciation and amortization                                         463,107      524,583
 
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable                             85,438      (72,511)
(Increase) decrease in inventories                                      5,720      (80,844)
(Increase) decrease in prepaid expenses                                28,750         (332)
(Increase) decrease in deposits                                      (739,446)     (19,735)
Increase (decrease) in income taxes payable                                 -            -
Increase (decrease) in accounts payable and accrued liabilities       229,513      269,242
                                                                    ---------    ---------
 
Net cash provided (used) by operating activities                      107,422      744,352
                                                                    ---------    ---------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment                           (173,142)    (173,284)
Proceeds to borrowers                                                  12,003       (1,876)
Repayment by borrowers                                                 (7,746)     (96,502)
                                                                    ---------    ---------
 
Net cash provided (used) by investing activities                      168,885      (78,658)
                                                                    ---------    ---------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable                                 (242,988)    (547,976)
                                                                    ---------    ---------
 
Net cash provided (used) by financing activities                     (242,988)    (547,976)
                                                                    ---------    ---------
 
NET INCREASE (DECREASE) IN CASH                                       181,525      117,718
 
CASH - beginning of period                                            615,712      548,494
                                                                    ---------    ---------
 
CASH - ending of period                                             $ 797,237    $ 666,212
  ($770,008 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 
                  NINE MONTHS ENDED SEPT 30, 1998 (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                                                                 Total
                                Class A          Preferred                   Additional       Retained        Stockholders'
                                Preferred         Stock           Common      Paid-in         Earnings          Equity
                                 Stock          Series "B"        Stock       Capital         (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                         -         (80,000)        80,000              -              -               -

CONVERSION OF CLASS A
 PREFERRED STOCK                (3,861,000)              -         82,400      3,778,600              -               -

ISSUANCE OF ADDITIONAL
COMMON STOCK                             -               -         54,529        (54,529)             -               -

NET INCOME FOR NINE MONTHS
ENDED SEPT. 30, 1998                     -               -              -              -         34,340          34,340
                               -----------     -----------    -----------    -----------    -----------     -----------
BALANCE, Sept. 30, 1998        $         -     $         -    $   417,886    $   466,960    $(1,711,172)    $  (826,326)
                               ===========     ===========    ===========    ===========    ===========     ===========
</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)
                          SEPTEMBER 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 September 30, 1998 are as follows:
 
                  ASSETS
 
     Cash                                    $  770,008
     Accounts Receivable                         19,206
     Inventory                                   26,346
                                             ----------
          Total Current Assets                  815,560
     Property, Plant and Equipment, net         583,135
     Prepaid Expenses                            40,066
     Intangibles and other, net                 244,316
                                             ----------
     TOTAL ASSETS                            $1,683,077
                                             ==========
 
               LIABILITIES
 
     Accounts Payable/Accrued Liabilities    $  804,874
     Notes Payable - Current                    264,150
                                             ----------
          Total Current Liabilities           1,069,024
     Notes Payable - Long-term                  478,827
                                             ----------
     TOTAL LIABILITIES                       $1,547,851
                                             ==========
 

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 end
of the fourth quarter of 1998. The video poker casino is in the final design and
permitting phase and construction is anticipated to commence during November
1998 with completion targeted for April 1, 1999.

        On June 10, 1996, the Company acquired 100% of the issued and
outstanding capital stock of GalaxSea Cruises and Tours, Inc. 

                                       6
<PAGE>
 
("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"), which has
been converted into 8,000,000 shares of Common Stock.  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.

        The Company has entered into a letter of intent to sell substantially
all of the assets of GalaxSea and I.T. Cruise for an aggregate purchase price of
$1,833,333, payable $1,166,667 at closing with the remaining $666,666 payable
after one year following closing, subject to the gross revenues of the purchased
businesses exceeding a specified amount. The sale of these assets is subject to
negotiation of a definitive purchase agreement and the satisfaction of various
closing conditions. The closing is tentatively scheduled for December 1, 1998.

NOTE 4. PRESENT CASH SHORTFALL

        As of October 1, 1998, the Company was approximately twenty one
principal payments in arrears, at regular principal and interest payments of
$50,000 per month (a total of $762,284 of principal and $16,057 in interest
payable; on August 5, 1998 accrued interest of $76,892 was paid current and
principal was reduced by $58,108), 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 $1,062,746 at September 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 $122,097 at October 1, 1998, and require aggregate payments of
principal and interest of $11,250 per month until July 1, 1997 and then $31,114
per month July 1, 1997 through December 31, 1997 and $16,670 per month
thereafter. As of October 1, 1998, 18 monthly payments, for a total of $436,960,
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, 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 October 1, 1998, Operator had placed in escrow $492,376 for
the period from May 1997 through September 1998.  Operator and the Company  plan
to petition the court in November 1998 to grant a management fee for services
from April 30, 1997 through the date the appeal is completely concluded.  The
Third Circuit Court of Appeal heard the appeal on November 6, 1998, and the
outcome is currently pending a ruling from the court. 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 

                                       8
<PAGE>
 
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 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 Operating and 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.

                                       9
<PAGE>
 
     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 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 15, 1998 through September 30, 1998, operating profits were
$151,169,  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 

                                       10
<PAGE>
 
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, 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 (which guaranty will be secured by a
second lien on the Company's Gold Rush property). 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 October 1, 1998, the Company was
approximately twenty one months in arrears (a total of $762,284 of principal and
$16,057 in interest payable; on August 5, 1998 accrued interest of $76,892 was
paid current and principal was reduced by $58,108) 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 $1,062,746 at October 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 $122,097 at October 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 first
quarter of 1999, but there can be no assurance.  If not, it is possible that the
Company might continue to experience certain cash shortfalls in 1999, 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.  If the cruise operations of the Company are sold pursuant
to a definitive purchase agreement that may be negotiated under the letter of
intent to which the Company is a party, the Company will receive at closing
gross proceeds of $1,166,667, with an additional $666,667 payable following
twelve months after closing if certain revenue benchmarks are satisfied.  This
cash will enable the Company to meet certain of its cash obligations and,
thereafter, the Company's ability to meet its obligations will be solely
dependent upon revenues generated from the Company's truck stops and video poker
casino operations.  The Company believes such operations will provide sufficient
revenues, although the Company may need to negotiate a revised payment schedule
for the Company's indebtedness to facilitate such result.
 
        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

                                       11
<PAGE>
 
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 $352,716 for the nine months ended September 30, 1998, the
total escrow amounts to  $492,376 for the period from May 1997 through September
30, 1998.

     The Company had 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 third quarter of
1998 with $797,237 in cash and other current assets amounting to $536,960,
including accounts receivable of $276,246, inventories and prepaid expenses of
$211,759 and current notes receivable of $29,925. The Company's total
liabilities were $5,890184 at September 30, 1998, including accounts payable and
accrued liabilities of $1,573,990, current notes payable of $1,160,852, long-
term notes payable of $2,375,342 and preferred stock dividends payable of
$780,000.  The Company's liabilities increased $472,501 from $5,417,683 at
December 31, 1997 to $5,282,087 at September 30, 1998. This variance was
comprised of an increase in accounts payable and accrued liabilities of
$229,513, an increase due to construction of the River Port Truck Stop amounting
to $739,078, a decrease in liabilities from other notes payable totaling
$61,457, payments on long and short-term debt to banks totaling $161,325 and
payments on the Ozdon notes issued for the stock purchase of the Gold Rush of
$273,308.

     Accounts payable and accrued liabilities of $1,573,990 included $767,758 in
trade payables, state franchise taxes of $193,944, casino distributions of
$249,894, payroll and payroll taxes of $194,757, income tax payable of $739,078
and accrued interest of $156,863.

     The current portion of other notes payable totaling $1,811,624 includes
$88,306 payable to a bank for the construction of the River Port Truck Stop;
$225,712 payable to a bank for the construction of the Pelican Palace and the
purchase of the Lucky Longhorn; the stock purchase note from the Gold Rush
acquisition amounting to $61,250; $203,762 payable to Class A Preferred
shareholders; $543,384 related to the acquisition of I.T. Cruise and GalaxSea;
and $38,438 in equipment leases and other notes.

     Long-term debt of $1,224,570 includes $441,588 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; $553,160 related to the
acquisition of I.T. Cruise and GalaxSea; and $37,238 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 $1,750,030 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.  Through September 30, 1998 River Port LLC has
drawn $739,078 towards the construction of the River Port Truck Stop and Casino.

     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.

                                       12
<PAGE>
 
     At June 30, 1998, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,333,666.
 
     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.

     Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 1997 and
1998.  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 NINE MONTHS ENDED ENDED SEPTEMBER 30, 1998.

     Company operations resulted in net income before income taxes of $118,940
for the nine months ended September 30, 1998, a decrease of $205,780, or 63%,
from 1997's $324,720.  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 $352,716 for the
nine months ended September 30, 1998 compared to $93,895 for the nine months
ended September 30, 1997.  Excluding the litigation reserve, net income
increased 13% to $471,656 for the nine months ended September 30, 1998 compared
to $415,615 in 1997.  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 loss
of $60,408 through September 30,1998 compared to a loss of $32,290 in 1997.

REVENUES TOTALED $18,793,606 THROUGH SEPTEMBER 30, 1998 COMPARED TO $17,665,689
FOR 1997, UP 9%.

     VIDEO POKER REVENUES totaled $11,756,218 through September 30, 1998, up
$554,298, or 5% from 1997's $11,201,920.  Gains were achieved at the Pelican
Palace - $291,461;  the Lucky Longhorn $211,588;  King's Lucky Lady - $189,615;
the Gold Rush - $96,018 and the Diamond Jubilee - $63,476.  These gains were
partially offset by  the closure of Stelly's Southern Gold - $183,852 and the
reduction of Route Operations - $114,008 from 1997 to 1998.  Video poker revenue
production by location for 1998 and 1997 was as follows:

     Pelican Palace, Toomey, LA - $2,611,042 in 1998 and $2,319,581 in 1997, up
13%; resulting in average daily revenue per device (50 devices) of $191 through
September 30, 1998 compared to 1997's $170.

     Lucky Longhorn, Vinton, LA - $2,825,037 in 1998 and $2,613,449 in 1997, up
8%; resulting in average daily revenue per device (50 devices) of $207 through
September 30, 1998 compared to 1997's $191.

     King's Lucky Lady, Port Barre, LA - $1,905,163 in 1998 and $1,715,548 in
1997, up 11%; resulting in average daily revenue per device (50 devices) of $140
through September 30, 1998 compared to 1997's $126.

                                       13
<PAGE>
 
     Gold Rush, Opelousas, LA - $2,394,085 in 1998 and $2,298,067 in 1997, up
4%; resulting in average daily revenue per device (50 devices) of $175 through
September 30, 1998 compared to $168 for 1997.

     Diamond Jubilee, New Orleans, LA - $1,853,833 in 1998 and $1,790,357  in
1997, up 4%; resulting in average daily revenue per device (39.2 devices) of
$173 through September 30, 1998 compared to $159 for 1997 (on an average of 41.1
devices).

     Route Operations - South LA - $167,059 in 1998 and $281,067 in 1997, down
41%; resulting in average daily revenue per device (13 devices) of $47 through
September 30, 1998 compared to average daily revenue per device ( on an average
of 20.7 devices) of $50 in 1997.

     Stelly's-LeBeau, LA - closed May 28, 1997; nine 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 $6,318,292 for the nine months ended September 30,1998
compared to 1997's $5,370,586, an increase of 18%.  Fuel sales for 1998 amounted
to $3,988,989, making up 63.1% of the Company's retail sales, compared to 1997's
fuel sales of $3,533,689, contributing 65.8% of the Company's retail sales.

     Combined fuel and convenience store sales for the nine months ended
September 30,1998 increased $701,628, or 17%, to $4,909,771 compared to
$4,208,143 in 1997.   Convenience store retail sales totaling $920,782 were up
37% for 1998 versus 1997's $674,454.  Growth occurred at the Gold Rush, which
reported $2,492,971 in revenue for the nine months ended September 30, 1998
compared to 1997's $2,332,345, up 7%;  King's Lucky Lady generated $1,574,914,
down 2% from 1997's $1,602,392; and the River Port Truck Stop posted sales
totaling $748,137, up 174% for the nine months ended September 30,1998 compared
to seven months of operation in 1997 which totaled $273,406.  The addition of
Stan's Truck Stop during the third quarter of 1998 contributed sales of $93,749.

     Food and beverage sales for the nine months ended September 30, 1998
increased $246,079, or 21%, to $1,408,521, compared to  $1,162,442 in 1997.
Food and beverage sales for each location were as follows:  King's Lucky Lady
$665,485 in 1998 compared to 1997's $609,307, up 9%;  Gold Rush - $352,701 in
1998 compared to $307,573 in 1997, up 15%;  Pelican Palace - $290,509 in 1998
versus $192,241 in 1997, up 52%;  and the Diamond Jubilee and Stan's Truck 
Stop - $99,826 in 1998 compared to $53,321 for 1997, up 89%.

     CRUISE REVENUES accrued for I.T. Cruise and GalaxSea totaled $719,096 for
the nine months ended September 30,1998 compared to 1997's $1,093,183.  I.T.
Cruise revenue resulting from its contracts with International Tours, Inc.
amounted to accrued overrides and commissions of  $160,084 for 1998 compared to
1997's $212,105.  The accrual of GalaxSea's franchise system revenues was
comprised of overrides and commissions of $142,699 in 1998 versus $165,283 in
1997;  monthly license fees of  $150,300 in 1998 compared to $120,097 in 1997;
franchise sales fees of $2,500 in 1998 compared to $28,150 in 1997; marketing
fees totaling $238,731 in 1998 compared to 1997's $510,521; and convention and
training fees of $24,782 in 1998 compared to $54,349 in 1997.


CASINO AND TRUCK STOP OPERATIONS

     CASINO AND TRUCK STOP OPERATIONS recorded direct operating profit of
$2,306,715 for the nine months ended September 30, 1998, a decrease of $21,814,
or 1%, from 1997's $2,328,529.

     The Gold Rush's casino and truck stop operations produced operating profit
of approximately $910,034 in 1998 compared to $907,425 in 1997.  Fuel sales
averaged approximately 215,000 gallons per month versus 177,000 in 1997, up 21%.

     The Lucky Longhorn's operating profit was approximately $467,898 in 1998
compared to $494,580 in 1997, down 5%.  As a result of the settlement agreement
with the lessor the Company agreed to assume the remaining 50% of casino
security costs ( approximately $4,000 per month) and pay the lessor $3,000 per
month for a 20 month period towards parking lot maintenance. Operating margins
continue to suffer as strong promotional efforts are ongoing in an attempt 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 (owned 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 295,000 gallons per month during 1998 versus 171,000 in 1997, up
73%.

     The Pelican Palace generated operating profit of approximately $514,995 in
1998 compared to 1997's $455,007, an increase of 13%.  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

                                       14
<PAGE>
 
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 163,000
gallons per month during 1998 versus 141,000 in 1997, up 16%.

     King's Lucky Lady's operating profit for 1998 was approximately $423,215
compared to operating profit for 1997 of approximately $364,234, up 16%.  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 139,000
gallons per month during 1998 versus 130,000 in 1997, up 6%.

     The Diamond Jubilee / Stan's Truck Stop combined to produce operating
profit of approximately $17,578 in 1998, compared to 1997's $89,680, down 80%.
During 1998 two competitors with a total of 80 video poker devices came into the
market thus diluting The Diamond Jubilee's market share.  In addition, 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.  The Diamond Jubilee lost 10 devices on January 31, 1997
(100,000 gallons per month is necessary for 50 devices) and an additional five
devices were lost on August 17, 1998 (75,000 gallons per month is necessary for
40 devices) due to the former truck stop sublessee's failure to maintain
required fuel sales for the quarters ended December 31, 1997 and June 30, 1998.
Severe price competition was also prevalent in the area as the former sublessee
failed to maintain the minimum required fuel sales of 50,000 gallons per month
(June - 40,216 gallons and July - 45,039 gallons) required to maintain a video
poker casino license.  In order to preserve the video poker license, the Company
began operating Stan's Truck Stop which included fuel and restaurant operations
(see discussion above), effective August 4, 1998.  As noted above fuel sales for
the start of the third quarter were well below the required minimum to maintain
a video poker casino license, therefore the Company and NOVP elected to buy out
F & F.   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.  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.  The Operator and NOVP
entered into an agreement with the landlord to expend approximately $170,000 to
gain control of the fuel operation and to pay for facility improvements.  The
landlord agreed to a reduction in rental payments equal to $85,000 to assist in
this effort. The Company and NOVP have aggressively marketed the fuel operation
and increased the level of sales during the third quarter to exceed the minimum
level (approximately 158,000 gallons) in order to operate 35 video poker
devices.  Fuel sales averaged approximately 58,000 gallons per month during the
nine months ended September 30,1998 compared to 92,000 gallons per month in
1997.

     Route Operations generated operating profit for 1998 of approximately
$20,694 compared to operating profit for 1997 of approximately $39,148, down
47%.  During the nine months ended September 30,1998, the Company had 13 devices
operating within 6 locations, compared to 1997, when the Company operated an
average of 20.7 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
nine months ended September 30, 1997 amounted to $10,345.  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 $47,699 for the nine
months ended September 30, 1998 compared to 1997's operating loss of $31,690 for
seven  months of operation.  The loss was due to a full charge of rent expense
totaling $63,000 for the nine months ended September 30,1998.  Construction of a
complete truck stop and casino complex  is currently in progress on this leased
property. Fuel sales averaged approximately 56,000 gallons per month during 1998
versus 50,000 in 1997.

CRUISE OPERATIONS

     Combined Cruise Operations recorded an operating loss which amounted to
$89,835 for the nine months ended September 30,1998, on revenues totaling
$719,096, while 1997's operating loss of $90,597 was recorded based on revenues
of $1,093,183.  The loss in revenue was due to a major promotion for the film
"Out-to-Sea" which generated promotional revenue of approximately $111,747
during the second quarter of 1997, a restructuring of contracts by certain
cruise lines and a reduction in marketing fees resulting from  programs
coordinated to produce cruise industry publications and promotions subscribed to
by the cruise lines.  The GalaxSea franchise system included 75 franchisees at
September 30, 1998 compared to 72 at September 30,1997.
 
     GalaxSea's nine months ended September 30, 1998 revenues amounted to
$559,012, with an operating loss of approximately $174,095 compared to $251,728
recorded in 1997; revenues recorded for I.T. Cruise were $160,084, with an
operating profit of approximately $84,260 for the nine months ended September
30,1998 compared to $161,131 recorded in 1997.

                                       15
<PAGE>
 
EXPENSES TOTALED $18,408,619 THROUGH SEPTEMBER 30, 1998 COMPARED TO $17,370,685
FOR 1997, UP 6%.

     VIDEO POKER operations recorded a direct cost of revenue amounting to
$6,658,629 in 1998 and $6,455,310 in 1997, an increase of 3%.  This includes
fees paid to the State of Louisiana of $3,988,742 (33.9% of video poker revenue)
in 1998 and $3,817,227 (34.1% of video poker revenue) in 1997, and profit
sharing payments as defined in operating and management contracts of $2,669,887
(22.7% of video poker revenue) in 1998 and $2,638,083  (23.6% of video poker
revenue) in 1997.

     RETAIL operations recorded an increase of $658,288, or 15%,  in the cost
of revenue related to fuel, convenience store, food and beverage operations. The
total for the nine months ended September 30, 1998 amounted to $5,103,991 (80.8%
cost margin on retail sales) compared to $4,445,703 (82.8% 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 $636,965 (85.1% cost margin on retail sales)
for 1998 compared to $245,594 (89.8% cost margin on retail sales) for 1997.  In
addition Stan's Truck Stop's cost of revenue related to fuel, convenience store
and restaurant operations totaled $102,313 (89.4% cost margin on retail sales)
for 1998.  Improvements in the cost of revenue were mainly due to margin
improvements on fuel sales which posted a 92.8% margin in 1998 versus 94.5% in
1997 and food and beverage cost of revenue improvements from 48.4% in 1997 to
46.4% in 1998.  Overall convenience store margins declined slightly from 80.9%
in 1997 to 81.4% in 1998.

     Fuel cost of goods sold for 1998 amounted to $3,700,639, representing a
cost margin of 92.8%, compared to 1997's fuel cost of goods sold totaling
$3,533,689, with a cost margin of 94.5%.  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 nine months ended September 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.

     Convenience store retail cost of goods sold totaling $749,675 (81.4% of
sales) increased  37.4% in 1998 on growth in sales of 36.5%.  1997's retail cost
of goods sold totaled $545,640 (80.9% of sales) .

     Food and beverage cost of goods sold totaled $653,677, up 16% in 1998, with
a margin on sales of 46.4% compared to 1997's $562,274, with a margin on sales
of 48.4%; sales were up 21%.  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 four of these low volume restaurants compared to three in
1997.

     CRUISE operations recorded a direct cost of revenue amounting to $278,947
for the nine months ended September 30, 1998 compared to 1997's $574,245, a
decrease of 51%.  The reduction in cost  was mainly due to a major promotion for
the film "Out-to-Sea" for which $118,779 was recorded during the second quarter
of 1997, along with a general reduction in programs coordinated to produce
cruise industry publications and promotions subscribed to by the cruise lines.
1998's marketing, training and promotional expenses totaled $211,916 and royalty
fees were $67,031.  1997's marketing, training and promotional expenses amounted
to $520,877 with royalty fees of $51,277.

     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $5,688,262 in 1998 and
$5,093,224 in 1997 increased 12% and represented 30.3% and 28.8% of total
revenue for 1998 and 1997, respectively.

     DEPRECIATION AND AMORTIZATION amounted to $463,107 for the nine months
ended September 30, 1998 and $524,583 in 1997, a 12% decrease.  Interest expense
was $215,001 in 1998 and $277,240 in 1997, a 22% decrease.  Net other
revenue/(expense) was ($266,047) in 1998, compared to 32,717 in 1997.   The
majority of this expense was due to a total of $352,716 added to the litigation
reserve for the nine months ended September 1998 compared to 1997's litigation
reserve of $93,895.  Off-setting these expenses were combined interest and
rental income which amounted to $53,652 in 1998 and $35,266 for 1997.


COMPARISON OF 1998 TO 1997

     VIDEO POKER revenues increased to $11,756,218 during the nine months ended
September 30, 1998 from $11,201,920 in 1997, up $554,298, or 5%.  The Pelican
Palace produced $2,611,042 in 1998 versus $2,319,581 in 1997, an increase of
$291,461, or 13%.  King's Lucky Lady recorded video poker revenues of $1,905,163
in 1998 versus $1,715,548 in 1997, up $189,615, or 11%.  The Lucky Longhorn
generated $2,825,037 in 1998 compared to $2,613,042 in 1997, up $211,995, or 8%.
The Gold Rush posted $2,394,085 in 1998 compared with $2,298,067 in 1997, up
$96,018, or 4%.  The Diamond Jubilee produced $1,853,833 in 1998 versus
$1,790,357 in 1997, an increase of $63,476, or 4%.  The Company experienced
declines in video poker revenue related to the closure of Stelly's Southern Gold
on May 28, 1997, the nine months ended September 30, 1997 production was
$183,853; and the reduction of Route Operations resulting in $167,059 in 1998
down from $281,067 in 1997, down $114,008, or 41%.

     RETAIL revenues from fuel and convenience store, food and beverage
operations amounted to $6,318,292 for the nine months ended September 30,1998;
compared to 1997's $5,370,586, an increase of 18%. The cost of revenue related
to fuel, convenience store, food and 

                                       16
<PAGE>
 
beverage operations increased $658,288, or 15% from $4,445,703 in 1997 to
$5,103,991 in 1998, including $636,965 for the River Port Truck Stop, up from
1997's $245,594 and Stan's Truck Stop which recorded a cost of revenue totaling
$102,313. The cost of revenue excluding the River Port Truck Stop and Stan's
Truck Stop increased 3.9% on growth in sales of 7%.

     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES totaled $5,688,262 in 1998
and $5,093,224 for 1997, an increase of $595,038, or 12%.  This overall increase
resulted primarily from payroll, contract and professional services, truck stop
and casino marketing expenses and new operations.
 
     Payroll related expenses increased $211,699, or 9%, from $2,341,981 in 1997
to $2,553,680 for the nine months ended September 30,1998; including an increase
due to the Employment Agreement with Williams as outlined above, equal to
$80,938 from April 14 through September 30, 1998; operating the River Port Truck
Stop of $29,671 for nine months in 1998 versus seven months in 1997;  Stan's
Truck Stop added $35,719;  and a decrease from Cruise Operations of $116,416;
all other payroll expenses were up $181,787, an increase of 8.5%, 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
$35,884, or 4%, from $830,961 in 1997 to $866,845 for the nine months ended
September 30, 1998, which included legal and accounting fees totaling $308,029
in 1998 and $345,581 for 1997; a decrease of $37,552, or 11%, resulting from
regulatory and licensing issues as discussed above; casino security costs of
$239,798 in 1998 and $226,327 for 1997, an increase of $13,471, or 6%, resulting
from the increase in the Federal Minimum Wage; and contract and consulting
services totaling $319,018 in 1998 and $259,053 for 1997, a decrease of $59,965,
or 23%.  The reduction in payroll reflected in cruise operations was off-set by
out-sourcing certain marketing services which resulted in expenditures totaling
$216,792 during 1998 compared to $86,270 in 1997, an increase of $130,522.

     Truck stop and casino marketing expenses amounted to $826,239 in 1998, up
48%, or $266,899  from 1997's $559,340, consisting of 4.6% and 3.4% of combined
truck stop and casino revenue for 1998 and 1997 respectively.  This increase in
marketing expense was the result of targeted marketing programs to maintain
and/or to increase fuel sales, the implementation of a gift premium and customer
rewards and complimentary food and beverage promotions to increase the length of
time customers spend in the casino.  Complimentary food and beverage was the
majority of the increase amounting to $218,676; the direct cost of revenue being
approximately 46%.

     New operations contributed $116,539 to the increase in general operating
expenses from 1997 to 1998.  All other expenses totaled $1,283,545 in 1998
compared to 1997's $1,319,528, a decrease of $35,983, or 2.7%.

     DEPRECIATION AND AMORTIZATION amounted to  $463,107 for the nine months
ended September 30,1998 and $524,583 in 1997, a decrease of $61,476, or 12%.
Depreciation and amortization on video poker operations, which includes video
poker machines, leasehold improvements and revenue interest rights, amounted to
$161,949 in 1998 compared to $255,965 for 1997.  Depreciation and amortization
on truck stop and convenience store operations totaled $42,876 in 1998 and
$46,800 for 1997;  on cruise operations amounted to $249,642 in 1998 compared to
$213,718 for 1997; and $8,640 in 1998 versus 1997's $8,100 on corporate assets.
Interest expense was $215,001 in 1998 and $277,240 for 1997, a decrease of
$62,239, or 22%.  Net other revenue / (expense) totaled ($266,047) in 1998
compared to 1997's $32,718.  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 an additional $352,716 added as a result of nine months
ended September 30, 1998 operations and is recorded in the category of other
expense.  Income Tax Expense amount to $84,600 for the nine months ended
September 30, 1998.

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.  As a result of certain programs being written using two
digits rather than four digits to define the applicable year, any of the
Company's computer programs that have data sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.  This could result
in a system failure or miscalculation causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.  The Company has
implemented a year 2000 program to review the functionality of the Company's
information technology and non-information technology systems and applications
beyond 1999 as well as year 2000 issues related to the Company's third-party
vendors.  The Company operates its video poker devices under a license granted
by the Louisiana State Police Video Gaming Division.  The Company currently
operates 248 video poker machines which are linked to an on-line tracking and
accounting system maintained by the Gaming Division's technical department.  The
Gaming Division's technical department is currently in the testing stages for an
upgrade to its computer system to satisfy the year 2000 compliance issue.  The
Gaming Division is scheduled to install its new computer system in January of
1999 and will require 

                                       17
<PAGE>
 
software upgrades for all video poker "Clerk Validation Terminals". There will
be a mandatory chip upgrade during the first quarter of 1999 to coincide with
Year 2000 compliance. The expected cost of the chip will be in the $75 to $100
range, which will require the Company to spend approximately $18,600 to $24,800
on hardware, and it is anticipated that to complete the conversion the Company
will also incur an estimated amount of $15,000 for labor and testing. The second
major system which controls the Company's payrolls is managed by a third party
(Automatic Data Processing). The conversion of this system was completed during
the third quarter of 1998. Another third party vendor who provides accounting
software support (Great Plains Software) has warranted that its software will
accurately reflect the change from the year 1999 to the year 2000 and beyond.

The Company integrates all of its execute office systems through a "Novell" Lan
software networking environment.  The Company has plans to upgrade its current
server with software upgrades provided by Novell and intends to upgrade all
networked hardware to ensure compatibility and compliance with year 2000
requirements. It is estimated that this conversion will cost approximately
$15,000 and is scheduled for completion during the first quarter of 1999.

Computer terminals in use at Louisiana truck stop locations are not currently in
full compliance with the year 2000 roll-over requirements. Older personal
computers will not support an automatic roll-over to January 1, 2000.  It is
planned that a BIOS upgrade will be scheduled for all older personal computers
to ensure that the units will comply.  The estimated cost of BIOS upgrades will
not exceed $300 per personal computer, a total of $3,600.  At this time, the
company has identified twelve (12) units which will require a BIOS upgrade.  In
addition, custom application programs, written internally, will also require an
upgrade at an estimated cost of $10,000.   It is also anticipated that to
complete the conversion and upgrade, certain hardware purchases might be
necessary if old equipment fails to meet the new standards.  The Company
estimates that this could cost up to $20,000.

The Company's current plan contemplates expenditures totaling $90,000 to
implement all conversions to meet year 2000 compliance.

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.



                           PART II. OTHER INFORMATION


ITEM 4 IS OMITTED FROM THIS REPORT AS INAPPLICABLE.

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
deduct the full 32.5% and 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

                                       18
<PAGE>
 
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 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 October 1, 1998, Operator had placed in
escrow $492,376 for the period from May 1997 through September 30, 1998.
Operator and the Company  plan to petition the court in November 1998 to grant a
management fee for services from April 30, 1997 through the date the appeal is
completely concluded.  The Third Circuit Court of Appeals heard the appeal on
November 6, 1998, and the outcome is currently pending a ruling from the court.
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, Civil Action No. 98-1503 S, United States District Court, Western
District of Louisiana, Shreveport Division, which was removed to federal
district court on August 17, 1998.  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 believes it is
legally prevented from paying dividends at this time under provisions of the
Delaware General Corporation Law, and it is also contractually prohibited from
paying dividends while certain indebtedness is outstanding.  The Company
believes it will prevail, but there can be no assurance.


ITEM 2. CHANGES IN SECURITIES.

        The Company issued 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 1,755,274 shares of Common
Stock to International effective July 3, 1998 pursuant to International's anti-
dilution agreement respecting the conversion of Class A Preferred Stock.
Effective September 18, 1998, International converted 3,096,000 shares of Series
B Preferred Stock into 3,096,000 shares of Common Stock and the Company issued
such 3,096,000 shares of Common Stock to International.  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.


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 so that upon the
issuance of such shares of Common Stock to the former holders of Class A
Preferred Stock, International was 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.

                                       19
<PAGE>
 
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 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 after January 1, 1999 and on or
before February 15, 1999. The Company's Amended and Restated Bylaws also provide
that no matter may be brought before the annual meeting of stockholders unless
it is contained in the Company's Proxy Statement delivered to stockholders with
regard to such annual meeting.


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 filed as Exhibit 3.1.6 to the Company's Quarterly
        Report on Form 10-QSB for the second quarter of 1998.

*3.2    Amended and Restated Bylaws of the Company.

10.1    Operating Agreement of River Port Truck Stop, LLC between the Company
        and Donald I. Williams ("Williams") filed as Exhibit 10.1 to the
        Company's Quarterly Report on Form 10-QSB for the second quarter of
        1998.

10.2    Amendment to Employment Agreement between River Port Truck Stop, LLC,
        O.M. Operating, L.L.C. and Williams filed as Exhibit 10.2 to the
        Company's Quarterly Report on Form 10-QSB for the second quarter of
        1998.

10.3    Consulting and Administrative Agreement between the Company and River
        Port Truck Stop, LLC filed as Exhibit 10.3 to the Company's Quarterly
        Report on Form 10-QSB for the second quarter of 1998.


10.4    Letter Agreement between the Company and Williams relating to River Port
        Truck Stop, LLC filed as Exhibit 10.4 to the Company's Quarterly Report
        on Form 10-QSB for the second quarter of 1998.

                                       20
<PAGE>
 
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 filed as
        Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB for the
        second quarter of 1998.


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


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

* Filed herewith.

                                       21
<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: November 12, 1998             By:  /s/ George J. Akmon
                                        --------------------------------
                                        Executive Vice-President &
                                        Chief Financial Officer (Principal
                                        Financial and Chief Accounting
                                        Officer)

                                       22