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

                                  FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  For the fiscal year ended December 31, 1997
                                      OR
[ ]  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
                (Name of small business issuer in its charter)

         DELAWARE                                           75-2571032
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                          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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par
value $.01 per share

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  [X]

The issuer's revenues for its most recent fiscal year were: $23,806,042.

The aggregate market value of the voting common and non-voting stock held by
non-affiliates of the issuer, based on the average bid and asked price of such
stock, was $941,986 as of March 31, 1998.

At March 31, 1998, the registrant had outstanding 20,095,698 shares of par value
$.01 common stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Part III of this Annual Report on Form 10-KSB incorporates certain
information by reference from the definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders scheduled to be held on or around
June 3, 1998.

Transitional Small Business Disclosure Format (check one):

               Yes            No   X
                   -----         -----
<PAGE>
 
                               TABLE OF CONTENTS


ITEM 1.  DESCRIPTION OF BUSINESS.............................................  1
       General...............................................................  1
       Forward Looking Statements............................................  1
       Merger with OM Investors, Inc.........................................  1
       Acquisition of Ozdon Investments, Inc.................................  2
       Acquisition of GalaxSea and I.T. Cruise...............................  2
       Development of River Port Truck Stop..................................  3
       Gaming Industry Restrictions on Stock Ownership.......................  3
       Operation of Truck Stop Facilities....................................  3
          The Gold Rush - Opelousas, Louisiana...............................  3
          King's Lucky Lady - Port Barre, Louisiana..........................  4
          Pelican Palace - Toomey, Louisiana.................................  4
       Assignment to OM Operating, L.L.C.....................................  5
       License Renewal Process...............................................  6
       Operation of Video Poker Casinos......................................  6
          The Gold Rush - Opelousas, Louisiana...............................  7
          King's Lucky Lady - Port Barre, Louisiana..........................  7
          Pelican Palace - Toomey, Louisiana.................................  7
          Lucky Longhorn - Vinton, Louisiana.................................  7
          Stelly's-LeBeau, Louisiana.........................................  8
          The Diamond Jubilee - New Orleans, Louisiana.......................  8
          River Port - Port Allen, Louisiana.................................  9
       Video Poker Tavern Route..............................................  9
       Cruise Franchise and Travel Operations................................  9
       Marketing and Competition.............................................  9
          Marketing..........................................................  9
              Gaming Operations..............................................  9
              Cruise and Travel Operations...................................  9
          Competition........................................................ 10
              Gaming Operations.............................................. 10
              Cruise and Travel Operations................................... 10
       Employees............................................................. 11
       Environmental Matters................................................. 11
       Regulation and Licensing - Gaming Operations.......................... 11
          Louisiana.......................................................... 11
              Device Owner's License......................................... 11
              Establishment License.......................................... 12
              Recent Changes in Louisiana Act................................ 13
          Other States....................................................... 14
          Federal Regulation................................................. 14
       Regulation - Cruise and Travel Operations............................. 15
       Restrictions on Stockholders; Mandatory Disposition if Found
        Unsuitable........................................................... 15
       Insurance............................................................. 15
ITEM 2.  DESCRIPTION OF PROPERTY............................................. 15
ITEM 3.  LEGAL PROCEEDINGS................................................... 16
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 16

                                    PART II
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............ 17
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........... 18
ITEM 7.  FINANCIAL STATEMENTS................................................ 25
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE................................. 26


                                      -i-
<PAGE>
 
                                   PART III
ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT*
ITEM 10. EXECUTIVE COMPENSATION*
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................... 26
_________________________
*           Incorporated by reference to Proxy Statement.

                                     -ii-
<PAGE>
 
              NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION

                                    PART I


ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

     North American Gaming and Entertainment Corporation (the "Company") was
incorporated under the laws of the State of Delaware in 1969.  The Company
changed its name from Western Natural Gas Company to North American Gaming and
Entertainment Corporation on October 17, 1994 in connection with its merger (the
"Merger") with OM Investors, Inc. ("OM").   Following the Merger, the Company
has concentrated its business in the gaming industry and will continue to pursue
additional opportunities and developments in this industry, as well as in other
industries, such as the travel industry.  See "Acquisition of GalaxSea and I.T.
Cruise", below.  References hereinafter to the Company shall include OM and the
Company's other subsidiaries, on a consolidated basis, unless the context
clearly indicates otherwise.

FORWARD LOOKING STATEMENTS

     This Form 10-KSB includes certain statements that are not historical facts
and are deemed to be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.  See Item 6 -"Management's
Discussion and Analysis or Plan of Operations -- Forward Looking Statements" for
a further discussion of these "forward-looking statements".

MERGER WITH OM INVESTORS, INC.

     Effective October 17, 1994, the Company acquired by triangular merger all
of the assets and liabilities of OM in exchange for 10,000,000 shares of the
Company's common stock ("Common Stock") and 1,600,000 shares of the Company's
Class A preferred stock (each share of which was initially convertible into one
share of Common Stock) ("Class A Preferred Stock").  Such shares of Common Stock
and Class A Preferred Stock were issued pursuant to a registration statement on
Form S-4, Commission file no. 33-79384 (the "Form S-4 Registration Statement"),
filed with the Securities and Exchange Commission ("Commission") that became
effective July 28, 1994.  The Merger was approved by the stockholders of both
the Company and OM at special meetings held August 23, 1994.  The Class A
Preferred Stock has a par value of $3.00 per share and bears a 10% annual
cumulative dividend on par value; has a liquidation preference over Common Stock
equal to its par value plus any accumulated and unpaid dividends; is redeemable
by the Company at a redemption price equal to its par value plus any accumulated
and unpaid dividends; is convertible into Common Stock on a share-for-share
basis (subject to certain anti-dilution adjustments); and is entitled to vote
together with Common Stock as a single class, and not as a separate class
(except where expressly mandated and required by law, or in connection with an
amendment to the Company's Certificate of Incorporation to alter the rights of
Class A Preferred Stock), on all matters to be presented to the holders of
Common Stock, with the holders of Common Stock and the holders of Class A
Preferred Stock being entitled to one vote for each such share held.   In
connection with the acquisition of GalaxSea Cruises and Tours, Inc. and I.T.
Cruise, Inc., various adjustments were made to the Class A Preferred Stock and
313,000 shares were redeemed for a $939,000 subordinated debenture of the
Company.  See "Acquisition of GalaxSea and I.T. Cruise", below.

     Prior to consummation of the Merger, OM operated the truck stop facilities
and video poker casinos in two truck stops in Louisiana, the video poker casinos
in three other truck stops in Louisiana and the video poker devices for a route
of 18 bars and restaurants ("taverns") in Louisiana.  Upon consummation of the
Merger, OM contributed and assigned all of its rights, duties and obligations to
operate the five existing truck stop video poker casinos and the tavern route to
OM Operating, L.L.C. ("Operator"), a Louisiana limited liability company owned
49% by OM and 51% by Donald I. Williams, a former director and Vice President of
OM.  OM also contributed its interest in 259 video poker machines to Operator,
subject to approximately $861,098 of debt (as of the effective date of the
Merger) which Operator agreed to pay.  In exchange, OM is entitled to a 49%
interest in Operator and a gross income allocation equal to 20% of the net
revenues generated from operation of the video poker machines; net revenues
being 

                                      -1-
<PAGE>
 
defined as all money played in the devices less winnings paid out and all
fees and taxes paid to the state.  The contribution and assignment to Operator
was made because Louisiana law currently requires the operator of video poker
devices in truck stops to be at least majority owned by Louisiana residents, and
there could be no assurance this requirement would continue to be satisfied
after consummation of the Merger.  Effective December 15, 1995, the Company
caused OM to be merged into the Company and OM ceased to exist as a separate
legal entity.  The Company is now the owner of the 49% interest in the Operator
and the 20% gross income allocation from the Operator, and continues to operate
the two truck stop facilities operated by OM at the time of the Merger.

ACQUISITION OF OZDON INVESTMENTS, INC.

     On December 15, 1995 ("Closing"), but to be effective November 1, 1995, the
Company acquired 100% of the issued and outstanding capital stock of Ozdon
Investments, Inc. ("Ozdon") in exchange for 600,000 shares of the Company's
Common Stock and $1 million in principal amount of Notes (the "Notes") payable
by the Company to the shareholders of Ozdon ("Shareholders"), which Notes bear
interest at 9% per annum, are payable in 36 equal monthly payments of principal
and interest, and are secured by a pledge of the net cash flow generated from
the Gold Rush truck stop video poker casino.  The acquisition price was based on
a third party appraisal, utilizing a discounted cash flow for a two year holding
period.  Lamar E. Ozley, Jr., the former President, Chief Executive Officer and
Chairman of the Board of the Company, owned 46.5% of the outstanding shares of
Ozdon and his wife owned 2% of such outstanding shares.  Donald I. Williams, the
Manager of Operator, also owned 46.5% of the outstanding shares of Ozdon, but
transferred such shares to an affiliated limited liability company prior to the
Closing.  The Company agreed to dissolve and liquidate Ozdon into the Company
following Closing, and to distribute the assets used in the gaming operations of
Ozdon (including 50 gaming devices), subject to liabilities of approximately
$91,100, to Operator.  This distribution to Ozdon was made effective as of the
date of Closing, but the Company subsequently decided to retain Ozdon as a
wholly owned operating subsidiary and did not consummate the dissolution.

     Ozdon owned and operated a truck stop and video poker casino in Opelousas,
St. Landry Parish, Louisiana, at the intersection of Interstate Highway 49 and
U.S. Highway 167, approximately 20 miles from Lafayette, Louisiana.  The
Company, through Ozdon, will continue to own and operate the truck stop
facility, and Operator will operate the video poker casino pursuant to an
operating agreement with the Company.  Operator now owns all of the video poker
machines and assumed approximately $91,100 of indebtedness related to such
machines and operations. The truck stop and video poker casino is known as the
"Gold Rush Truck Stop and Video Poker Casino" ("Gold Rush").

ACQUISITION OF GALAXSEA AND I.T. CRUISE

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

     GalaxSea was acquired by virtue of a merger with a newly created wholly
owned subsidiary of the Company under the terms of which the Company issued
4,934,106 shares of Common Stock and 8,000,000 shares of a newly designated
series of the Company's preferred stock, par value $.01 per share, designated as
Series B Convertible Preferred Stock ("Series B Preferred Stock").  The
8,000,000 shares of Series B Preferred Stock are entitled to one vote for each
share issued and will vote together with the Common Stock as one class, and not
as a separate class (except as mandated by law).  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 will, upon the issuance of such shares of Common Stock to the former holders
of Class A Preferred Stock, be entitled to an additional 5,452,854 shares of
Common Stock without further consideration, in order to maintain its percentage
ownership of voting stock at 44%.  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.

                                      -2-
<PAGE>
 
     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.

     GalaxSea is an Oklahoma corporation that was formed in September 1995.
Effective October 1, 1995, GalaxSea acquired substantially all of the operating
assets of GalaxSea Associates, Inc. ("GAI"), a Florida corporation.  GAI had
been in the business of franchising "cruise only" retail travel stores since
1988.  The principal business of GalaxSea will continue to be the granting of
franchises for the operation of travel vacation stores that specialize in the
marketing and selling of cruise travel, tours and related travel arrangements
according to the concept and business system developed by GalaxSea and GAI.

     I.T. Cruise is an Oklahoma corporation that was formed in 1993.  I.T.
Cruise has served as the cruise marketing division of International since that
time.  The principal business of I.T. Cruise is to coordinate cruise marketing
programs between the various major cruise lines and International's network of
approximately 900 travel agency locations.

DEVELOPMENT OF RIVER PORT TRUCK STOP

     In January of 1997 the Company formed a subsidiary called "River Port Truck
Stop, Inc." and entered into an agreement with S.W. Day and T. Joe Callaway
("Lessor") to lease property in Port Allen, Louisiana, 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.  The Company is planning to build and operate
a video poker casino, restaurant, truck stop and convenience store on the
property. A convenience store and fuel facility is currently in operation, and
effective June 1, 1997 the Company, through its subsidiary River Port Truck
Stop, Inc., began operations.  The Company has secured the necessary building
permits for the truck stop portion of the facility.  Limited construction has
commenced with funds obtained from operational cash flow (approximately
$177,000), but full-scale construction will not commence until permanent
financing has been obtained.

GAMING INDUSTRY RESTRICTIONS ON STOCK OWNERSHIP

     Upon the effective date of the Merger with OM, the Company's Certificate of
Incorporation was amended to adopt various restrictions on ownership of the
common and preferred stock of the Company in order to comply with applicable
gaming statutes.  Persons who are not suitable to be stockholders of the Company
under such statutes may not own common or preferred stock of the Company.
Further, any stockholder may be required, at such stockholder's expense, to make
filings with applicable gaming authorities to determine suitability, and if
found not suitable will be required to dispose of such stockholder's stock and
will not be entitled to vote or receive distributions pending such disposal.
These restrictions are further described, below, under the caption entitled
"Restrictions on Stockholders; Mandatory Disposition if Found Unsuitable".

OPERATION OF TRUCK STOP FACILITIES

     The Company presently operates the truck stop facilities (i.e. the fuel
pumps, convenience store and restaurant) at three truck stops located in
Opelousas, Port Barre and Toomey, Louisiana, respectively, and anticipates that
it may operate the truck stop facility at Port Allen, Louisiana, when
construction is completed.  The Company owns the facility in Opelousas, operates
the facilities in Port Barre and Toomey pursuant to long term contracts with the
owners of the truck stops, and operates the facility in Port Allen pursuant to a
long term lease with the owner of the land.  These facilities and the agreements
with the owners are described below.

     THE GOLD RUSH - OPELOUSAS, LOUISIANA.  The Gold Rush truck stop is located
in Opelousas, St. Landry Parish, Louisiana, a town with a population of
approximately 19,273 located at the intersection of Interstate Highway 49 and
U.S. Highway 167, approximately 20 miles from Lafayette, Louisiana.  The Gold
Rush truck stop facility opened for business on February 17, 1993, and the video
poker casino opened for business on the same date.  The 

                                      -3-
<PAGE>
 
Gold Rush has 31 fuel dispensers, an approximately 4,234 square foot convenience
store and a restaurant. At December 31, 1997, the Company employed 24 persons in
the truck stop operations. The Company has granted Operator a license to handle
all sales of alcoholic beverages at the convenience store and restaurant.

     KING'S LUCKY LADY - PORT BARRE, LOUISIANA.  King's Lucky Lady truck stop
is in Port Barre, Louisiana, a town with a population of approximately 2,150
located five miles east of Opelousas, on U.S. Highway 190.  King's Lucky Lady
has 16 fuel dispensers, an approximately 800 square foot convenience store and a
restaurant.  The Company, as successor in merger to OM, entered into a
Commercial Lease on April 18, 1992 with T.B. Guillory , Inc. ("Guillory"), a
nonaffiliate corporation that owns the facility, to renovate it, equip it with
video poker devices and operate and manage both the truck stop facility and the
video poker casino.  Renovation was completed and operations commenced in August
1992.  The lease was for an initial term of five years (commencing May 1, 1992),
and the Company had the option to renew it for three additional five year terms,
subject to the parties negotiating a percentage rental for the renewal period
acceptable to both parties.  The parties were unable to negotiate an acceptable
renewal percentage rental before May 1, 1997, and Guillory delivered notice to
Operator that the lease terminated effective April 30, 1997 and that Operator no
longer had any right to operate the video poker casino after such date.
Litigation was commenced between Guillory and the Company and Operator for a
determination whether the lease was terminated or whether the Company and
Operator had the right to extend the lease.  On March 3, 1998, judgment was
rendered against the Company and Operator and they were ordered to vacate the
premises effective as of April 30, 1997.  The Company and Operator have appealed
this judgment, which appeal is pending.  During the appeal, Operator will
continue to operate King's Lucky Lady and will escrow 100% of the monthly
operating profit, unless a different escrow procedure is authorized by the
court.  As of April 1, 1998, Operator had placed $197,404 in escrow for the
period of May 1997 through February 1998.  The Company and Operator intend to
vigorously pursue their rights to have the lease renewed.  If Operator does not
prevail on appeal, the Company's rights to operate the video poker casino will
terminate effective as of April 30, 1997.  See "Item 3 - "Legal Proceedings" for
a further discussion of this case.

     If the lease is renewed, under the lease the Company is responsible for all
expenses, utilities, maintenance and repairs and all taxes on the personal
property.  The rental payable during the initial five year term is equal to 20%
of the net revenues generated from the video poker devices; net revenues being
defined as all money played in the devices less winnings paid out and all fees
and taxes paid to the state.  During any renewal period, all lease terms remain
the same except the percentage rental is subject to renegotiation at the
commencement of each renewal period, as noted above.  All or a portion of the
lease may be assigned with Guillory's consent, which cannot be unreasonably
withheld.  Guillory consented to the contribution and assignment of the
operation of the video poker casino to Operator.  The Company actually operates
the truck stop facility, other than sales of alcoholic beverages, with its own
personnel and employed 36 persons for such operations at December 31, 1997.  The
Company has granted Operator a license to handle all sales of alcoholic
beverages at the convenience store and restaurant.

     PELICAN PALACE - TOOMEY, LOUISIANA.  The Pelican Palace truck stop is in
Toomey, Louisiana, a town with a population under 1,000 located three miles east
of the Texas state line on Interstate 10, approximately three miles from Vinton,
Louisiana (population approximately 3,150).  The Company, as successor in merger
to OM, entered into an Operating and Financing Agreement on July 21, 1993 (as
amended March 17, 1995) with Curray Corporation ("Curray"), a nonaffiliate
corporation that owns the land on which the Pelican Palace now stands, pursuant
to which the Company agreed to furnish the financing for, and to build, operate
and manage, a truck stop facility and video poker casino.  The Company agreed to
expend up to approximately $1,450,000 constructing and equipping the truck stop
and video poker casino, all of which had been expended at December 1, 1995, and
Curray pledged all such improvements and equipment to the Company as collateral
for a first lien mortgage note in the amount of $1,450,000. The Company also
agreed to purchase 50 video poker machines to be used in the casino, at a cost
of approximately $282,000.  Construction was substantially completed in March
1994.  The truck stop facility opened for business in March 1994 and the video
poker casino opened for business on March 30, 1994.  During 1996, certain
renovations to the truck stop and parking lot were completed, which were funded
out of cash flow.  The Pelican Palace has 14 fuel dispensers, an approximately
1,200 square foot convenience store and a restaurant.  Pursuant to the Operating
and Financing Agreement, the Company has the right and the obligation to operate
and manage both the truck stop facility and the video poker casino for an
initial term of five years (commencing March 30, 1994) and the Company has the
option to renew it for three additional five year terms on the same terms as the
original five year period. However, on October 19, 1995, the Company and Curray
agreed to co-management of the Pelican Palace whereby the Company and Operator
serve as the operator of the video poker casino, restaurant and beverage
facilities, with 

                                      -4-
<PAGE>
 
Curray assuming the role of landlord, pursuant to which Curray assumes all
responsibility for property maintenance. Under the Operating and Financing
Agreement, the net income from operation of the truck stop facility and the
video poker casino was allocated 70% to the Company to repay the first lien
mortgage, and the remaining 30% was split equally between the Company and
Curray, until the mortgage was paid. After the mortgage was paid on May 31,
1996, the net income from operations is split 50% to the Company and 50% to
Curray. However, the Company has agreed to pay from its share of net income an
amount equal to 2% of the net revenues generated from the video poker machines
to a nonaffiliate party as a finder's fee in connection with the Pelican Palace
acquisition. The Company has entered into a subcontract with a nonaffiliate
corporation to manage and operate the fuel pump operations and convenience store
in return for a monthly payment to the Company of $2,500, plus a percentage of
all fuel sales and a percentage of merchandise sales over $500,000.
Consequently, the Company will not employ on site personnel to manage these
operations. The Company will, however, remain primarily responsible for
management of such operations. Therefore, the Company is not required to obtain
Curray's consent to this subcontract. Curray consented to the contribution and
assignment of the operation of the video poker casino to Operator. At December
31, 1997, the Company was operating the restaurant at the Pelican Palace and
employed 13 persons for such operations. The Company has granted Operator a
license to handle all sales of alcoholic beverages at the convenience store and
restaurant.

ASSIGNMENT TO OM OPERATING, L.L.C.

     Louisiana law requires a device operator's license in order to own and
operate truck stop video poker devices, and further requires that a licensed
device owner and operator be at least majority owned by Louisiana residents.
See "Regulation and Licensing", below.  Following the Merger, there could be no
assurance that the Company would be majority owned by Louisiana residents, and
if not, then OM would not be deemed majority owned by Louisiana residents and
would lose its device operator's license to operate and manage the five truck
stop video poker casinos. Consequently, on the effective date of the Merger with
OM, OM contributed and assigned to Operator all of its rights, duties and
obligations to operate the five existing video poker casinos and the tavern
route, and Operator became the licensed device operator.  Operator is a
Louisiana limited liability company organized by OM and Donald I. Williams, a
former director and Vice President of OM.  Operator is now owned 51% by Mr.
Williams, who contributed $100 to Operator for his ownership interest, and 49%
by the Company, as successor in merger to OM, and will exist until the earlier
of December 31, 2050 or the date that Operator no longer owns or operates any
video poker devices.  Mr. Williams is the manager of Operator and 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, modifying Mr. Williams'
compensation (which is presently set at $84,000 per year), and other material,
nonroutine decisions require the approval of both the Company and Mr. Williams.
Amendments to the limited liability company Operating Agreement, which sets
forth the respective rights, duties and responsibilities of the Company and Mr.
Williams, also requires approval by both.

     In addition to contributing and assigning the right to operate the video
poker casino and tavern route operations to Operator, OM contributed and
assigned all of its interest in 259 video poker devices and related operating
assets, subject to approximately $861,098 of debt (as of the effective date of
the Merger with OM) which Operator agreed to pay.  In each of 1995 and 1996, the
Company contributed and assigned an additional 50 devices and related operating
assets subject to approximately $91,100 and $96,050 of debt, respectively, with
respect to the Company's acquisition of Ozdon Investments, Inc. and the sublease
with New Orleans Video Poker, Inc., and funded approximately $7,400 in leasehold
improvements during 1997.  In exchange for such contributions and assignments,
the Company is entitled to a 49% net profits interest in Operator and a special
gross income allocation and distribution equal to 20% of the net revenues
generated from operation of the video poker devices; net revenues being defined
as all money played in the devices less winnings paid out and all fees and taxes
paid to the state.  Operator is responsible for all operational costs and
expenses of the video poker casinos and the tavern route, including labor,
maintenance, repair and its share of the rental or other percentage fees payable
to the owners of the truck stop facilities in which the casinos are located
pursuant to the contracts between the Company and such owners, the casino
operations portion of which have been assigned by the Company to Operator.  In
view of the allocation and distribution to the Company of 20% of the net
revenues generated from the devices and the allocation and distribution among
the Company and Mr. Williams based on their respective capital accounts until
their capital accounts have been reduced to zero, which had not occurred as of
December 31, 1997, significant distributions have not been made to Mr. Williams
with respect to his 51% net profits interest.

                                      -5-
<PAGE>
 
     Mr. Williams has granted the Company a right of first refusal to purchase
his 51% interest in Operator prior to his sale or transfer to another person,
and he is otherwise prohibited by Operator's Operating Agreement from selling or
otherwise encumbering his 51% interest without the Company's prior written
consent.  Further, he has granted an option to the Company to purchase his 51%
interest for $10,000 in the event Louisiana law is changed to eliminate the
requirement that device owners and operators be at least majority owned by
Louisiana residents.  Finally, Operator's Operating Agreement also provides that
Mr. Williams must transfer his 51% interest to a designee of the Company,
without further consideration, if he ceases to be a Louisiana resident or ceases
to meet the suitability requirements for a device operator's license under
Louisiana law.  See "Regulation and Licensing", below.

     As noted above, under "Acquisition of Ozdon Investments, Inc.", the Company
contributed to Operator on December 15, 1995 the gaming devices and other assets
necessary to run the video poker casino operations at the Gold Rush, subject to
liabilities of approximately $91,100 which were assumed by Operator.  This
contribution increased the capital account of the Company under the terms of the
Operating Agreement between the Company and Mr. Williams.  Also, as noted below
under "Operation of Video Poker Casinos--The Diamond Jubilee, New Orleans,
Louisiana", Operator commenced operation of a video poker casino in New Orleans
effective July 1, 1996 pursuant to a sublease between Operator and New Orleans
Video Poker Company, Inc. ("NOVP"), a corporation owned 50.1% by Mr. Williams
and his spouse and 29.5% owned by nine other stockholders of the Company.
Further, as noted below under "Operation of Video Poker Casinos -- Silver Fox -
Jeanrerette, Louisiana", the Company and Operator sold the video poker casino
operations in 1996 at one of the truck stops originally operated by OM.
Consequently, the number of video poker casinos currently operated by Operator
is five, including King's Lucky Lady, and Port Allen will constitute the sixth
casino operated by Operator when it is finished.

LICENSE RENEWAL PROCESS

     As further discussed under "Regulation and Licensing", below, the Louisiana
Gaming Control Board ("Gaming Control Board") has undertaken a review of all
licensees operating video poker casinos, including the Operator.  The Company
has had preliminary meetings with the State Police, which is conducting the
initial reviews for the Gaming Control Board, concerning the structure of
Operator described above and whether such structure satisfies the Louisiana
residency requirements necessary for a license to operate video poker casinos.
The Company believes the structure satisfies the residency requirements, but the
Gaming Control Board has not made a final determination of this matter.  If the
State Police concludes that the structure of Operator does not satisfy the
Louisiana residency requirements, it will forward its conclusion to the Gaming
Control Board and the Company and Operator will be entitled to a hearing before
the Gaming Control Board.  In such event, it is possible that the Company and
Operator would be required to restructure Operator, which could, depending on
the nature of any such restructure, result in material adverse changes to the
Company's ownership interest in, and revenues received from, Operator, which in
turn could have a material adverse effect on the Company's financial condition.
It is also possible that the Gaming Control Board would not allow the Company
and Operator an opportunity to restructure Operator, and instead revoke
Operator's license, although the Company does not presently believe the  Gaming
Control Board will take such action.  The revocation of Operator's license would
have a material adverse effect on the Company's business operations and
financial condition.

OPERATION OF VIDEO POKER CASINOS

     Under Louisiana law, a licensed truck stop facility covering at least five
contiguous acres which has overnight facilities, a restaurant and service
facilities for 18 wheel tractor-trailers may segregate an area of the facility
as the video poker casino for adult patronage only and place up to 50 video
poker devices for play in the casino area; while racetracks and off track
betting ("OTB") parlors are permitted to install an unlimited number of video
poker devices, and qualifying locations with liquor licenses ("taverns") are
limited to three such devices.  Operator presently operates the video poker
casinos in five truck stops in Louisiana, including King's Lucky Lady, and
handles all sales of alcoholic beverages at the convenience store and restaurant
in three of such truck stops.  Upon completion of the Port Allen Truck Stop,
Operator will operate a sixth video poker casino.  At December 31, 1997,
Operator employed approximately 93 persons in connection with such operations.
The truck stops in which these video poker casinos are operated are located in
Opelousas, Port Barre, Loomey, Vinton, and New Orleans, Louisiana, and the sixth
casino will be located in Port Allen, Louisiana.  Operator generally operates
these video poker casinos pursuant to long term contracts with the owners of the
truck stops.  These casinos and the agreements with the owners are described
below. 

                                      -6-
<PAGE>
 
See, also, "Regulation and Licensing -- Louisiana -- Recent Changes in
Louisiana Act", below, for a discussion of recent changes to Louisiana law
regarding operation of truck stop video poker casinos.

      THE GOLD RUSH - OPELOUSAS, LOUISIANA.  The Gold Rush is also described
above under "Operation of Truck Stop Facilities".  The video poker casino and
lounge at the Gold Rush contains approximately 1,752 square feet and 50 video
poker devices.  Operator's right to operate the casino and lounge is granted
pursuant to a license from the Company which may be terminated by either the
Company or Operator upon 120 days' prior written notice to the other party.  A
non-affiliate of the Company is entitled to a revenue participation interest of
10% of the gaming profits (total cash played in the machines less winnings paid
out and less all franchise, licensing and device fees paid to the State of
Louisiana or any other political subdivision) from the operations of the video
poker casino.  There are two other truck stops operating a total of
approximately 85 video poker devices within 20 miles of the Gold Rush, a race
track operating approximately 60 video poker devices within 18 miles, and a
Native American gaming casino approximately 35 miles from the Gold Rush.  Of the
two other truck stops with video poker casinos, one is the Company's King's
Lucky Lady video poker casino.  See "Marketing and Competition", below.
Operator employed 19 persons at the Gold Rush at December 31, 1997.

      KING'S LUCKY LADY - PORT BARRE, LOUISIANA.  King's Lucky Lady is also
described above under "Operation of Truck Stop Facilities".  The video poker
casino and lounge at King's Lucky Lady contains approximately 1,600 square feet
and 50 video poker devices.  Operator's right to operate the casino and lounge
is granted pursuant to the Commercial Lease previously discussed.  There are two
other truck stops operating a total of approximately 85 video poker devices
within 20 miles of King's Lucky Lady, a race track operating approximately 60
video poker devices within 18 miles and a Native American gaming casino
approximately 40 miles from King's Lucky Lady.  One of these truck stops is the
Gold Rush.  See "Marketing and Competition", below.  Operator employed 20
persons at King's Lucky Lady at December 31, 1997.  See the discussion of King's
Lucky Lady, above, for a discussion of the Company's possible loss of the right
to operate the video poker casino at King's Lucky Lady effective April 30, 1997.

      PELICAN PALACE - TOOMEY, LOUISIANA.  The Pelican Palace is also described
above under "Operation of Truck Stop Facilities".  The video poker casino and
lounge at the Pelican Palace contains approximately 2,200 square feet and 50
video poker devices.  Operator's right to operate the casino and lounge is
granted pursuant to the Operating and Financing Agreement previously discussed.
There are eight other truck stops operating a total of approximately 370 video
poker devices, and a race track operating approximately 350 video poker devices,
within 20 miles of the Pelican Palace. The Lucky Longhorn, one of these truck
stops, is also operated by Operator and is located across Interstate 10.
Additionally, there is a Native American gaming casino operating approximately
40 miles from the Pelican Palace, and four riverboat casinos operating within
approximately 25 miles.  See "Marketing and Competition," below.   Operator
employed 18 persons at the Pelican Palace at December 31, 1997.

      LUCKY LONGHORN - VINTON, LOUISIANA.  The Lucky Longhorn video poker casino
contains approximately 3,000 square feet and 50 video poker devices within the
Lucky Longhorn truck stop in Vinton, Louisiana, across Interstate 10 from the
Pelican Palace.  Operator operates the video poker casino pursuant to an Act of
Contract and Agreement dated June 5, 1992 with three nonaffiliated corporations
and two nonaffiliated individuals who own the truck stop (referred to
collectively as "Longhorn") which was assigned to Operator by OM.  Pursuant to
the Act of Contract and Agreement, as modified, the Company, as successor in
merger to OM, agreed to provide Longhorn financing of $800,000 to renovate the
Lucky Longhorn.  This financing was provided by the Company arranging an
$800,000 bank loan to Longhorn, which was guaranteed by the Company.  At
December 31, 1995, this loan had been repaid.  Operator has the exclusive right
to place and operate video poker devices in the Lucky Longhorn for a period of
10 years (commencing August 2, 1992).  Operator and Longhorn split 50%/50% the
net revenues generated from operation of the video poker devices; net revenues
being defined as all money played in the devices less winnings paid out and the
22.5% (32.5% after July 1, 1994) net device revenue tax payable to the state.
Operator has interpreted the Act of Contract and Agreement to provide that the
full 32.5% net device revenue tax is deducted for purposes of determining net
revenues, but Longhorn has questioned whether only the former rate of 22.5%
should be used for these purposes.  The reduction in Longhorn's net revenue
distributions for 1997 (a full year), 1996 (a full year), 1995 (a full year) and
1994 (six months only) utilizing the full 32.5% tax, rather than the 22.5% tax,
aggregated $175,132, $180,420, $209,190 and $116,162, respectively.  Operator
believes its interpretation is correct and has filed a petition in Louisiana
state court seeking an interpretation by the court whether Operator's
interpretation is correct.  See "Item 3 -- Legal Proceedings." Operator is
solely responsible from its share of the revenues for paying all other costs and
expenses related to the video poker casino, with the exception of contracted
security.  Operator employed 19 persons 

                                      -7-
<PAGE>
 
at the Lucky Longhorn at December 31, 1997. Operator has assumed all of the
Company's responsibilities under the Act of Contract and Agreement. Longhorn has
consented to the assignment by the Company and Operator.

     There are eight other truck stops operating a total of approximately 370
video poker devices, and a race track operating approximately 350 video poker
devices, within 20 miles of the Lucky Longhorn.  Additionally, there is a Native
American gaming casino operating approximately 40 miles from the Lucky Longhorn,
and four riverboat casinos operating within approximately 25 miles.  See
"Marketing and Competition", below.

     STELLY'S-LEBEAU, LOUISIANA.  Stelly's video poker casino was closed on
January 4, 1996 pending completion of various improvements required to satisfy
Louisiana video poker regulations, and was reopened on November 22, 1996.  It
was closed again on May 28, 1997 because its license to operate video poker
devices was suspended by the Louisiana State Police because it had failed to
maintain sufficient fuel sales necessary to operate 16 video poker devices.  As
of the date of filing of this Form 10-KSB, Operator has terminated its rights to
operate the video poker casino at Stelly's.

     THE DIAMOND JUBILEE - NEW ORLEANS, LOUISIANA.  The Diamond Jubilee video
poker casino contains approximately 2,700 square feet and 50 video poker devices
(40 devices from February 1, 1997 through the date of filing of this Form 10-
KSB) within The Diamond Jubilee truck stop in east New Orleans, Louisiana.
Operator operates the video poker casino pursuant to a Sublease Agreement (the
"Casino Sublease") dated July 1, 1996 between Operator and New Orleans Video
Poker, Inc. ("NOVP"), a Louisiana corporation 50.1% owned by Donald I. Williams
and his spouse and 29.5% owned by nine other stockholders of the Company.  NOVP,
through various agreements with third parties, manages the truck stop and
related fuel operations and the restaurant.  NOVP leases the truck stop
operations and the video poker casino from Stanley Doussan ("Doussan") pursuant
to a Lease Agreement, Addendum to Lease and Sublease and Operator's Agreement
dated July 10, 1992, as amended by an Amendment to Lease and Addendum to Lease
dated December 15, 1992 (collectively, the "Operator's Agreements"). The
Operator's Agreements give NOVP the right to lease and operate the truck stop
and video poker casino for a period of 10 years (commencing January 1, 1993).
NOVP is required to pay rent to Doussan equal to 50% of the net receipts from
the video poker devices (except for the first three years Doussan agreed to
reduce it to 40% unless NOVP recouped $300,000 of its construction costs prior
to the end of such three year period).  Net receipts are defined to mean all
money played in the devices less winnings paid out and any tax or franchise fee
payable to the state.  NOVP is also required to pay an escalating fixed monthly
rental, which is currently $4,751 per month and escalates to $4,907 per month
for the last year of the term of the Operator's Agreements.  Under the terms of
the Casino Sublease, which was consented to by Doussan, Operator leases the
video poker casino, bar, related parking area and one gasoline pump for a term
of one year, subject to automatic renewal for successive one year periods at
Operator's sole discretion, with a maximum of 30 one year renewals, provided
NOVP can terminate the Casino Sublease at any time if the sublease payments to
it fall below $5,000 per month for five consecutive months after payment by
Operator of various indebtedness assumed by it.  Operator agreed to pay rent to
NOVP during the term of the Casino Sublease equal to 50% of the net operating
cash flow of Operator from operations of the casino, after deducting all costs
and expenses of operations, interest and principal on indebtedness for
furniture, fixture or equipment and a reasonable reserve.  Operator assumed
approximately $96,050 of indebtedness of NOVP as the purchase price for 50 video
poker devices and an automated teller machine.  Operator also has an option to
sublease the truck stop and fuel operations and restaurant and purchase NOVP's
50% share of net operating cash flow.  The Company also issued 450,000 shares of
Common Stock to NOVP as partial consideration for NOVP entering into the Casino
Sublease, and granted piggy-back and demand registration rights to NOVP expiring
July 1, 1998.  Operator employed 13 persons at The Diamond Jubilee at December
31, 1997.

     There are six other truck stops operating a total of approximately 190
video poker devices, and a river boat casino, within 12 miles of The Diamond
Jubilee.  See "Marketing and Competition", below.  At December 31, 1996, The
Diamond Jubilee did not have sufficient fuel sales necessary to operate 50 video
poker devices under Louisiana regulations, and as of February 1, 1997 the
Company was required to remove 10 devices from operations until increased fuel
sales are maintained. Further, fuel sales dropped below 75,000 gallons per month
during the first quarter of 1998, which will result in the removal of an
additional five devices from operations during the second quarter of 1998 until
increased fuel sales are maintained.  In order to increase fuel sales, the
Company will be required to make a substantial investment to include a
convenience store and additional gasoline pumps.  The Company is presently
negotiating with NOVP and Doussan to share such costs if any such improvements
are desired.  There can 

                                      -8-
<PAGE>
 
be no assurance that such improvements will be made and, if not made, it is not
likely that the fuel sales will increase to a level to allow reinstallation of
all 15 devices.

     RIVER PORT - PORT ALLEN, LOUISIANA.  River Port is also described above
under "Operation of Truck Stop Facilities."  On January 17, 1997, a wholly owned
subsidiary of the Company entered into a Lease Agreement with S.W. Day and T.
Joe Calloway, two nonaffiliated individuals, to lease undeveloped land for a
term of 50 years and to construct on it a truck stop and video poker casino.
The Company had the right to terminate the Lease Agreement prior to June 30,
1997 if certain conditions are not satisfied.  The Company plans to build an
approximately 3,500 square feet video poker casino and bar and an approximately
3,500 to 4,500 square feet restaurant/convenience store on the land at an
approximate cost of $2,300,000 (including equipment) which the Company expects
to fund through long-term indebtedness not yet obtained.  The Lease Agreement
provides for payment of a base rent of $7,000 per month, commencing on the
earlier of commencement of construction or June 30, 1997, and additional rent
equal to 10% of the net revenues generated from video poker operations; net
revenues meaning all money played in the devices less winnings paid out and all
franchise fees, device fees and other taxes payable to the state or any other
governmental agency, other than federal or state income taxes.

VIDEO POKER TAVERN ROUTE

     Operator also operated 13 video poker devices in six third-party taverns as
of December 31, 1997 through a subcontract with a nonaffiliated which provides
that Operator is entitled to 50% of the net revenues payable to the
subcontractor generated from the devices, and the subcontractor and Operator
split certain costs of operations on an agreed basis.  OM assigned this
subcontract to Operator and the subcontractor has consented to this assignment.

CRUISE FRANCHISE AND TRAVEL OPERATIONS

     GalaxSea offers two types of franchises for sale.  The first is for the
establishment and start-up of a new cruise travel store that sells cruises and
tours exclusively (a "Start-up").  The second is for full service retail travel
agencies which allow such stores and agencies to, respectively, convert to (a
"Conversion") or add on (an "Add-on") GalaxSea travel vacation stores.
Regardless of the type of franchise, each GalaxSea store is expected to closely
adhere to the GalaxSea system which focuses on creating a retail environment and
attitude and to participate in the national, regional and local marketing
promotions that GalaxSea provides for its franchisees.  As of December 31, 1997,
GalaxSea had 69 franchises in its system.  GalaxSea receives a franchise fee for
each franchise sold.  The franchise fee for a Start-up is presently $25,000.
The franchise fee for a Conversion/Add-on is presently $5,000 subject to a
discount based on existing cruise sales volume.  Each franchisee pays a monthly
license fee rather than a royalty percentage based on that agency's annual
cruise sales volume.  The maximum monthly license for any GalaxSea agency is
presently $750.  In addition to franchise fees and monthly license fees,
GalaxSea has contracts with most major cruise lines which provide for GalaxSea
to receive override payments based on the cruise sales of all GalaxSea
franchisees.  The contracts also generally provide for favorable commission
structures for the franchisees.

MARKETING AND COMPETITION

     MARKETING.  Gaming Operations.  Operator markets its video poker casinos
through limited newspaper and radio advertising, and from word of mouth
referrals.  Customers are drawn primarily from the local population and
surrounding area, except for the properties on the Texas state line which draw
largely from residents of Texas, which does not have video poker gaming.

     Cruise and Travel Operations.  GalaxSea markets its franchise sales through
its extensive contacts in the travel industry.  It also promotes its franchise
system through national, regional and local advertising campaigns through the
print, radio and television media, and through direct mail advertising
campaigns, and the franchisees are required to contribute to the cost of such
advertising.  As part of the acquisition of GalaxSea by the Company, GalaxSea
and International entered into a long-term joint marketing agreement, pursuant
to which GalaxSea will have access to market its Add-on franchises to
International's network of approximately 900 travel agency locations.

     I.T. Cruise markets directly to the various cruise lines through personal
relationships and direct contact, and deals with International's network of
travel agency locations in the same manner.

                                      -9-
<PAGE>
 
     COMPETITION.  Gaming Operations.  The gaming industry is highly
fragmented and characterized by a high degree of competition among a large
number of participants, including riverboat casinos, dockside casinos, land-
based casinos, video lottery terminals, video poker devices, Native American
gaming ventures and other forms of legalized gaming in the United States.  Many
of the Company's competitors and potential competitors have significantly
greater experience and financial resources than the Company.  The Company
believes that competition in the gaming industry is based on the quality and
location of gaming facilities, the effectiveness of marketing efforts and
customer service and satisfaction.  The Company's truck stops casinos are
subject to extensive competition from other truck stops and taverns located
within its market area for each truck stop, and from Louisiana's racetracks and
OTB parlors which may install an unlimited number of video poker devices.  As of
December 31, 1997, there were over 15,000 video poker devices in operation in
Louisiana.  Most are one to three devices located in taverns.  As of such date,
there were approximately 100 licensed truck stops with approximately 3,500
devices in the aggregate.  Each truck stop is permitted to have up to 50 video
poker devices and each tavern is permitted to have up to three video poker
devices. In addition, Louisiana has authorized riverboat gaming, and one land-
based casino located in New Orleans (which is presently involved in bankruptcy
reorganization proceedings).  Twelve riverboats were in operation at December
31, 1997, four in Lake Charles (approximately 23 miles from the Company's Lucky
Longhorn and Pelican Palace), three in New Orleans (over 100 miles from any of
the Company's truck stop casinos, except The Diamond Jubilee, which is in New
Orleans), two in Bossier City (over 100 miles from any of the Company's truck
stop casinos), one in Shreveport (over 100 miles from any of the Company's truck
stop casinos), and two in Baton Rouge (over 40 miles from any of the Company's
truck stop casinos).  At December 31, 1997, there were three Native American
casinos in operation in Louisiana, one in Kinder, one in Marksville and one in
Charentan.  The riverboats and land-based casinos are permitted to have table
games, slot machines and video poker devices.  It is anticipated that the
riverboats and the casinos will focus their marketing efforts on the tourist
market.  Although the Company has focused its marketing efforts primarily on
local residents, such other gaming operations will provide substantial
competition.

     The adjacent state of Mississippi has also legalized dockside gaming.
Dockside gaming in Mississippi, riverboat casinos in Louisiana and the land-
based casino in New Orleans have or are anticipated to have a wide variety of
gaming devices and table games, while Louisiana law limits the Company's
operations to video poker devices. Further, Louisiana law limits the jackpot
that may be paid by a video poker device to $500 per play while other gaming
activities have no such limit.  The Company believes the limit to be a
competitive disadvantage.

     The operation of truck stop video poker casinos is a highly competitive
business.  The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities, customer
services offered, and the implementation and success of marketing programs.  The
Company believes it competes effectively with other truck stops and taverns in
its market in these areas.

     There has been a moderate increase during the last two years in the number
of gaming establishments opening for operation in Louisiana and Mississippi, and
competition for the business of gaming patrons has become very intense.  As a
result, it is expected that the profit margins which may be expected by gaming
establishments like the Company will 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.

     Cruise and Travel Operations.  GalaxSea experiences competition for the
sale of its franchised cruise retail travel agencies from various national and
regional franchise operators and cruise only consortia, many of which have
significantly greater experience and financial resources than GalaxSea.  I.T.
Cruise experiences competition in its direct dealings with cruise lines from
other travel agency groups and travel suppliers, many of which also have
significantly greater experience and financial resources than I.T. Cruise.

     Vigorous competition is encountered in the travel business from more than
30,000 travel agents and direct sales by airlines and travel suppliers in the
U.S. and abroad.  This competition is mainly based on service, convenience and
proximity to the customer and has increased due to several factors in recent
years, including the fact that a number of independent agencies have been
acquired by larger travel companies.  Travel agency groups also have increased
in size, enabling independent agencies to be more competitive in providing
travel services.  Recently, the airlines have placed limits on commissions paid
to travel agents for airline tickets, which has caused some independent agents
to go out of business.  GalaxSea's franchisees are encouraged, and in some cases
required, only to book cruise and tour business, which results in the franchisee
generally earning larger commission than it would from airlines. 

                                      -10-
<PAGE>
 
GalaxSea believes this will enable it to increase its number of Start-up and 
Add-on franchises, although there can be no assurance in this regard. GalaxSea
also believes that its joint marketing agreement with International will enable
it to attract a certain number of agencies affiliated with International to buy
Add-on franchises. During 1997, GalaxSea sold one Start-up franchise and seven
of International's affiliated agencies bought Add-on franchises.

EMPLOYEES

     As of December 31, 1997, the Company employed 84 persons full time and part
time, including two executive officers and four administrative personnel, with
the remainder involved in on-site operation of the Gold Rush, King's Lucky Lady
and Pelican Palace truck stops, and five involved in the operation of the
existing River Port convenience store and fuel facility.  As of December 31,
1997, Operator employed 93 persons full and part time, including one executive
and five managerial personnel, with the remainder involved in on-site operation
of the five truck stop casinos.  None of the Company's or Operator's current
employees are covered by any collective bargaining agreements.  The Company
considers its employee relations and those of Operator to be good.

     GalaxSea presently has three employees.  I.T. Cruise presently has no
employees.  Several employees of International also perform duties for GalaxSea
and I.T. Cruise, and the Company reimburses International for their services.

ENVIRONMENTAL MATTERS

     A number of jurisdictions have adopted laws and regulations relating to
environmental controls and the development and operation of various projects.
The Company is responsible for complying with various federal and state waste
disposal and licensing laws in connection with the truck stop facilities it
operates, including the requirement of obtaining permits for underground storage
tanks for fuel products and the requirement of properly disposing of waste motor
oil and other regulated products.  The Company has obtained all required
permits, and is not aware of any material violation of applicable environmental
regulations with respect to its truck stop operations.  There have been no
changes to the Company's operations and no reserves have been established for
any environmental hazards with respect to its truck stop operations.
Environmental contingencies are not expected to have a material adverse effect
on future results of operations or financial condition.

REGULATION AND LICENSING - GAMING OPERATIONS

     LOUISIANA

     DEVICE OWNER'S LICENSE.  The manufacture, distribution, servicing and
operation of video draw poker gaming devices ("Devices") in Louisiana is subject
to the Louisiana Gaming Control Law and the Louisiana Video Draw Poker Devices
Control Law and the Rules and Regulations promulgated thereunder (the "Louisiana
Act").  Licensing and regulatory control is provided by the Louisiana Gaming
Control Board (the "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").  The laws and regulations of
the Gaming Control Board and the Division are based upon a primary consideration
of maintaining the health, welfare and safety of the general public and upon a
policy which is concerned with protecting the video gaming industry from
elements of organized crime, illegal gambling activities and other harmful
elements, and protection of the public from illegal and unscrupulous gaming to
ensure the fair play of video gaming Devices.  The Louisiana Act was amended in
1994 to further qualify and restrict video gaming operations in truck stops.
See "Recent Changes in Louisiana Act", below.

     Operator, an indirect operating subsidiary of the Company which operates
the truck stop casinos, has been granted a license as a Device owner by the
Division.  Under the terms of the Louisiana Act, licenses expire at midnight on
June 30 of each year and must be renewed annually through payment of certain
fees and continued compliance with the suitability requirements of the Louisiana
Act.  All license fees must be paid on or before May 15 in each year licenses
are renewable.  Operator has timely submitted its renewal applications, but
there is a backlog existing at the Gaming Control Board and at the Division.
The Gaming Control Board and the Division are behind in reviewing applications,
including the application of Operator.  See, also, "License Renewal Process",
above, for a discussion of the renewal examination to which the Company is
presently subject and the possible results thereof if the Operator is found not
to meet the residency requirements.

                                      -11-
<PAGE>
 
     The Gaming Control Board may deny, impose a condition or fine, suspend or
revoke any license, renewal, or application for a license for violation of any
rules and regulations of the Gaming Control Board or Division or any violations
of the Louisiana Act. Fines for violations of gaming laws or regulations may be
levied against the licensees and the persons involved.  In addition, the
licensees could be subject to separate fines for each violation of the gaming
laws.  The Louisiana Act states that a license issued by the Gaming Control
Board is a pure and absolute privilege. The issuance, condition, denial,
suspension or revocation of a license is at the discretion of the Gaming Control
Board in accordance with the provisions of the Louisiana Act.  A license is not
property or a protected interest under the constitution of either the United
States or the State of Louisiana.  Suspension or revocation of the license of
Operator could have a material adverse effect upon the business of the Company.

     The Gaming Control Board has the authority to conduct overt and covert
investigations of any person, entity, applicant or participant involved directly
or indirectly in the video gaming industry in Louisiana.  This investigation may
extend beyond the information provided in the formal application, including
information with regard to the licensee's immediate family and relatives and
their affiliations with certain groups, organizations, corporations, firms or
other business entities.  The investigation may also extend to every person who
has or controls more than a 5% ownership, income or profit interest in an entity
which applies for a license in accordance with the Louisiana Act, or who is a
key employee or who has the ability to exercise significant influence over the
licensee.  All persons or entities investigated must meet all suitability
requirements and qualifications for a licensee.  The Gaming Control Board may
deny an application for licensing or renewal of a license for any cause which it
may deem reasonable.  The applicant for licensing must pay a filing fee which
also covers the cost of investigation.

     In order for a corporation or limited liability company like Operator to be
licensed by the Gaming Control Board, it must be demonstrated that a majority of
the corporation or limited liability company is owned by persons who have been
domiciled in Louisiana for a period of at least two years prior to the date of
the application.  See "License Renewal Process", above, for a discussion of the
renewal examination to which the Company is presently subject and the possible
results thereof if the Operator is found not to meet the residency requirements.

     Devices must meet strict specifications established by the Gaming Control
Board.  The number of Devices is limited depending on the type of location at
which the Devices are located.  Fees payable to the Gaming Control Board include
an application fee, which is non-refundable, an annual fee, based upon a
percentage of the net revenues from the operation of each Device, a Device
owner's fee, a Device operations fee, license establishment fee and a Device
owner's franchise fee.  All fees are payable in either semi-monthly, quarterly
or annual installments depending on the fee being paid.

     According to the regulations adopted by the Gaming Control Board, the
annual gross revenues generated from the video poker operations of a facility
may not exceed its annual gross revenues from its primary business operations.
The Company was not in compliance with this regulation for its fiscal years
ended 1997, 1996, 1995 and 1994. However, this regulation was not being enforced
in 1997, 1996, 1995 and 1994.  The Louisiana Act was recently amended, as
discussed below under "Recent Changes in Louisiana Act", to further qualify and
restrict video gaming operations in truck stops.  However, as amended, the
Louisiana Act still does not contain a provision similar to this regulation.
The Gaming Control Board has informally indicated that it does not currently
plan to enforce any of its regulations that are not based on express statutory
provisions.  Since the legislature further qualified and restricted truck stop
video poker operations, but did not choose to include a restriction of this
type, the Company presently anticipates that the Gaming Control Board will
continue to choose not to enforce this regulation.

     ESTABLISHMENT LICENSE.  The Louisiana Act also provides that a truck stop
facility ("Establishment") must obtain a license as an Establishment to allow
the placement and operation of Devices within the Establishment.  The
Establishment license is typically granted to the owner of the truck stop
facility, but may also be granted to a lessee of the facility.  The owners are
the Establishment licensees for King's Lucky Lady, the Pelican Palace, The
Diamond Jubilee and the Lucky Longhorn.  Ozdon is the establishment licensee for
the Gold Rush.  River Port Truck Stop, Inc. is presently anticipated to be the
establishment licensee for River Port.

     Establishment licenses are also subject to annual renewal at the same time
Device owner licenses are renewable, and the payment of an annual fee.  The
Gaming Control Board has the same authority to deny, suspend, condition or
revoke an Establishment license, and to conduct investigations (including
investigations of 5% owners), as it does for Device owner licenses.  As with the
Device owner license, the Establishment license is a pure and 

                                      -12-
<PAGE>
 
absolute privilege. The loss by the Company or the owner of the truck stop of
the Establishment license for any of the five truck stops within which Operator
operates video poker casinos would have a material adverse effect upon the
business of the Company.

     The Louisiana Act also provides protection to lessees of truck stop
facilities such as the Company and Operator.  It provides that if the lease of a
licensed Establishment expires or is terminated without legal cause by the owner
of the Establishment, neither the owner nor any new lessee shall have the right
to apply for a Device license at the Establishment for six years, unless the
owner of the Establishment was also the holder of the Device owner license for
the devices being operated at the Establishment, and the former lessee/licensee
is given the right to continue operations at the Establishment by agreement with
the owner or any new lessee.

     The Gaming Control Board and the Division are strictly enforcing the
requirements of the Louisiana Act which require the Establishment Licensee to be
in control of the fuel operations and related amenities at the truck stop. The
determination whether the Establishment Licensee has satisfied such control
requirements involves various subjective criteria and the determination is not
easily predictable. It is possible that the Gaming Control Board or the Division
could interpret these subjective criteria in such a manner to conclude that the
Establishment licensee at one or more of the Company's truck stops was not in
compliance, in which case their Establishment license could be revoked, which
would also result in the Operator losing its ability to operate the video poker
truck stop casino at such truck stop.  The Company is reviewing its present
arrangements with its various Establishment licensees and the fuel operators at
the existing truck stops in an attempt to determine whether they are in
compliance or whether modifications need to be made to bring them into
compliance.  There can be no assurance that the Gaming Control Board or the
Division might not have a different interpretation than the Company or
Establishment licensee with regard to the existing arrangements and their
compliance with the fuel operations control requirement.

     RECENT CHANGES IN LOUISIANA ACT.  Effective July 1, 1994, the Louisiana
legislature adopted amendments to the Louisiana Act which have a material effect
on operations of truck stop casinos.  The franchise payment payable to the State
of Louisiana was raised from 22.5% of net device revenues (money played in video
poker devices less winnings paid) to 32.5% and 26% of net device revenues for
those operated in truck stops and taverns, respectively.

     In addition to raising the franchise payment, the Louisiana legislature
also adopted additional standards to be satisfied for a truck stop facility to
be considered a qualified truck stop facility for placement of video poker
devices.  These standards include increasing the required parking area for 18-
wheel vehicles; requiring a 24-hour on-site restaurant facility; requiring
access to repair facilities; and requiring certain other amenities be available
for truck drivers.  Under the new law, operators had until January 1, 1996 to
bring their truck stops into compliance with these new standards.  As of
December 31, 1997, each of the five truck stops at which Operator operates truck
stop casinos satisfies these additional criteria.

     The Louisiana legislature also adopted minimum fuel sales requirements for
qualified truck stops effective July 1, 1994, except that existing licensed
facilities had until January 1, 1996 to satisfy such requirements.  The fuel
sales requirements and their relationship to the number of video poker devices
that may be operated at the truck stop are based on average monthly sales, as
follows: (i) up to 50 devices if sales equal at least 100,000 gallons per month
and 40,000 of such gallons are diesel, (ii) up to 40 devices if sales equal at
least 75,000 gallons, but are less than 100,000 gallons, per month and 30,000 of
such gallons are diesel, and (iii) up to 35 devices if sales equal at least
50,000 gallons, but are less than 75,000 gallons, and 10,000 of such gallons are
diesel.  During the grandfather period for existing licensed facilities (which
expired January 1, 1996), facilities were required to average monthly sales of
at least 25,000 gallons per month, commencing October 1994, in order to continue
operating video poker devices at the facility. As of December 31, 1997, four of
the truck stop facilities at which Operator operates truck stop casinos was
operating the maximum number of 50 devices.  However, as of December 31, 1997,
fuel sales at The Diamond Jubilee were below the level required to operate 50
video poker devices, and on February 1, 1997 ten devices were removed from
operations at The Diamond Jubilee until increased fuel sales are maintained.
Also, as discussed above under "Operation of Video Poker Casinos - The Diamond
Jubilee", an additional five devices will be removed in the second quarter of
1998 until increased fuel sales are maintained.  It is anticipated that the
Division will review fuel sales at truck stops on a quarterly basis to determine
whether the average monthly fuel sales volumes are being satisfied for the
number of devices operated, and, if not, the number of operating devices will be
reduced until the next quarterly review.  The reduction in the number of devices
operated at the Operator's truck stop casinos could have an adverse effect on
the cash flow of the Company if the level of fuel sales cannot be increased to
reach the 

                                      -13-
<PAGE>
 
former level of devices maintained by Operator, although such effect
will be mitigated by the fact that rarely are all devices in a location in
operation at the same time.

     There has been during the past several years a perceived increase in anti-
gaming sentiment in Louisiana within certain segments of the population and with
certain politicians.  In April 1996, the Louisiana Legislature approved a local-
option bill which gave the voters in each parish the right to decide during the
November 5, 1996, general election what forms of gaming they want to continue in
their parish.  At this general election, all parishes in which the Company
operates video poker casinos voted to continue truck stop video poker, but two
parishes voted to discontinue video poker casinos which will result in the
future closure of six taverns and the loss of 13 video poker devices as of June
30, 1999.  The Company believes there is continuing anti-gaming sentiment
prevailing within certain segments of the population and with certain
politicians.  From time to time bills are proposed in the legislature to
restrict or terminate truck stop video poker casinos, and the Gaming Control
Board and Division are interpreting very strictly various regulatory
requirements which sometimes involve subjective criteria, which interpretations
may result in the loss of licenses by certain licensees.  The Company cannot
predict whether anti-gaming sentiment or any future proposed legislation will
result in further changes to the gaming laws of Louisiana, or an outright ban on
certain forms of gaming, including truck stop video poker casinos.  The State of
Louisiana and the local parishes generate substantial revenues from license fees
and taxes on the gaming industry, so the loss of portions of these revenues
would most likely be carefully examined in connection with any future proposed
limitations on gaming.  The Company continues to monitor these proceedings and
provides input as appropriate.  The Company also continues to review other
gaming opportunities outside Louisiana, and other non-gaming opportunities, for
purposes of diversification.

     The Gaming Control Board has undertaken a review of all licensees operating
video poker casinos.  The Company is aware of at least two operators who have
lost their licenses on the grounds they were not in compliance with Louisiana
requirements.  The Operator is being examined as part of this process.  See
"License Renewal Process", above, for a description of this examination and the
possible results thereof.

     OTHER STATES

     The ownership and operation of gaming facilities in other states where
gaming is legal are subject to extensive state and local regulation.  To the
extent the Company expands its gaming operations into other states, the Company
will, among other things, be required to register under the gaming acts of such
states and its gaming operations will be subject to the licensing and regulatory
control of the gaming commissions of such states, and various local, city and
county regulatory agencies.  The Company will be required to submit detailed
financial, operating and other reports to such gaming commissions, and
substantially all loans, leases, sales of securities and similar financing
transactions entered into by the Company will be required to be reported to or
approved by such gaming commissions. The Company will also be required to
periodically submit detailed financial and operating reports and to furnish any
other information required thereby.

     Each of the directors, officer and key employees of the Company who are
actively and directly engaged in the administration or supervision of gaming, or
who have any other significant involvement with the activities of the Company,
will be required to be found suitable therefor, and may be required to be
licensed, by applicable gaming commissions.  The finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation.  In addition, any
individual who is found to have a material relationship to, or material
involvement with, the Company may be required to be investigated in order to be
found suitable or to be licensed as a business associate of the Company.  Key
employees, controlling persons or others who exercise significant influence upon
the management or affairs of the Company may also be deemed to have such a
relationship or involvement.  There can be no assurance that such persons will
be found suitable by the applicable gaming commissions in states in which the
Company may seek to expand.

     FEDERAL REGULATION

     Operator is required to file annually with the United States Department of
Justice under the Gambling Devices Act of 1962.  All currently required filings
have been made.

                                      -14-
<PAGE>
 
REGULATION - CRUISE AND TRAVEL OPERATIONS

     GalaxSea must comply with federal and applicable state laws regarding its
franchising operations, including the preparation and distribution to potential
franchisees of a franchisee offering circular, and the registration of GalaxSea
and the circular in certain states.

     There are no regulations or licensing requirements applicable to I.T.
Cruise's operations.

RESTRICTIONS ON STOCKHOLDERS; MANDATORY DISPOSITION IF FOUND UNSUITABLE

     The Louisiana Act requires holders of 5% or more of the Company's Common
Stock, Class A Preferred Stock or Series B Preferred Stock to meet the
suitability requirements applicable for the types of licenses held by the
Company or Operator, and, if required by the Division, to file a license
application with the Division.  Failure to meet such suitability requirements or
file any required application can result in suspension or forfeiture of the
Louisiana licenses.  Other states grant their gaming commissions the discretion
to require a suitability finding with respect to anyone who acquires any
security of the Company, regardless of the percentage of ownership.
Furthermore, certain of these states provide that any owner of voting securities
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of equity interests in the Company beyond such period of time as may be
prescribed by the gaming commission of such state may be guilty of a crime.  Any
person who fails or refuses to apply for a finding of suitability or a license
within a specified number of days after being ordered to do so by an applicable
gaming commission may be found unsuitable.  In addition, certain of these states
provide that if any owner of voting securities is found to be unsuitable, such
owner must immediately surrender all securities to the Company, and the Company
must refund any money or other thing of value that may have been invested in or
made use of by the Company.

     As a result of the foregoing restrictions on ownership, the Company's
Certificate of Incorporation was amended in conjunction with the Merger with OM
to provide that if a holder or a beneficial holder of Common Stock, Class A
Preferred Stock or Series B Preferred Stock or any other class of capital stock
is required by the Division or the gaming commission of any other state to be
found suitable, the holder shall apply for a finding of suitability within the
time period required by applicable law or by such regulatory authority.
Further, the applicant for a finding of suitability will be required to pay all
costs of the investigation for such finding of suitability.  The amended
Certificate also provides that if a holder or beneficial owner who is required
to be found suitable does not apply for such finding within the required time
period, or is not found suitable by the applicable regulatory authority, (i) the
holder shall, upon request of the Company, dispose of his Common Stock, Class A
Preferred Stock or Series B Preferred Stock or any other class of capital stock
within 30 days or within the time prescribed by the applicable regulatory
authority, whichever is earlier, or (ii) the Company may, at its option, redeem
the holder's Common Stock, Class A Preferred Stock or Series B Preferred Stock
or any other class of capital stock at the lesser of the market price thereof on
the date of the finding of unsuitability or the price at which such Common
Stock, Class A Preferred Stock or Series B Preferred Stock or any other class of
capital stock was acquired by the holder, and (iii) if required under applicable
state law, such shares may not be voted by such unsuitable person and no
dividends or distributions of any kind may be made on such shares to such
unsuitable person.

INSURANCE

     The Company carries commercial general liability coverage on the properties
it operates.  The Company also carries property insurance on an actual cash
value basis covering the cost of direct physical damage.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The Company owns the Gold Rush truck stop facility and the building in
which the video poker casino is operated.  This property is subject to a
mortgage having a remaining principal balance of approximately $828,625 at
December 31, 1997, and which requires monthly payments of principal and interest
of approximately $22,814 through June 20, 2001, at which time the note will be
paid in full.  This property is further described under Item 1 -"Description of
Business -- Operation of Truck Stop Facilities", "-- Assignment to OM Operating,
L.L.C." and "--Operation of Video Poker Casinos".  Reference is hereby made to
these sections for a description of this property and the Company's various
rights relative to this property.

                                      -15-
<PAGE>
 
     A description of the various agreements under which the Company operates
and manages the two other truck stop facilities and participates in the
ownership of the four other truck stop video poker casinos, and a description of
the River Port lease, is also included under Item 1--"Description of Business --
Operation of Truck Stop Facilities", "--Assignment to OM Operating, L.L.C." and
"-- Operation of Video Poker Casinos".  Reference is also hereby made to these
sections for a description of those agreements and the Company's various rights
relative to the truck stops.

     The Company's principal executive office is located in Dallas, Texas.  The
Company leases approximately 5,645 square feet pursuant to a 72 month lease
(commencing November 1996) which provides for a rental rate of approximately
$4,704 per month.  The Company subleases approximately 2,015 square feet of its
office space to International for $1,595 per month pursuant to a month to month
verbal agreement.

ITEM 3.  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.  See "Item
1 -- Description of Business -- Operation of Video Poker Casinos -- Lucky
Longhorn - Vinton, Louisiana."  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.  No trial date has been set, and settlement discussions
are ongoing with Longhorn.  The Company believes the issue will be resolved
satisfactorily, but there can be no assurance in this regard.

     T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, LLC, 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 operatre King's Lucky
Lady effective April 30, 1997, unless some other arrangement can be arranged
with Guillory.  During the course of the litigation, Operator was ordered by the
court to escrow 50% of the monthly operating profit generated by King's Lucky
Lady, and effective from the date of the judgment on March 3, 1998 Operator will
be required to escrow 100% of the operating profit, unless Operator and the
Company are able to negotiate a different arrangement with Guillory or convince
the court to modify such arrangement.  As of April 1, 1998, Operator had placed
in escrow $197,404 for the period from May 1997 through February 1998.  Operator
and the Company  plan to petition the court in June 1998 to grant a management
fee for services from April 30, 1997 through the date the appeal is completely
concluded.  Presently, the Company and Operator plan to also assert a claim for
damages for unjust enrichment against Guillory if it does 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.

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

None.

                                      -16-
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

     The Company's Common Stock is traded over-the-counter and quoted from time
to time in the OTC Bulletin Board "pink sheets" under the trading symbol "NAGM".
Consequently, there is currently no established public trading market for the
Company's Common Stock.  The following table sets forth the range of high and
low bid prices as reported by the OTC Bulletin Board for the periods indicated.
Such quotations represent inter-dealer prices without retail markup, markdown,
or commission, and may not necessarily represent actual transactions.

                                               CLOSING BID PRICE
                CALENDAR YEARS                -------------------
                  BY QUARTER                 HIGH              LOW
                --------------               ----              ----
 
   1996         First                        $  1/4            $ 1/4
                Second                        11/16              1/4
                Third                          7/16             1/16
                Fourth                         7/32              1/8
 
   1997         First                        $ 5/32            $5/32
                Second                         5/32             5/32
                Third                          3/32             3/32
                Fourth                         1/32             1/32

     At March 31, 1998, the Company had approximately 3,276 common stockholders
of record, 31 holders of Class A Preferred Stock of record and one holder of
Series B Preferred Stock of record.

     The Company has not paid cash dividends on Common Stock during the last two
years and the Board of Directors of the Company does not currently intend to pay
cash dividends on Common Stock in the foreseeable future. The holders of
outstanding Series B Preferred Stock are entitled to receive dividends and
distributions on a share-for-share basis equal to dividends and distributions on
the Common Stock, and vice versa, so that Common Stock and Series B Preferred
                      ---- -----                                             
Stock are treated equally on a combined basis as though the combined shares were
one class of capital stock of the Company.  The Company may not declare or pay
dividends on Common Stock or Series B Preferred Stock if there are accumulated
and unpaid dividends on Class A Preferred Stock.  From October 17, 1994 through
May 31, 1996, the outstanding Class A Preferred Stock bore a dividend of $.30
per annum (payable monthly), an annual dividend of $480,000 because all
1,600,000 shares were outstanding.   The Company is $780,000 in arrears on
dividends on its Class A Preferred Stock through May 31, 1996.  These dividends
will accumulate and be payable in full prior to any distributions on the Common
Stock or Series B Preferred Stock.  Simultaneously with the closing of its
acquisition of GalaxSea on June 10, 1996, the Company 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 until June 10, 1998 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 prior to June 10, 1998.  Class A Preferred Stock is
also redeemable at any time by the Company by payment of a per share redemption
price of $3.00 per share, plus any accumulated and unpaid dividends.

     As of December 31, 1997, the Company was fourteen principal payments in
arrears (a total of $470,673 in principal is past due; interest has not been
paid since November 1, 1997, and an aggregate of $17,398 in interest is past
due) to International Tours, Inc. ("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 $1,116,854 at December 31, 1997 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 

                                      -17-
<PAGE>
 
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 $68,434 at December 31, 1997, and require aggregate payments of
principal and interest of $11,250 per month until July 1, 1997 and $31,114 per
month thereafter. As of April 1, 1998, 12 monthly payments, for a total of
$313,776, have not been made pursuant to the subordinated debentures. The
subordinated debentures and the amounts unpaid are expressly made subordinate to
the International note as well as other senior debt of the Company. Until the
International note is paid in full and the subordinated debentures are paid in
full, the Company is prohibited from paying dividends on its Common Stock.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

     PRESENT CASH SHORTFALL.  As of January 1, 1998, the Company was fourteen
months in arrears (a total of $470,673 of principal and $17,398 in interest
payable) in payments to International on the promissory note issued to
International by the Company as partial consideration for the I.T. Cruise
acquisition.  The note had an original principal balance of $1,400,000, requires
monthly payments of principal and interest of $50,000, had an unpaid principal
balance of $1,116,854 at January 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 $80,671 at April 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, any required
restructuring of the Company's revenue and profits interests in OM Operating,
L.L.C. (see "Item 1 -- Description of Business -- License Renewal Process"), 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 second
quarter of 1998, but there can be no assurance.  If not, it is possible that the
Company might continue to experience certain cash shortfalls in 1998, depending
on the level of revenues generated from the Company's operations.  It is not
possible to predict whether such cash shortfalls might be experienced, but the
Company believes its cruise operations will contribute positive cash flow as it
continues to mature and it is possible that no cash shortfalls will be
experienced even if no revised payment schedule is negotiated, although there
can be no assurance.
 
     As described in "Item 1 -- Description of Business -- License Renewal
Process", the structure of OM Operating, L.L.C. ("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. 

                                      -18-
<PAGE>
 
See also, "Item 1 -- Description of Business -- Regulation and Licensing -- 
Gaming Operations -- Louisiana -- Establishment License" and -- "Recent Changes 
in Louisiana Act" for a discussion of the strict enforcement of the Louisiana
Act and the perceived anti-gaming sentiment in Louisiana within certain segments
of the population and with certain politicians, which sentiment 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.

     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.  The Company ended fiscal 1997 with $615,712 in cash and
other current assets amounting to $642,952, including accounts receivable of
$361,684, inventories and prepaid expenses of $265,259 and current notes
receivable of $16,009. The Company's total liabilities were $5,417,683 at
December 31, 1997, including accounts payable and accrued liabilities of
$1,344,477, current notes payable of $1,341,130, long-term notes payable of
$1,952,076 and preferred stock dividends payable of $780,000.  The Company's
liabilities decreased $441,742 from $5,859,425 at December 31, 1996 to
$5,417,683 at December 31, 1997.  This decline was comprised of increases in
current liabilities of $307,111 and other notes totaling $4,905, reductions in
liabilities from payments on long and short-term debt to banks and equipment
manufacturers totaling $234,953, payments on the Ozdon notes issued for the
stock purchase of the Gold Rush of $334,934, note reductions related to the
acquisition of I.T. Cruise and GalaxSea of $98,065, payments on promissory notes
payable to Class A Preferred shareholders of $16,928 and payments on  pre-Merger
liabilities of Western Natural Gas Company ("WNGC") of $68,878.

     Accounts payable and accrued liabilities of $1,344,477 included $655,850 in
trade payables, state franchise taxes of $207,210, casino distributions of
$209,844, payroll and payroll taxes of $174,967, income tax payable of $10,774
and accrued interest of $85,832.

     The current portion of other notes payable totaling $1,341,130 includes
$536,261 related to the acquisition of I.T. Cruise and GalaxSea; the stock
purchase note from the Gold Rush acquisition amounting to $334,558; $211,819
payable to a bank for the construction of the Pelican Palace and the purchase of
the Lucky Longhorn; $203,762 payable to Class A Preferred shareholders;  and
$54,730 in equipment leases and other notes.

     Long-term debt of $1,952,076 includes $616,806 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; $611,593 related to the
acquisition of I.T. Cruise and GalaxSea; and $31,093 in equipment leases and
other notes.

     In July 1993, OM Investors, Inc. committed to loan $1,450,000 to the Curray
Corporation ("Curray") for the construction of the Pelican Palace truck stop and
video poker facility in Toomey, Louisiana.  Construction was commenced in 1993
and substantially completed in March 1994.  The $1,450,000 loan was evidenced by
a promissory note payable to the Company which was paid-in-full as of May 31,
1996.  Under the Operating and Financing Agreement with Curray, 70% of the net
income from the operation of the facility was dedicated to the repayment of the
note.  Now that the note receivable from Curray is paid-in-full, net income is
split 50% to the Company and 50% to Curray.

     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.

                                      -19-
<PAGE>
 
     At December 31, 1997, property and equipment (net) at truck stops, video
poker facilities, cruise marketing and corporate offices totaled $1,351,791.
 
     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.  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.

     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 expects to continue following 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 TWELVE MONTHS ENDED DECEMBER 31, 1997.

     Company operations resulted in net income before income taxes of $154,822
for the twelve months ended December 31, 1997, a decrease of $535,812 from
1996's $690,634.  Effective June 1, 1996 the Company began recording income from
GalaxSea and I.T. Cruise marketing and franchise operations, which amounted to a
loss of $236,926 in 1997 compared to 1996's loss of $339,862.  On June 1, 1997
the Company began recording retail revenues as a result of operating the
existing convenience store and fuel facility at the River Port Truck Stop in
Port Allen, LA.,with a resulting operating loss of $44,019 through December
31,1997.  The Company's operating profit before depreciation, amortization and
interest expense amounted to $1,245,054 through December 31, 1997, down 26% from
1996's $1,677,792.

REVENUES TOTALED $23,806,042 THROUGH DECEMBER 31, 1996 COMPARED TO $19,709,299
FOR 1996, UP 21%.

     VIDEO POKER REVENUES totaled $14,947,240 through December 31, 1997, up
$1,825,915, or 14% from 1996's $13,121,325.  The majority of this growth in
video poker revenue resulted from a full year of operation at The Diamond
Jubilee which generated incremental revenue of $1,201,398 during 1997.   Gains
were also achieved at the Pelican Palace - $359,146;  the Gold Rush - $275,136;
Stelly's Southern Gold - $125,374;  and King's Lucky Lady -$55,230.  Declines in
video poker revenue were experienced at the Lucky Longhorn - $100,080 and Route
operations -$90,289 from 1996 to 1997.  Video poker revenue production by
location for 1997 and 1996 was as follows:

                                      -20-
<PAGE>
 
     Lucky Longhorn, Vinton, LA - $3,516,099 in 1997 and $3,616,178 in 1996,
down 3%; resulting in average daily revenue per device (50 devices) of $193
through December 31, 1997 compared to 1996's $198.

     Pelican Palace, Toomey, LA - $3,093,173 in 1997 and $2,734,027 in 1996, up
13%; resulting in average daily revenue per device (50 devices) of $170 through
December 31, 1997 compared to 1996's $150.

     Gold Rush, in Opelousas, LA - $3,070,091 in 1997 and $2,794,955 in 1996, up
10%; resulting in average daily revenue per device (50 devices) of $168 through
December 31, 1997 compared to $153 for 1996.

     Diamond Jubilee generated $2,398,962 in 1997 compared to its contribution
in 1996 of $1,197,564 for the six months ended December 31, 1996, an increase of
100%; resulting in average daily revenue per device (on an average of  40.9
devices) of $161 through December 31, 1997 compared to $132 per device (50
devices) from July 1996 through December 31, 1996.

     King's Lucky Lady, Port Barre, LA - $2,345,981 in 1997 and $2,290,751 in
1996, up 2%; resulting in average daily revenue per device (50 devices) of $129
through December 31, 1997 compared to 1996's $126.

     Route Operations - South LA - $339,083 in 1997 and $429,371 in 1996, down
21%; resulted in average daily revenue per device (on an average of 22 devices)
of $42 through December 31, 1997 compared to average daily revenue per device
(on an average of 25 devices) of $48 in 1996.

     Stelly's-LeBeau, LA - produced video poker revenue of $183,853 in
approximately five months of operation compared to $58,479 for less than two
months in 1996; resulting in average daily revenue per device (16 devices) of
$78 through May 28, 1997 compared to average daily revenue per device (16
devices) of $83 in 1996.


     RETAIL REVENUES from fuel and convenience store, and food and beverage
operations amounted to $7,553,400 in 1997 compared to 1996's $6,073,907, an
increase of 24%.

     Combined fuel and convenience store sales for 1997 increased $1,335,107, or
29% to $5,966,888 compared to $4,631,781 in 1996.  Fuel sales for 1997 amounted
to $5,016,039 making up 66.4% of the Company's retail sales, compared to 1996's
fuel sales of $3,906,306 contributing 64% of the Company's retail sales.
Convenience store retail sales totaling $950,849 were up 31% for 1997 versus
1996's $725,474.  Growth occurred at the Gold Rush, which reported $3,297,550 in
revenue compared to 1996's $2,668,763, up 24%;  King's Lucky Lady generated
$2,160,010, up 10% from 1996's $1,963,018; and the River Port Truck Stop posted
sales totaling $509,328 from June through December.

     1997 food and beverage sales increased $144,386, or 10% to $1,586,512,
compared to  $1,442,126 in 1996. Food and beverage sales for each location were
as follows:  King's Lucky Lady $821,342 in 1997 compared to 1996's $794,328, up
3%;  Pelican Palace - $276,764 in 1997 versus $237,210 in 1996, up 8%;  Gold
Rush - $419,205 in 1997 compared to $368,003 in 1996, up 14%; and The Diamond
Jubilee - $69,201 in 1997 compared to $42,585 for 1996, up 63%.


     CRUISE REVENUES generated by I.T. Cruise and GalaxSea totaled $1,305,402 in
1997 compared to $514,067 for the seven months ended December 31, 1996.  I.T.
Cruise revenue resulting from its contracts with International Tours, Inc.
amounted to accrued overrides and commissions of  $212,452 for 1997 compared to
1996's $220,000; there were no marketing fees from I.T. Cruise recorded in 1997
as compared to  $5,939 in 1996.   The accrual of GalaxSea's franchise system
revenues was comprised of overrides and commissions of $177,654 in 1997 versus
$84,383 in 1996;  monthly license fees of  $131,871 in 1997 compared to $81,575
in 1996;  franchise sales fees of $28,150 in 1997 versus 1996's $28,250;
marketing fees totaling $664,853 in 1997 compared to 1996's $54,721;  and
convention and training fees of $90,422 in 1997 compared to $39,199 in 1996.

                                      -21-
<PAGE>
 
CASINO AND TRUCK STOP OPERATIONS

     CASINO AND TRUCK STOP OPERATIONS recorded direct operating profit from
Casino and Truck Stop Operations of $2,945,893 in 1997, an increase of $304,173,
or 12% over 1996's $2,641,720.

     The Gold Rush's casino and truck stop operations produced operating profit
of approximately $1,142,331 in 1997 compared to $998,117 in 1996, up 14%.  Fuel
sales averaged approximately 191,000 gallons per month.

     The Lucky Longhorn's operating profit was approximately $648,338 in 1997
compared to $713,879 in 1996, down 9%.  During the month of January 1997,
operations were suspended for 3 days due to an ice storm.  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 1996.  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.  Fuel sales averaged approximately
188,000 gallons per month.

     The Pelican Palace generated operating profit of approximately $554,697 in
1997 compared to 1996's $314,865, an increase of 76%. During the month of
January 1997, operations were suspended for 3 days due to an ice storm.  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 1996.  In
1996, a portion of the income was applied to the reduction of a note receivable,
which was satisfied in May of 1996 (noted above).  Fuel sales averaged
approximately 145,000 gallons per month.

     King's Lucky Lady's operating profit for 1997 was approximately $492,147
compared to operating profit for 1996 of approximately $483,841, up 2%.  See
"Item 1 -- Description of Business -- Operation of Truck Stop Facilities --
King's Lucky Lady - Port Barre, Louisiana"  for a discussion of the judgement
rendered against Company regarding the validity of the it's 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 129,000
gallons per month.

     The Diamond Jubilee generated operating profit of approximately $97,604 in
1997, compared to 1996's $90,819, up 8%, representing a complete year of video
poker income compared to six months of 1996; two competitors with a total of 80
video poker devices came into the market during 1997 thus diluting The Diamond
Jubilee's market share.  See " Item 1 -- Description of Business -- Operation of
Video Poker Casinos -- The Diamond Jubilee - New Orleans, Louisiana" for a
discussion of the loss of 10 devices at The Diamond Jubilee after December 31,
1996, and the expected loss of an additional five devices during the second
quarter of 1998, until increased fuel sales are maintained.  Fuel sales averaged
approximately 89,000 gallons per month during 1997.  Average fuel sales by
quarter for 1997 were as follows:   1st - 76,366 gallons per month;  2nd -
92,975 gallons per month;  3rd - 105,238 gallons per month; and 4th - 81,897
gallons per month.   Increased price competition has affected sales, which
resulted in less than the required minimum for the fourth quarter of 1997
(100,000 gallons per month is necessary for 50 devices), so the Company operated
50 devices from July of 1996 through January of 1997, but has only operated 40
devices since of February 1, 1997.  In order to increase fuel sales
substantially, the Company will be required to make a substantial investment to
include a convenience store and additional gasoline pumps.  The Company is
presently negotiating with NOVP and the landlord to share such costs if any such
improvements are desired. There can be no assurance that such improvements will
be made and, if not made, it is not likely that the fuel could be maintained at
the minimum level to operate 50 devices, or even 40 devices.

     Route Operations generated operating profit for 1997 of approximately
$46,133 compared to operating profit for 1996 of approximately $61,596, down
25%.  At December 31, 1997, the Company had 13 devices operating within 6
locations, compared to 1996, when the Company operated 22 devices within 10
locations.  The reduction in the number of route locations is the result of the
expiration of the initial five year operating leases with tavern owners who have
elected to purchase and operate their own video poker devices.  The original
operating leases had no provision for renewal.

     Stelly's Southern Gold recorded operating profit through December 31, 1997
of approximately $8,662 compared to a loss in 1996 of  $21,397.  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 

                                      -22-
<PAGE>
 
the license to operate video poker devices at this facility on May 28, 1997. See
"Item 1 -- Description of Business -- Operation of Video Poker Casinos --
Stelly's - LeBeau, Louisiana" for a discussion of the the termination of this
operating lease and the loss of all 16 devices at Stelly's.
 
     River Port Truck Stop posted sales of $509,328 for the months of June
through December of 1997, resulting in an operating loss of $44,019 for 1997.
Fuel sales averaged approximately 49,000 gallons per month.


CRUISE OPERATIONS

     COMBINED CRUISE OPERATIONS recorded an operating loss which amounted to
$236,926 in 1997, on revenues totaling $1,305,402. 1996's loss of $339,862 for
seven months of operations was recorded based on revenues of $514,057.  The gain
in revenue was for the most part due to marketing fees totaling $664,853 in 1997
compared to 1996's $54,721.  These marketing fees were the result of a broad
based program coordinated by GalaxSea to produce cruise industry publications
and promotions subscribed to by the cruise lines. Also, a complete year of
operations illustrated the annualized impact of accrued overrides and
commissions, monthly license fees, convention and training fees on total
operating revenue.  A change in the marketing contract with Princess Cruises
caused accrued overrides and commissions to reflect a reduction in revenue in
1997 in the amount of $115,000, as the fees previously accrued in 1997 and
expected to be received in January of 1998 are now going to be paid quarterly
throughout each year starting in 1998. The GalaxSea franchise system was
expanded to 69 during 1997, up from 1996's 61 franchisees; the growth was
comprised of seven add-ons and one start-up.
 
     GalaxSea's 1997 revenues amounted to $1,092,050, with an operating loss of
approximately $382,865; revenues recorded for I.T. Cruise were $212,452, with an
operating profit of approximately $145,939 for 1997.


EXPENSES TOTALED $23,651,220 THROUGH DECEMBER 31, 1997 COMPARED TO $19,018,665
FOR 1996, UP 24%.

     VIDEO POKER operations recorded a direct cost of revenue amounting to
$8,535,678 in 1997 and $7,551,036 in 1996, an increase of 13%.  This includes
fees paid to the State of Louisiana of $5,090,508 (34.1% of video poker
revenue) in 1997 and $4,478,153 (34.1% of video poker revenue) in 1996, and
profit sharing payments as defined in operating and management contracts of
$3,483,915 (23.3% of video poker revenue) in 1997 and $3,072,885 (23.4% of
video poker revenue) in 1996.

     RETAIL operations recorded a cost of revenue related to fuel, convenience
store, food and beverage operations totaling $6,304,179  (83.5% of truck stop
and convenience store sales) in 1996, compared to $5,031,519  (82.8% of truck
stop and convenience store sales) in 1996.   Fuel cost of goods sold for 1997
amounted to $4,722,738, representing a cost margin of 94.2%,  compared to 1996's
fuel cost of goods sold totaling $3,748,439, with a cost margin of 96%.  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
1997, 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 $807,846 (85.0% of sales) was up 30% for 1997 versus
1996's $621,383 (85.7% of sales).  In addition, the cost of revenue in food and
beverage operations amounted to  $773,595, up 17% in 1997 with a cost of goods
sold margin of 48.8% compared to 1996's $661,697, with a cost of goods sold
margin of 45.9%.  Restaurant promotions designed to increase fuel sales
contributed to this decline in profit margin along with the pass through of
minimum wage cost increases.  The need to remain competitive at all locations
requires the setting of lower price points, which in turn results in a
significant number of sales at a low dollar value.  The State regulations
governing truck stops require operation of 50 seat (minimum) restaurants on a
24-hour basis in order to operate 19 or more video poker machines.  The Company
presently operates three of these low volume restaurants.

     CRUISE operations recorded a direct cost of revenue amounting to $671,313
for 1997.  This was comprised of marketing, training and promotional expenses
totaling $ 599,068 and royalty fees of $72,245.  During 1996 the Company
recorded a total of $101,3897 in direct costs of revenue.

                                      -23-
<PAGE>
 
     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $7,078,853 in 1997 and
$5,554,120 in 1996 represented 29.7% and 28.2% of total revenue for 1997 and
1996, respectively.

     DEPRECIATION AND AMORTIZATION amounted to $754,021 in 1997 and $664,365 in
1996.  The Company recorded depreciation and amortization for a full fiscal
period in 1997, which totaled $346,492 compared to 1996's $168,304, resulting
from the acquisition of GalaxSea and I.T. Cruise, which took place in June of
1996.  Interest expense was $336,211 in 1997 and $322,793 in 1996.   Other
revenue and expense (net) was $67,780 in 1997, compared to $$206,557 in 1996.


COMPARISON OF 1997 TO 1996

     VIDEO POKER revenues increased from $13,121,325 in 1996 to 14,947,240 in
1997, up $1,825,915 or 14%, due primarily to a full year of operation at The
Diamond Jubilee, which generated revenue of $2,398,962 during 1997 compared to
$1,197,564 in 1996, an increase of $1,201,398, or 100%.  The Pelican Palace
produced $3,093,173 in 1997 versus $2,734,027 in 1996, an increase of $359,146,
or 13%.  The Gold Rush posted $3,070,091 in 1997 compared with $2,794,955 in
1996, up $275,136, or 10%.  Stelly's produced video poker revenue of $183,853 in
approximately five months of operation compared to $58,479 for less than two
months in 1996; an increase of $125,374.  King's Lucky Lady recorded video poker
revenues of $2,345,981 in 1997 versus $2,290,751 in 1996, up $55,230, or 2%.
Declines in video poker revenue were experienced at the Lucky Longhorn from
$3,616,178 in 1996 to $3,516,099 in 1997, down $100,080, or 3%; and Route
operations to $339,083 in 1997 from $429,371 in 1996, down $90,289, or 21%.

     RETAIL revenues from fuel and convenience store, food and beverage
operations amounted to $7,553,400 in 1997 compared to 1996's $6,073,907, an
increase amounting to $1,479,493, or 24%.  The cost of revenue related to fuel,
convenience store, food and beverage operations increased $1,272,660, or 25%
from $5,031,519 in 1996 to $6,304,179 in 1997.

     GENERAL OPERATING AND ADMINISTRATIVE EXPENSES totaled $7,091,843 in 1997
and $5,572,545 for 1996, an increase of $1,519,298, or 27.3%.  This overall
increase resulted primarily from payroll, contract and professional services,
truck stop and casino promotional expenses and new operations.

     Payroll related expenses increased $354,691, or 13%, from $2,823,026 in
1996 to $3,177,717 in 1997.  This overall increase in payroll expense was
comprised of the following: operating The Diamond Jubilee for a full fiscal
period resulted in an increase in labor cost over 1996 of $104,717;  Cruise
Operations added $81,030; River Port added $36,565; and Stelly's added $14,304;
and all other payroll expenses were up $118,075, an increase of 4.6%. The
increase in the Federal Minimum Wage from $4.35 per hour to $4.75 per hour went
into effect on October 1, 1996 and was increased again on September 1, 1997 to
$5.15 per hour.  This increase was 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
$434,016, or 69%, from $626,017 in 1996 to $1,060,033 in 1997; which included
legal and accounting fees totaling $413,695 in 1997 and $177,023 for 1996, an
increase of $236,672, or 134%, resulting from regulatory and licensing issues as
discussed above;  casino security costs of $313,992 in 1997 and $226,381 for
1996, an increase of $88,445, or 39%, resulting from operating The Diamond
Jubilee for a full fiscal period and the increase in the Federal Minimum Wage;
and consulting fees totaling $331,512 in 1997 and $222,613 for 1996, an increase
of $108,899, or 49% related to a full fiscal period in cruise marketing
operations.

     Truck stop and casino promotional expenses amounted to $804,897 in 1997, up
30%, or $187,530  from 1996's $617,367, consisting of 3.9% and 3.2% of combined
truck stop and casino revenue for 1997 and 1996 respectively.  This increase in
promotional expense was the result of targeted marketing programs to maintain
and/or to increase fuel sales and to increase the length of time customers spend
in the casino.

     The Company recorded expenses for a full fiscal period for The Diamond
Jubilee and cruise marketing operations, along with seven months in 1997
operating the existing convenience store and fuel facility at the River Port
Truck Stop.  Direct operating expenses associated with these operations, but
excluding payroll, outside services and 

                                      -24-
<PAGE>
 
promotional expenses, amounted to $777,440 in 1997 compared to 1996's $307,609,
an increase of $469,831, or 153%. These incremental direct operating expenses
were recorded for cruise operations, up $282,334, or 123%, The Diamond Jubilee,
up $106,536, or 136%, and River Port added $80,961.

     All other expenses totaled $1,271,756 in 1997 compared to $1,198,526, an
increase of $73,230, or 6.1%.

     DEPRECIATION AND AMORTIZATION amounted to $754,021 in 1997 and $664,365 in
1996, an increase of $89,656, or 14%.  Depreciation and amortization on video
poker operations, which includes video poker machines, leasehold improvements
and revenue interest rights,  amounted to $335,324 in 1997 compared to $425,807
for 1996.  Depreciation and amortization on truck stop and convenience store
operations totaled $59,215 in 1997 and $51,829 for 1996; and amounted to $12,990
in 1997 versus 1996's $18,425 on corporate assets.  Interest expense was
$336,211 in 1997 and $322,793 for 1996, an increase of $13,418, or 4%.  Combined
other revenue and expense (net) totaled $67,780 in 1997, which 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 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.  This escrow requirement amounted to $139,660 through
December 31, 1997 and was recorded as an expense entitled as a "litigation
reserve".

YEAR 2000 ISSUES

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

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

FORWARD LOOKING STATEMENTS

     Statements that are not historical facts included in this Form 10-KSB 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-KSB. 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.

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

     The financial statements required by this item begin at Page F-1 hereof.

                                      -25-
<PAGE>
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     None.



                                   PART III

For information called for by Items 9, 10, 11 and 12, reference is made to the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders
scheduled to be held on or around June 3, 1998, which the Company intends to
file with the Securities and Exchange Commission on or before April 30, 1998,
which information is incorporated herein by reference.


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------

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

          1.  Financial Statements:  The financial statements filed as part of
     this report are listed in the "Index to Financial Statements" on Page F-1
     hereof.

          2.  Exhibits required to be filed by Item 601 of Regulation S-B:

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

     2.1              Restated Plan and Agreement of Merger, dated as of January
                      21, 1994, as amended and restated, by and between the
                      Company, OM Investors, Inc. ("OM") and a subsidiary of the
                      Company (without schedules) filed as Exhibit 2.1 to the
                      Company's Registration Statement on Form S-4, Registration
                      No. 33-79384, and incorporated herein by reference.

     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.

                                      -26-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

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

     10.1             The Company's Incentive Stock Option Plan, filed as
                      Exhibit 10.7 to the 1986 Form 10-K and incorporated herein
                      by reference.

     10.2.1           OM's Note in the original principal amount of $1,200,000
                      dated April 11, 1994 payable to Springhill Bank and Trust
                      Company filed as Exhibit 10.14.1 to the Form S-4 and
                      incorporated herein by reference.

     10.2.2           Six Continuing Guaranty's of the Note referenced in
                      Exhibit 10.14.1 dated October 21, 1993 filed as Exhibit
                      10.14.2 to the Form S-4 and incorporated herein by
                      reference.

     10.3.1           OM's Note in the original principal amount of $331,000,
                      dated April 11, 1994, payable to Springhill Bank and Trust
                      Company filed as Exhibit 10.15.1 to the Form S-4 and
                      incorporated herein by reference.

     10.3.2           Eight Continuing Guaranties of the Note referenced in
                      Exhibit 10.15.1 dated September 1, 1992 filed as Exhibit
                      10.15.2 to the Form S-4 and incorporated herein by
                      reference.

     10.3.3           Six Continuing Guaranties of the Note referenced in
                      Exhibit 10.15.1 dated June 22, 1993 filed as Exhibit
                      10.15.3 to the Form S-4 and incorporated herein by
                      reference.

     10.4             Forms of ten OM Notes payable to stockholders dated
                      various dates filed as Exhibit 10.16 to the Form S-4 and
                      incorporated herein by reference.

     10.5.1           Promissory Note in the original principal amount of
                      $800,000 dated June 26, 1993 payable by D.M.L. Cattle
                      Company, Inc. and Dorothy M. Leach to Springhill Bank &
                      Trust Company filed as Exhibit 10.17.1 to the Form S-4 and
                      incorporated herein by reference.

     10.5.2           Mortgage relating to the Promissory Note referenced in
                      Exhibit 10.17.2 filed as Exhibit 10.17.2 to the Form S-4
                      and incorporated herein by reference.

     10.5.3           Continuing Guaranty dated January 26, 1993 between OM and
                      Springhill Bank & Trust Company relating to the Promissory
                      Note referenced in Exhibit 10.17.1 filed as Exhibit
                      10.17.3 to the Form S-4 and incorporated herein by
                      reference.

     10.5.4           Continuing Guaranty dated January 26, 1993 between
                      Springhill Bank & Trust Company and eight OM stockholders
                      relating to the Promissory Note referenced in Exhibit
                      10.17.1 filed as Exhibit 10.17.4 to the Form S-4 and
                      incorporated herein by reference.

     10.6             Shareholders' Agreement dated January 31, 1994 between
                      various stockholders of the Company and OM filed as
                      Exhibit 10.18 to the Form S-4 and incorporated herein by
                      reference.

     10.7.1           Bill of Credit Sale with Vendor's Lien dated March 14,
                      1994 between OM and Delta Diversions, Inc. filed as
                      Exhibit 10.19.1 to the Form S-4 and incorporated herein by
                      reference.

                                      -27-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

     10.7.2           Promissory Note dated March 14, 1994 in the original
                      principal amount of $124,931.75 payable by OM to Delta
                      Diversions, Inc. filed as Exhibit 10.19.2 to the Form S-4
                      and incorporated herein by reference.

     10.7.3           Security Agreement relating to Exhibit 10.19.2 filed as
                      Exhibit 10.19.3 to the Form S-4 and incorporated herein by
                      reference.

     10.8.1           Conditional Sale Contract Promissory Note and Security
                      Agreement dated November 23, 1993 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.20.1 to the Form S-
                      4 and incorporated herein by reference .

     10.8.2           Assignment dated November 22, 1993 relating to Exhibit
                      10.20.1 filed as Exhibit 10.20.2 to the Form S-4 and
                      incorporated herein by reference.

     10.9.1           Conditional Sale Contract Promissory Note and Security
                      Agreement dated October 7, 1993 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.21.1 to the Form S-
                      4 and incorporated herein by reference .

     10.9.2           Assignment dated September 27, 1993 relating to Exhibit
                      10.21.1 filed as Exhibit 10.21.2 to the Form S-4 and
                      incorporated herein by reference.

     10.10.1          Conditional Sale Contract Promissory Note and Security
                      Agreement dated December 9, 1993 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.22.1 to the Form S-
                      4 and incorporated herein by reference.

     10.10.2          Assignment dated December 9, 1993 relating to Exhibit
                      10.22.1 filed as Exhibit 10.22.2 to the Form S-4 and
                      incorporated herein by reference.

     10.11            Conditional Sale Contract Promissory Note and Security
                      Agreement dated August 23, 1992 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.23 to the Form S-4
                      and incorporated herein by reference.

     10.12            Conditional Sale Contract Promissory Note and Security
                      Agreement dated August 23, 1992 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.24 to the Form S-4
                      and incorporated herein by reference.

     10.13.1          Conditional Sale Contract Promissory Note and Security
                      Agreement dated March 1, 1994 between OM and A.M.A.
                      Distributors, Inc. filed as Exhibit 10.25.1 to the Form S-
                      4 and incorporated herein by reference.

     10.13.2          Assignment dated February 28, 1994 relating to Exhibit
                      10.25.1 filed as Exhibit 10.25.2 to the Form S-4 and
                      incorporated herein by reference.

     10.14.1          Operating and Financing Agreement dated July 21, 1993
                      between OM and Curray Corporation relating to the Pelican
                      Palace filed as Exhibit 10.27.1 to the Form S-4 and
                      incorporated herein by reference.

     10.14.2          Letter Agreement dated September 21, 1993 between OM and
                      Mary Merrell Fountain relating to the Pelican Palace filed
                      as Exhibit 10.27.2 to the Form S-4 and incorporated herein
                      by reference.

     10.14.3          Commercial Lease dated February 14, 1994 between Tobacco
                      Plus, Inc. and OM and Curray Corporation relating to the
                      Pelican Palace filed as Exhibit 10.27.3 to the Form S-4
                      and incorporated herein by reference.

                                      -28-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

     10.14.4          Lease dated February 18, 1994 between Albert and Jay, Inc.
                      and OM relating to the Pelican Palace filed as Exhibit
                      10.27.4 to the Form S-4 and incorporated herein by
                      reference.

     10.14.5          Collateral Promissory Note dated July 21, 1993 in the
                      original principal amount of $1,450,000 payable by Curray
                      Corporation to OM filed as Exhibit 10.27.5 to the Form S-4
                      and incorporated herein by reference .

     10.14.6          Collateral Mortgage dated July 21, 1993 between Curray
                      Corporation and OM relating to Exhibit 10.27.5 filed as
                      Exhibit 10.27.6 to the Form S-4 and incorporated herein by
                      reference.

     10.14.7          Notarial Endorsement and Assignment of Note dated October
                      29, 1993 relating to Exhibit 10.27.5 filed as Exhibit
                      10.27.7 to the Form S-4 and incorporated herein by
                      reference.

     10.14.8          Consent dated April 20, 1994 relating to the Pelican
                      Palace filed as Exhibit 10.14.1 to the Form S-4 and
                      incorporated herein by reference filed as Exhibit 10.27.8
                      to the Form S-4 and incorporated herein by reference.

     10.15.1          Commercial Lease dated April 28, 1992 between OM and T.B.
                      Guillory, Inc. and Bill Guillory relating to King's Lucky
                      Lady filed as Exhibit 10.28.1 to the Form S-4 and
                      incorporated herein by reference.

     10.15.2          Consent dated April 21, 1994 relating to King's Lucky Lady
                      filed as Exhibit 10.28.2 to the Form S-4 and incorporated
                      herein by reference.

     10.16.1          Act of Contract and Agreement dated June 5, 1992 between
                      The Longhorn Club, Inc., The Longhorn Truck & Car Plaza,
                      Inc., D.M.L. Cattle Company, Inc., Dorothy M. Leach,
                      Charles R. Cotton, Southern Trading Corporation and OM
                      relating to the Lucky Longhorn filed as Exhibit 10.29.1 to
                      the Form S-4 and incorporated herein by reference.

     10.16.2          Amendment to Act of Contract and Agreement dated July 15,
                      1992, amending Exhibit 10.29.1 filed as Exhibit 10.29.2 to
                      the Form S-4 and incorporated herein by reference.

     10.16.3          Act of Contract between OM and Southern Trading
                      Corporation dated June 5, 1992 relating to Exhibit 10.29.1
                      filed as Exhibit 10.29.3 to the Form S-4 and incorporated
                      herein by reference.

     10.16.4          Assignment dated February 15, 1993 between OM and Southern
                      Trading Corporation relating to Exhibit 10.29.1 filed as
                      Exhibit 10.29.4 to the Form S-4 and incorporated herein by
                      reference.

     10.16.5          Assignment dated June 22, 1993 between OM and John F.
                      DeRosier relating to Exhibit 10.29.1 filed as Exhibit
                      10.29.5 to the Form S-4 and incorporated herein by
                      reference.

     10.16.6          Consent dated May 1, 1994 relating to the Lucky Longhorn
                      filed as Exhibit 10.29.6 to the Form S-4 and incorporated
                      herein by reference.

     10.17.1          Contract dated January 4, 1993 between Pat F. Willis, Jr.
                      and Blaine Guillory and Stelly's of LeBeau, Inc. relating
                      to Stelly's filed as Exhibit 10.30.1 to the Form S-4 and
                      incorporated herein by reference.

                                      -29-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

     10.17.2          Contractual Agreement between OM, Pat F. Willis, Jr.,
                      Blane Guillory, Stelly's of LeBeau, Inc. and Goudeau, Inc.
                      relating to Exhibit 10.30.1 filed as Exhibit 10.30.2 to
                      the Form S-4 and incorporated herein by reference.

     10.17.3          Consent dated May 1, 1994 relating to Stelly's and
                      Landry's filed as Exhibit 10.30.3 to the Form S-4 and
                      incorporated herein by reference.

     10.17.4          Letter Agreement dated December 26, 1995 between Stelly's
                      of LeBeau, Inc. and OM Operating, L.L.C. ("Operator")
                      amending Exhibit 10.30.1 filed as Exhibit 10.30.4 to the
                      Company's Annual Report on Form 10-KSB for the fiscal year
                      ended December 31, 1995 and incorporated herein by
                      reference.

     10.17.5          Assignment of Contracts dated March 21, 1993 between OM
                      and Pat F. Willis, Jr. and Blane Guillory relating to
                      Exhibit 10.17.1 (Stelly's) filed as Exhibit 10.31.2 to the
                      Form S-4 and incorporated herein by reference.

     10.17.6          Addendum to Contract of Assignment dated December 28, 1995
                      between Operator and Pat F. Willis, Jr. and Blane Guillory
                      clarifying and amending the Assignment of Contracts filed
                      as Exhibit 10.17.5.

     10.17.7          Promissory Note dated December 28, 1995 in original
                      principal amount of $81,000 payable to Operator by Blane
                      Guillory and other persons.

     10.18.1          Amended and Restated Articles of Organization of OM
                      Operating, L.L.C. filed as Exhibit 10.32.1 to the Form S-4
                      and incorporated herein by reference.

     10.18.2          Corrected Operating Agreement of OM Operating, L.L.C.
                      filed as Exhibit 10.32.2 to the Company's Annual Report on
                      Form 10-KSB for the fiscal year ended December 31, 1994
                      and incorporated herein by reference.

     10.19.1          Stock Purchase Agreement dated effective November 1, 1995,
                      between the Company and certain shareholders of Ozdon
                      Investments, Inc. ("Ozdon") relating to the purchase of
                      93% of the outstanding capital stock of Ozdon filed as
                      Exhibit 10.1.1 to the Company's Current Report on Form 8-K
                      dated December 15, 1995 and incorporated herein by
                      reference.

     10.19.2          Form of Addendum No. One to the Stock Purchase Agreement
                      filed as Exhibit 10.33.1 filed as Exhibit 10.1.2 to the
                      Company's Current Report on Form 8-K dated December 15,
                      1995 and incorporated herein by reference.

     10.19.3          Form of Stock Purchase Agreement dated effective November
                      1, 1995, relating to the remaining 7% of the capital
                      shares of Ozdon filed as Exhibit 10.2.1 to the Company's
                      Current Report on Form 8-K dated December 15, 1995 and
                      incorporated herein by reference.

     10.19.4          Form of Addendum No. One relating to the Stock Purchase
                      Agreement filed as Exhibit 10.33.3 filed as Exhibit 10.2.2
                      to the Company's Current Report on Form 8-K dated December
                      15, 1995 and incorporated herein by reference.

     10.19.5          Form of License to operate video poker casino dated
                      effective December 15, 1995 between the Company and
                      Operator relating to operation of the video poker casino
                      at the Gold Rush and the license of the sale of alcoholic
                      beverages on the premises filed as Exhibit 10.33.5 to the
                      Company's Annual Report on Form 10-KSB for the fiscal year
                      ended December 31, 1995 and incorporated herein by
                      reference.

                                      -30-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

     10.20            License Agreement dated effective December 15, 1995
                      between the Company and Operator licensing sales of
                      alcoholic beverages at King's Lucky Lady filed as Exhibit
                      10.34 to the Company's Annual Report on Form 10-KSB for
                      the fiscal year ended December 31, 1995 and incorporated
                      herein by reference.

     10.21            License Agreement dated effective December 15, 1995
                      between the Company and Operator licensing sales of
                      alcoholic beverages at the Pelican Palace filed as Exhibit
                      10.35 to the Company's Annual Report on Form 10-KSB for
                      the fiscal year ended December 31, 1995 and incorporated
                      herein by reference.

     10.22            Option Agreement dated November 1, 1994 between the
                      Company and George J. Akmon representing 210,000 shares of
                      Common Stock filed as Exhibit 10.36 to the Company's
                      Annual Report on Form 10-KSB for the fiscal year ended
                      December 31, 1995 and incorporated herein by reference.

     10.23            Option Agreement dated January 17, 1996 between the
                      Company and George J. Akmon representing 500,000 shares of
                      Common Stock filed as Exhibit 10.37 to the Company's
                      Annual Report on Form 10-KSB for the fiscal year ended
                      December 31, 1995 and incorporated herein by reference.

     10.24            Option Agreement dated January 17, 1996 between the
                      Company and Richard P. Crane, Jr. representing 500,000
                      shares of Common Stock filed as Exhibit 10.38 to the
                      Company's Annual Report on Form 10-KSB for the fiscal year
                      ended December 31, 1995 and incorporated herein by
                      reference.

     10.25.1          Stock Purchase and Registration Rights Agreement dated
                      July 1, 1996 between the Company and New Orleans Video
                      Poker Company, Inc. ("NOVP"), filed as Exhibit 10.1 to the
                      Company's Quarterly Report on Form 10-QSB for the fiscal
                      quarter ended September 30, 1996 and incorporated herein
                      by reference.

     10.25.2          Sublease Agreement dated July 1, 1996 between OM Operating
                      Company, LLC ("Operating") and NOVP filed as Exhibit
                      10.1.2 to the Company's Quarterly Report on Form 10-QSB
                      for the fiscal quarter ended September 30, 1996 and
                      incorporated herein by reference.

     10.25.3          Consent to Sublease entered into as of October 7, 1996, by
                      and between Operating, NOVP and Stanley Doussan filed as
                      Exhibit 10.1.3 to the Company's Quarterly Report on Form
                      10-QSB for the fiscal quarter ended September 30, 1996 and
                      incorporated herein by reference.

     10.26            License to Operate Video Poker Casino dated effective
                      December 15, 1995 between Operating and Ozdon Investments,
                      Inc., relating to The Gold Rush Truck Stop filed as
                      Exhibit 10.2 to the Company's Quarterly Report on Form 10-
                      QSB for the fiscal quarter ended September 30, 1996 and
                      incorporated herein by reference.

     10.27.1          Agreement and Plan of Merger dated effective June 7, 1996,
                      relating to the acquisition of GalaxSea and I.T. Cruise
                      filed as Exhibit 10.1.1 to the Company's Current Report on
                      Form 8-K dated June 10, 1996 and incorporated herein by
                      reference.

     10.27.2          Form of Note dated June 10, 1996 in the original principal
                      amount of $1,400,000 payable by the Company to
                      International relating to the acquisition of I.T. Cruise
                      filed as Exhibit 10.1.2 to the Company's Current Report on
                      Form 8-K dated June 10, 1996 and incorporated herein by
                      reference.

     10.27.3          Form of Security Agreement dated effective June 10, 1996
                      between International and the Company securing repayment
                      of the Note filed as Exhibit 10.27.2 filed as Exhibit as
                      10.1.3 to the Company's Current Report on Form 8-K dated
                      June 10, 1996 and incorporated herein by reference.

                                      -31-
<PAGE>
 
     Exhibit
     Number           Description of Exhibits
     ------           -----------------------

     10.27.4          Form of GalaxSea Cruise Marketing Agreement dated May 1,
                      1996 between International and GalaxSea filed as Exhibit
                      10.1.5 to the Company's Current Report on Form 8-K dated
                      June 10, 1996 and incorporated herein by reference.
 
     10.27.5          Form of Cruise Marketing Agreement dated May 1, 1996
                      between International and I.T. Cruise filed as Exhibit
                      10.1.6 to the Company's Current Report on Form 8-K dated
                      June 10, 1996 and incorporated herein by reference.

     10.27.6          Form of Assignment between International and I.T. Cruise
                      dated June 1, 1996 filed as Exhibit 10.1.7 to the
                      Company's Current Report on Form 8-K dated June 10, 1996
                      and incorporated herein by reference.

     10.27.7          Form of Security Agreement dated June 10, 1996 between the
                      Company, Ozdon Investments, and Lamar E. Ozley, Jr., as
                      Trustee for the former shareholders of Ozdon Investments,
                      Inc. filed as Exhibit 10.1.8 to the Company's Current
                      Report on Form 8-K dated June 10, 1996 and incorporated
                      herein by reference.

     10.28.1          Lease Agreement dated January 17, 1997 between S.W. Day
                      and T. Joe Calloway and River Port Truck Stop, Inc. (a
                      subsidiary of the Company) filed as Exhibit 10.28.1 to the
                      Company's Annual Report on Form 10-KSB for the fiscal year
                      ended December 31, 1996 and incorporated herein by
                      reference.

     *21.1            Subsidiaries of the Company.

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

________________________

*    Filed herewith.

b)   Reports on Form 8-K

     None.

                                      -32-
<PAGE>
 
                                  SIGNATURES


In accordance with Section 13 or 15(d) 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


April 13, 1998                      By:  /s/ E. H. Hawes, II, President
                                        --------------------------------------
                                        E. H.  Hawes, II, President
                                        and Chief Executive Officer
                                        (Principal Executive Officer)



In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.

April 13, 1998                      /s/ E. H. Hawes, II
                                    ------------------------------------------
                                    E.H. HAWES, II
                                    Director (Chairman)

April 13, 1998                      /s/ Daryl N. Snadon
                                    ------------------------------------------
                                    DARYL N. SNADON
                                    Director

April 13, 1998                      /s/ Richard P. Crane, Jr.
                                    ------------------------------------------
                                    RICHARD P. CRANE, JR.
                                    Director


April 13, 1998                      /s/ George J. Akmon
                                    ------------------------------------------
                                    GEORGE J. AKMON
                                    Executive Vice President, Chief Financial
                                    Officer and Treasurer (Principal Financial
                                    and Accounting Officer)

                                      -33-
<PAGE>
 
     NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
     --------------------------------------------------------------------

                         INDEX TO FINANCIAL STATEMENTS
                         -----------------------------



                                                              PAGE
                                                              ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                       F-2
 
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996       F-3
 
CONSOLIDATED STATEMENTS OF OPERATIONS - FOR THE YEARS ENDED
 DECEMBER 31, 1997 AND 1996                                    F-4
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -
 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996                F-5
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - FOR THE YEARS ENDED
 DECEMBER 31, 1997 AND 1996                                    F-6
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     F-7




                                      F-1
<PAGE>
 
                              ARTHUR ANDERSEN LLP




                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of
North American Gaming and Entertainment Corporation:

We have audited the accompanying consolidated balance sheets of North American
Gaming and Entertainment Corporation (a Delaware corporation) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of North American
Gaming and Entertainment Corporation and subsidiaries as of December 31, 1997
and 1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.


                                        /s/ ARTHUR ANDERSEN LLP



New Orleans, Louisiana,
March 12, 1998



                                      F-2
<PAGE>
 
     NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
     --------------------------------------------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------

                          DECEMBER 31, 1997 AND 1996
                          --------------------------

<TABLE>
<CAPTION>
                                                          1997          1996
                                                          ----          ----
<S>                                                  <C>           <C>
ASSETS
------

CURRENT ASSETS:
  Cash                                               $   428,454   $   364,965
  Restricted cash                                        187,258       183,529
  Accounts receivable                                    361,684       291,597
  Inventories, at cost                                   151,903        81,557
  Prepaid insurance                                       94,326        99,328
  Notes receivable - current                              16,009       135,824
  Current deferred tax asset                              19,030        19,030
                                                     -----------   -----------
                                                       1,258,664     1,175,830
                                                     -----------   -----------
PROPERTY AND EQUIPMENT, net of accumulated 
  depreciation                                         1,351,791     1,492,255
                                                     -----------   -----------
 
OTHER ASSETS:
  Deposits                                               151,768        76,488
  Long-term deferred tax asset                           428,948       539,448
  Revenue interest rights, net of accumulated 
    amortization                                         235,393       286,753
  Trade name, contract rights and organizational 
    costs, net of accumulated amortization               168,418       258,583
  Goodwill, net of accumulated amortization              928,512     1,183,607
  Notes receivable - long-term                            33,523        49,173
                                                     -----------   -----------
                                                       1,946,562     2,394,052
                                                     -----------   -----------
       Total assets                                  $ 4,557,017   $ 5,062,137
                                                     ===========   ===========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
 
CURRENT LIABILITIES:
  Accounts payable and accrued liabilities           $ 1,333,703   $ 1,005,349
  Notes payable - current                              1,341,130     1,385,597
  Income taxes payable                                    10,774        32,017
  Preferred stock dividends payable                      780,000       780,000
                                                     -----------   -----------
  Total current liabilities                            3,465,607     3,202,963
                                                     -----------   -----------
 
NOTES PAYABLE - LONG-TERM                                663,249       898,756
                                                     -----------   -----------
 
NOTES PAYABLE TO CERTAIN STOCKHOLDERS - LONG-TERM      1,288,827     1,757,706
                                                     -----------   -----------
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
  Class A preferred stock, $3.00 par value, 
    10% annual cumulative dividend, 1,600,000 
    shares authorized, 1,287,000 shares issued at
    December 31, 1997 and 1996                         3,861,000     3,861,000
  Preferred stock, series "B" $.01 par value, 
    8,000,000 shares authorized and issued at 
    December 31, 1997 and 1996                            80,000        80,000
  Common stock, $.01 par value, 25,000,000 shares 
    authorized, 20,095,698 and 20,093,347 shares 
    issued at December 31, 1997 and 1996                 200,957       200,957
  
  Additional paid-in capital (deficit)                (3,257,112)   (3,257,112)
  Retained earnings (deficit)                         (1,745,511)   (1,682,133)
                                                     -----------   -----------
                                                        (860,666)     (797,288)
                                                     -----------   -----------
       Total liabilities and stockholders' equity    $ 4,557,017   $ 5,062,137
                                                     ===========   ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                      F-3
<PAGE>
 
      NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
      --------------------------------------------------------------------


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                 ----------------------------------------------


<TABLE>
<CAPTION>
                                                          1997          1996
                                                          ----          ----
<S>                                                  <C>           <C>
REVENUE:
  Video poker                                        $14,947,240    $13,121,325
  Truck stop and convenience store                     7,553,400      6,073,907
  Cruise                                               1,305,402        514,067
                                                     -----------    -----------
                                                      23,806,042     19,709,299
                                                     -----------    -----------
 
COSTS AND EXPENSES:
  Video poker:
    Cost of revenue                                    8,574,423      7,551,036
    Depreciation and amortization                        335,324        425,807
                                                     -----------    -----------
                                                       8,909,747      7,976,843
                                                     -----------    -----------
 
  Truck stop and convenience store:
    Cost of revenue                                    6,304,179      5,031,519
    Depreciation and amortization                         59,215         51,829
                                                     -----------    -----------
                                                       6,363,394      5,083,348
                                                     -----------    -----------
 
  Cruise:
    Cost of revenue                                      671,313        101,389
    Depreciation and amortization                        346,492        168,304
                                                     -----------    -----------
                                                       1,017,805        269,693
                                                     -----------    -----------
 
  General and administrative, including 
    depreciation of $12,990 and $18,425 
    in 1997 and 1996                                   7,091,843      5,572,545
                                                     -----------    -----------
 
OPERATING INCOME                                         423,253        806,870
                                                     -----------    -----------
 
  Interest expense                                       336,211        322,793
  Other revenue, net                                      67,780        206,557
                                                     -----------    -----------
 
INCOME BEFORE PROVISION FOR INCOME TAXES                 154,822        690,634
 
  Provision for income taxes                             218,200        378,279
                                                     -----------    -----------
 
NET INCOME (LOSS)                                        (63,378)       312,355
 
LESS:  Preferred stock dividends                            -          (200,000)
                                                     -----------    -----------
 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK         $   (63,378)   $   112,355
                                                     ===========    ===========
BASIC EARNINGS (LOSS) PER SHARE                         $.00           $.01
                                                        ====           ====
</TABLE>



   The accompanying notes are an integral part of the financial statements.



                                      F-4
<PAGE>
 
     NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
     --------------------------------------------------------------------


           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
           ---------------------------------------------------------

                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                ----------------------------------------------

<TABLE>
<CAPTION>
                                                                                                            Total
                                            Class A   Preferred              Additional      Retained   Stockholders'
                                           Preferred    Stock     Common       Paid-in       Earnings       Equity
                                             Stock    Series "B"  Stock   Capital (Deficit)  (Deficit)    (Deficit)
                                           ---------  ----------  ------  -----------------  ---------  -------------
<S>                                        <C>        <C>         <C>     <C>                <C>        <C>
BALANCE, December 31, 1995                 $4,800,000   $  -      $147,116   $(3,334,565)   $(1,794,488)   $(181,937)
                                           ----------   -------   --------   -----------    -----------    --------- 
ISSUANCE OF COMMON STOCK
 AND PREFERRED STOCK
 SERIES "B" TO ACQUIRE
 GALAXSEA CRUISES AND
 TOURS, INC. AND IT CRUISE,
 INC., $.01 par value, 4,934,106
 COMMON SHARES, 8,000,000
 PREFERRED "B" shares                            -       80,000     49,341          -              -         129,341
 
RETIREMENT OF CLASS A
 PREFERRED STOCK                             (939,000)     -          -             -              -        (939,000)
 
ISSUANCE OF COMMON STOCK
 TO ENTER OPERATING
 AGREEMENT WITH NEW
 ORLEANS VIDEO POKER, INC.
 $.01 par value, 450,000 shares                  -         -         4,500        77,453           -          81,953
 
CLASS A PREFERRED STOCK
 DIVIDENDS                                       -         -          -             -          (200,000)    (200,000)
 
NET INCOME FOR THE YEAR
 ENDED DECEMBER 31, 1996                         -         -          -             -           312,355      312,355
                                           ----------   -------   --------   -----------    -----------    --------- 
 
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)
                                           ==========   =======   ========   ===========    ==='=======    =========
</TABLE>



   The accompanying notes are an integral part of the financial statements.



                                      F-5
<PAGE>
 
     NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
     --------------------------------------------------------------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                ----------------------------------------------

<TABLE>
<CAPTION>
                                                        1997          1996
                                                        ----          ----
<S>                                                  <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                   $ (63,378)  $   312,355
 Adjustments to reconcile net income (loss) 
   to net cash provided by operating activities:
     Gain on sale of property, plant and equipment        -          (17,451)
     Depreciation and amortization                     729,009       663,359
     Bad debt expense                                   14,500          -
     Deferred tax expense                              110,500       172,135
 Changes in operating assets and liabilities:
   (Increase) decrease in-
     Accounts receivable                               (70,087)     (125,950)
     Income taxes receivable                              -          116,634
     Inventories                                       (70,346)      (21,666)
     Prepaid insurance                                   5,002       (52,253)
     Deposits                                          (75,280)      (29,242)
   Increase (decrease) in:
     Accounts payable and accrued liabilities          328,354       183,714
     Income taxes payable                              (21,243)       32,017
                                                     ---------   -----------
 
     Net cash provided by operating activities         887,031     1,233,652
                                                     ---------   -----------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from sale of property, plant and equipment      -           30,148
 Purchases of property, plant and equipment           (228,742)     (305,503)
 Advances on notes receivable                           (5,045)      (75,058)
 Repayments by borrowers                               126,010       333,671
 Acquisition of GalaxSea and IT Cruise                    -         (100,000)
                                                     ---------   -----------
 
   Net cash used in investing activities              (107,777)     (116,742)
                                                     ---------   -----------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Retirement of Preferred Stock                            -         (939,000)
 Proceeds from borrowings                               66,664     1,027,334
 Payments on borrowings                               (778,700)   (1,352,869)
                                                     ---------   -----------
 
     Net cash used in financing activities            (712,036)   (1,264,535)
                                                     ---------   -----------
 
NET INCREASE (DECREASE) IN CASH                         67,218      (147,625)
 
CASH - beginning of year                               548,494       696,119
                                                     ---------   -----------
 
CASH - ending of year                                $ 615,712   $   548,494
                                                     =========   ===========

CASH PAID DURING THE YEAR FOR:
   Income taxes, net of refunds received             $ 148,128   $    52,233
   Interest                                          $ 273,052   $   321,507

</TABLE> 

   The accompanying notes are an integral part of the financial statements.



                                      F-6
<PAGE>
 
     NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
     --------------------------------------------------------------------


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

                          DECEMBER 31, 1997 AND 1996
                          --------------------------



1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
    ---------------------------------------------------------------------

The accompanying consolidated financial statements include the accounts of North
American Gaming and Entertainment Corporation, a Delaware corporation (NAGEC)
and its consolidated subsidiaries, OM Operating, LLC (OM), GalaxSea Cruises and
Tours, Inc. (GalaxSea), and IT Cruise, Inc. (IT Cruise), (collectively, the
Company).

In February 1992, OM Investors, Inc. was formed to operate video poker machines,
restaurants and convenience stores in truck stops in Louisiana.  In October
1994, OM Investors, Inc. merged with Western Natural Gas Company ("Western") a
publicly-traded corporation with no operating activities at the date of merger.
Concurrent with the merger, Western changed its name to North American Gaming
and Entertainment Corporation.  In June 1996, the Company acquired GalaxSea and
IT Cruise, companies who operate in the cruise line travel business (see Note
10).  Also in June 1996, the Company purchased the operating right to the
Diamond Jubilee truck stop (see Note 9).

The Company's operations as of December 31, 1997 consisted of the truck stop
facilities and video poker casinos in three truck stops, the video poker casinos
in two other truck stops, and the video poker devices for a route of 6 bars and
restaurants, all located in the state of Louisiana.  The Company also operates
two subsidiaries in the cruise travel business, GalaxSea and IT Cruise (see Note
10).

Certain reclassifications have been made to the prior period financial
information in order to conform to current year presentation.  Significant
accounting policies are summarized below:

Use of Estimates
----------------

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

Video Poker Revenue (Net Device Revenue)
----------------------------------------

Video poker revenue is the net revenue from gaming activities, which is the
difference between gaming wins and losses.

Restricted Cash
---------------

The Louisiana State Police regulations regarding Video Draw Poker require the
Company to maintain a minimum balance at all times in their gaming account
equivalent to 15% of the previous month's net device revenues or to secure the
account by a line of credit or bond.  The Company meets this requirement by
maintaining the required minimum balance in their gaming account.

Inventories
-----------

Inventories are stated at the lower of cost or market; cost is determined by the
average cost method.



                                      F-7
<PAGE>
 
Revenue Interest Rights
-----------------------

Revenue interest rights consist of costs to acquire a fixed percentage of
revenues from the Longhorn Club (see Note 9) and are being amortized on a
straight-line basis over the term of the related agreement.

Minority Interest in Consolidated Subsidiary
--------------------------------------------

In connection with the merger between OM and Western discussed above, OM
contributed to OM Operating, LLC (Operator) its assets and liabilities related
to the operation of the video draw poker gaming devices.  Donald I. Williams, an
employee of the Company,  contributed $100 to Operator as his capital
contribution.  Operator was formed to facilitate compliance with Louisiana law
which requires the operator of video poker devices in truck stops to be at least
majority owned by Louisiana residents.

OM receives a gross income allocation equal to 20% of the gross gaming income
generated from the operation of the video poker gaming devices.  Gross gaming
income is defined as total money played in all devices, less all payouts on
winnings to players and less all gaming and device taxes and fees payable to the
State of Louisiana.

Mr. Williams is allocated 51% of the profits and losses of Operator.  OM is
allocated 49% of the profits and losses of Operator.  Notwithstanding the above,
each member's distributive share of income, gain, loss, deduction or credit
shall conform with the Operating Agreement of the Operator which provides net
income after the gross income allocation to OM to be allocated to OM and Mr.
Williams in proportion to their respective capital account balances.

Application of the above provisions of the Operating Agreement of Operator
resulted in 100% of the net income being allocated to OM and 0% being allocated
to Mr. Williams for the years ended December 31, 1997 and 1996.

Upon dissolution each member shall first be entitled to a distribution equal to
the fair market value (measured as of the date contributed) of their
contributions to Operator.  After this return of capital distribution, the
remaining assets will be distributed in the same proportion as each member's
remaining equity accounts bears to the total remaining equity of Operator.

See discussion at Note 7 of the license renewal process which could require the
Company to restructure this ownership structure.

Regulation
----------

Video poker revenue represents approximately 63% and 67% of the Company's
operating revenue for the years ended December 31, 1997 and 1996, respectively.
Failure to comply with Louisiana State Police regulations regarding Video Poker
could result in its license being revoked (see Note 7).

Earnings (Loss) per Common Share
--------------------------------

In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share," which simplifies the computation of earnings per
share ("EPS").  SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, and requires restatement of all prior
period EPS data presented.  Under SFAS No. 128, the Company computes two
earnings per share amounts - basic EPS and diluted EPS.  Basic EPS is calculated
based on the weighted average number of shares of common stock outstanding for
the periods presented.  Diluted EPS is based on the weighted average number of
shares of common stock outstanding for the periods, including dilutive potential
common shares which reflect the dilutive effect of the Company's stock options.
No such dilutive effect existed in regards to the Company's earnings per share
as there were no dilutive options outstanding as of year end of either period
presented.  Retroactive application of SFAS No. 128 did not result in any change
in previously reported historical earnings per share.



                                      F-8
<PAGE>
 
Recent Accounting Pronouncements
--------------------------------

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for periods beginning
after December 15, 1997.  SFAS No. 131 will require the company to report
financial and descriptive information about its operating segments.  The Company
will adopt SFAS No. 131 in 1998.

2.  PROPERTY AND EQUIPMENT:
    -----------------------

Expenditures for property and equipment are recorded at cost.  Renewals and
improvements which extend the economic life of such assets are capitalized.
Expenditures for maintenance, repairs and other renewals are charged to expense.
Property and equipment included the following:

<TABLE>
<CAPTION>
                                        1997          1996
                                        ----          ----
<S>                                <C>           <C> 
    Land                           $    10,000   $    10,000
 
    Buildings                          257,064       257,064
 
    Leasehold Improvements             937,115       829,093
 
    Video Poker Machines             1,670,935     1,659,828
 
    Furniture and Equipment            565,996       480,600
 
    Vehicles                            84,894        60,677
                                   -----------   -----------
 
                                     3,526,004     3,297,262
    Less Accumulated Depreciation   (2,174,213)   (1,805,007)
                                   -----------   -----------
 
    Property and Equipment - Net   $ 1,351,791   $ 1,492,255
                                   ===========   ===========
</TABLE>

Depreciation is provided over the estimated useful lives of assets using an
accelerated method for financial accounting purposes.  Depreciation expense
totaled $369,206 and $445,841 for 1997 and 1996, respectively.

Video poker machines are pledged to secure certain notes payable and a letter of
credit.  (See Notes 5 and 7).

3.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
    -----------------------------------------

Accounts Payable and Accrued Liabilities as of December 31, 1997 and 1996
included the following:

<TABLE>
<CAPTION>
                                       1997        1996
                                       ----        ----
<S>                                <C>         <C> 
    Trade accounts payable         $  646,760  $  443,138
    Accrued payroll                   174,967     120,523
    Accrued interest payable           85,832      19,509
    State franchise fees payable      207,210     211,744
    Gaming allocations payable        209,844     210,435
    Other                               9,090        -
                                   ----------  ----------
 
                                   $1,333,703  $1,005,349
                                   ==========  ==========
</TABLE>

4.  INCOME TAXES:
    -------------
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.  The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.  The
Company files a consolidated U. S. Federal tax return.


                                      F-9
<PAGE>
 
The components of the provision for income taxes as shown on the accompanying
consolidated statement of operations, are as follows:

<TABLE> 
<CAPTION> 
                            1997       1996
                            ----       ----
<S>                       <C>        <C> 
    Current  -  Federal   $ 48,647   $116,635
             -  State       59,053     89,509
    Deferred               110,500    172,135
                          --------   --------
 
                          $218,200   $378,279
                          ========   ========
</TABLE>

Components of the net deferred tax asset are as follows:

<TABLE>
<CAPTION>
                                          1997          1996
                                          ----          ----
<S>                                    <C>           <C>
    Deferred tax assets:
    Net operating loss carryforwards   $1,172,879    $1,283,379
    Vacation accrual                       29,325        14,103
    Other, net                              4,499        20,410
                                       ----------    ----------
 
    Total deferred tax assets           1,206,703     1,317,892
    Less - valuation allowance           (758,725)     (759,414)
                                       ----------    ----------
 
    Net deferred tax assets            $  447,978    $  558,478
                                       ==========    ==========
</TABLE>

At December 31, 1997, the Company had a net operating loss carryforward
available for Federal income tax purposes of approximately $3,316,000.  Because
of tax rules relating to changes in corporate ownership, the utilization by the
Company of these benefit carryforwards in reducing its tax liability is
restricted to a cumulative annual utilization of approximately $330,000.  The
amounts of operating loss carryforwards expire in varying amounts each year
beginning in 1996 through 2008.  Due to the uncertainty of realization and the
annual restriction discussed above, a deferred tax asset valuation allowance has
been provided.  Effective January 1, 1996, the Company reduced the valuation
allowance by approximately $720,000 which eliminated all of the unamortized
goodwill associated with the Western merger at that date.

The following is a reconciliation of the U. S. statutory tax rate to the
Company's effective rate for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                               1997   1996
                               ----   ----
<S>                           <C>     <C>
    Statutory rate             34.0%  34.0%
    Goodwill amortization      72.7    8.2
    State income taxes         49.3   13.0
    Other                     (15.1)  (0.4)
                              -----   ----
 
    Company's effective rate  140.9%  54.8%
                              =====   ====
</TABLE>

The availability of the Company's NOL carryforward to offset future income taxes
is currently being challenged by the Internal Revenue Service.  In the opinion
of management, based on the advice of legal counsel, the Company expects its
position to be upheld upon appeal.



                                      F-10
<PAGE>
 
5.  NOTES PAYABLE:
    --------------

<TABLE>
<CAPTION>
                                                         1997          1996
                                                         ----          ----
<S>                                                  <C>           <C> 
NOTES PAYABLE TO A BANK, interest at 8.5%, 
  secured by a collateral mortgage
  note in the amount of $1,450,000 
  and guaranteed by certain stockholders             $   828,625   $ 1,023,217
 
NOTES PAYABLE TO CERTAIN STOCKHOLDERS, 
  unsecured, interest at 9%, payable in 
  36 equal monthly installments, issued 
  in exchange for 100% of stock of Ozdon 
  Investments, Inc.                                      334,558       669,492
 
NOTE PAYABLE TO A STOCKHOLDER, interest 
  at 9%, payable in monthly installments 
  of $50,000.  Loan collateralized by 
  security interest in 100 % of the
  stock of GalaxSea and IT Cruise.                     1,116,854     1,199,219
 
NOTES PAYABLE TO CERTAIN STOCKHOLDERS, 
  interest of 9%, payable in equal monthly 
  installments until maturity on June 1, 2003, 
  collateralized by a subordinated debenture.            896,346       913,274
 
NOTE PAYABLE TO A BANK, interest of prime plus 
  2% (10.75% at December 31, 1996), payable in 
  monthly installments of  $20,833 of principal 
  plus interest.  The note is guaranteed by a 
  stockholder of the Company                                -           68,878
 
 
OTHER                                                    116,823       167,979
                                                     -----------   -----------
 
                                                       3,293,206     4,042,059
 
  Less:  Current Portion                              (1,341,130)   (1,385,597)
                                                     -----------   -----------
 
  Long-Term Portion                                  $ 1,952,076   $ 2,656,462
                                                     ===========   ===========
</TABLE>

The amounts due in subsequent years are as follows:

<TABLE>
<S>                                     <C>
              1998                      $1,340,754
              1999                       1,015,022
              2000                         425,547
              2001                         320,906
              2002                         190,977
                                        ----------
 
              Total                     $3,293,206
                                        ==========
</TABLE>

Debt Restructuring
------------------

As of March 1, 1998, the Company was in arrears in payments to International
Tours, Inc. (International), a related party, 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 $1,116,854 at December 31, 1997 and March 1, 1998, and is secured by
a pledge of the outstanding capital stock of I.T. Cruise and GalaxSea owned by
the Company.  The Company is current in payment of all other indebtedness and
payables except as discussed below.

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 amounts 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, has granted relief to the
Company to allow it to pay the lesser of $50,000 per month or



                                      F-11
<PAGE>
 
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 no longer in
arrears, 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
at December 31, 1997 and March 1, 1998.  These notes require aggregate payments
of principal and interest of $11,250 per month, and are expressly made
subordinate to the International note as well as other senior debt of the
Company.

As of December 31, 1997, the carrying value of the Company's long-term debt
approximated fair value.

6.  RELATED PARTY TRANSACTIONS:
    ---------------------------

During 1996, the Company acquired GalaxSea and IT Cruise from International
Tours, Inc. (International).  The principal owner of IT Cruise was a minority
shareholder of the Company at the time of the acquisitions.  The additional
common and preferred Class B shares issued as part of the consideration for this
transaction gave International ownership in 44% of the total common and
Preferred Class B shares of the Company.  Since October 27, 1996, the Company
has subleased space in its corporate office to International receiving rents of
$19,100 and $3,200 in 1997 and 1996, respectively.  Several employees of
International also perform duties for GalaxSea and IT Cruise.  The Company has
an agreement under which it reimburses International for services provided by
its employees.  Payments under this agreement were $111,000 and $105,000 in 1997
and 1996, respectively.  In 1997, the Company performed certain accounting
services for International and received $13,000.  In 1997 and 1996, 4 and 37
franchise locations of International were converted to franchises of GalaxSea,
respectively.  In conjunction with the GalaxSea and IT Cruise acquisitions, as
well as the retirement of preferred stock, NAGE incurred notes payable to
certain shareholders in 1996, as detailed in Note 5.  At December 31, 1996, the
Company held a note receivable from International totaling $117,911.

During 1997 and 1996 the Company paid a significant shareholder consulting fees
totaling $68,750 and $37,000.

During 1996, the Company acquired the rights to operate the Diamond Jubilee from
New Orleans Video Poker, Inc. (NOVP) a corporation owned 79.6% by shareholders
of the Company (see Note 9).

7.  CONCENTRATIONS, COMMITMENTS AND CONTINGENCIES:
    ----------------------------------------------

The Company's gaming operations are located in south central and southwest
Louisiana.  Substantially all of the Company's customers reside in eastern Texas
or southern Louisiana.  A change in general economic conditions or the extent
and nature of regulations enabling gaming in Louisiana or Texas could adversely
effect future operating results of the Company.

The Company's operations in Louisiana depend on the continued licensability and
qualification of the Company and its subsidiary under the laws enacted in the
state of Louisiana.  Such licensing and qualifications are reviewed periodically
by the gaming authorities in Louisiana.

License Renewal Process
-----------------------

The Louisiana Gaming Control Board has undertaken a review of all licensees
operating video poker casinos.  The Company has had preliminary meetings with
the State Police, which is conducting the initial review for the Board,
concerning the ownership structure of the Company's video poker operations (see
Note 1) and whether such structure satisfies the Louisiana residency
requirements necessary to operate video poker casinos.  The Company believes its
structure is satisfactory, but there can be no assurance that the State Police
and the Gaming Control Board will concur.  If the Company's ownership structure
is not found to satisfy the residency requirements, the Company may be required
to restructure its operating agreements or may have its license revoked,
although the Company does not believe the Board will take the latter action.  If
the Company were required to restructure its operating agreements, this
restructuring, depending on its nature, could have a material adverse effect on
the Company.  A revocation of the Company's license would have a material
adverse effect on the Company's business operations and financial condition.



                                      F-12
<PAGE>
 
King's Lucky Lady
-----------------

As discussed in Note 9, the initial term of the lease for King's Lucky Lady
expired on April 30, 1997.  As of March 12, 1998, the parties have been unable
to negotiate a percentage rental acceptable to both parties for the lease to be
renewed.  The Company has been notified by the lessor of his intention to
terminate the lease.  On March 3, 1998, the 27th Judicial District Court in St.
Landry Parish, Louisiana issued a partial final judgment which deemed the lease
invalid effective April 30, 1997, and required the Company to vacate the
property.  The Company has appealed this judgment.  The outcome of the
suspensive appeal, which was filed with the Third Circuit Court of Appeals, is
uncertain at this time.  Since April 30, 1997 the Company has been depositing
50% of net cash from operations from the King's property into an escrow account.
As conditions to filing the appeal, the Company provided a $250,000 letter of
credit in lieu of a suspensive appeal bond, and effective March 3, 1998 is
required to deposit 100% of all net operating cash flows in the escrow account.
The Company has not included the escrowed cash, which totaled $140,000 at
December 31, 1997, in its balance sheet and has recorded an expense for this
amount.  King's Lucky Lady accounted for $2,317,000 of the Company's gaming
revenues for 1997.

Lucky Longhorn
--------------

The Company has the exclusive right to place and operate video poker devices in
the Lucky Longhorn for a period of 10 years, commencing August 2, 1992 (see Note
9).  The Company and Longhorn split equally the net revenues generated from
operation of the video poker devices; net revenues being defined as all money
played in the devices less winnings paid out and the 22.5% (32.5% after July 1,
1994) net device revenues tax payable to the state.  The Company has interpreted
the Act of Contract and Agreement to provide that the full 32.5% net device
revenue tax is deducted for purposes of determining net revenues, but Longhorn
has questioned whether only the former rate of 22.5% should be used for these
purposes.  The reduction in Longhorn's net revenue distributions for 1997 (a
full year), 1996 (a full year), 1995 (a full year) and 1994 (six months only)
utilizing the full 32.5% tax, rather than the 22.5% tax, was $351,227, $180,420,
$209,190 and $116,162, respectively.  The Company believes its interpretation is
correct and has filed a petition in Louisiana state court seeking a concurring
opinion by the court.

Louisiana Regulations
---------------------

According to the regulations established by the State Police of Louisiana (the
Division) for video draw poker machines, the licensed facility's primary
business annual gross revenue shall exceed the facility's video gaming annual
gross revenue.  For the period ended December 31, 1997 and 1996, the Company was
in violation of this regulation.  This regulation was not being enforced in 1997
and 1996.  Currently, gaming laws in effect do not contain a provision similar
to this regulation, and the Division has informally indicated that it does not
plan to enforce any of its regulations that are not based on express statutory
provisions.  Management presently anticipates that the Division will continue to
choose not to enforce this regulation.

Effective July 1, 1994, the Louisiana legislature adopted additional standards
to be satisfied for a truck stop facility for placement of video poker devices.
These standards include increasing the required parking area for 18-wheel
vehicles; requiring a 24-hour on-site restaurant facility; requiring on-site
repair facilities; and requiring that certain other amenities be available for
truck drivers.  Operators had until January 1, 1996 to bring their truck stops
into compliance with these new standards.  As of December 31, 1997, all five
truck stops at which the Company operates truck stop casinos satisfied these
additional criteria.

The franchise payment payable to the State of Louisiana in 1996 and 1997 was
32.5% of net gaming device revenue for truck stop casinos and 26% of net gaming
device revenue for devices placed in bars and restaurants.

The Louisiana legislature also adopted minimum fuel sales requirements for
qualified truck stops effective July 1, 1994, except that existing licensed
facilities would have until January 1, 1996 to satisfy such requirements.  The
fuel sales requirements and their relationship to the number of video poker
devices that may be operated at the truck stop are based on average monthly
sales.  As of December 31, 1997, four of the five Company facilities met the
monthly fuel sales requirements.  However, fuel sales at the Diamond Jubilee
location did not meet the minimum for a casino with forty video poker machines,
and the property may face additional loss of machines.  This property accounted
for $2,398,000 of the Company's gaming revenues for 1997.



                                      F-13
<PAGE>
 
In the opinion of management, there are no other contingent claims or litigation
against the Company which would materially affect its financial position.

8.  STOCKHOLDERS' EQUITY:
    ---------------------

The Class A preferred stock has a par value of $3 per share and bears a 10%
annual cumulative dividend on par value, payable monthly to record holders on
the last day of each month.  No dividends have been paid since the issuance of
the preferred stock in October 1994.  During 1996, in conjunction with the
retirement of 313,000 shares of Class A preferred stock at the time of the
acquisition of GalaxSea and IT Cruise, the Class A preferred shareholders agreed
to allow the Company to discontinue accruing dividends on preferred stock for a
two-year period.  (See further discussion at Note 10.)  Dividends of $480,000
were accrued during 1996 and total accrued dividends payable are $780,000 at
December 31, 1997 and 1996, respectively.

Each Class A share of preferred stock is convertible, at the option of the
holder thereof at any time, into one share of common stock.  Holders of
preferred stock are entitled to one vote for each share thereof held, and
holders of shares of common stock are entitled to one vote for each share
thereof held.  The holders of shares of common stock and preferred stock will
vote together and not as separate classes.

The Class A preferred stock may be redeemed at any time by the Company upon 30
days advance written notice to the record holders thereof on the Company's
books, upon payment to the holders thereof of cash in an amount per share equal
to the par value of such preferred stock, together with any accumulated
dividends thereon.  Any record holder of preferred stock may convert such
preferred stock into common stock prior to such date of redemption by delivering
written notice to the Company of such holder's election to convert all or a
portion of such shares.  In the event of any liquidation, dissolution or winding
up of the Company, the holder of each share of preferred stock then outstanding
will be entitled to be paid an amount equal to the par value of such share of
preferred stock, together with any accumulated dividends thereon, before any
payment or distribution on common stock.

The Company may not without the vote or written consent by the holders of at
least a majority of the outstanding class "A" preferred stock, voting as a
separate class, amend the certificate so as to alter or change the powers,
preferences or special rights of the preferred stock so as to adversely affect
the holders of preferred stock.  However, the designation by the Board of one or
more series of existing authorized preferred stock with dividend, liquidation,
voting or conversion rights having priority over or having greater or more
beneficial rights per share than the preferred stock is not considered an
amendment to the certificate for which the holders of preferred stock are
entitled to vote as a class.

The Company's Certificate of Incorporation restricts ownership of the common and
preferred stock of the Company in order to comply with applicable gaming
statutes.  Persons who are not suitable to be stockholders of the Company under
such statutes may not own common or preferred stock of the Company.  Further,
any stockholder may be required, at such stockholder's expense, to make filings
with applicable gaming authorities to determine suitability, and if found not
suitable will be required to dispose of such stockholder's stock and will not be
entitled to vote or receive distributions pending such disposal.

The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options.  FASB Statement No. 123 AAccounting for Stock-Based
Compensation: ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted,
changes the methods for recognition of cost on similar to those of the Company.
Adoption of SFAS 123 is optional; however, pro forma disclosures as if the
Company adopted the cost recognition requirements under SFAS 123 in 1996 are
presented below.

On November 2, 1994, the Company granted its chief operating officer options to
purchase 210,000 shares of common stock for $.80 per share.  One-third of the
shares vested immediately, with the remaining two-thirds vesting as follows:
one-third as of November 1, 1995 and one-third as of November 1, 1996.  Options
granted expire no later than the fifth anniversary of the date of grant.



                                      F-14
<PAGE>
 
On January 17, 1996 the Company granted its chief operating officer and one of
its directors options to purchase 500,000 shares each of common stock for
$.30/share.  The shares were fully vested as of the date of the grant and expire
five years from the date of the grant.

No options to purchase the Company's stock were issued during 1997.

A summary of the company's stock options as of December 31, 1997 and 1996 and
changes during the year ended on those dates follows:

<TABLE>
<CAPTION>
                                              1997                      1996
                                    ------------------------  ------------------------
                                            Weighted Average          Weighted Average
                                    Shares   Exercise Price   Shares   Exercise Price
                                    ------  ----------------  ------  ----------------
<S>                                 <C>     <C>               <C>     <C>
Outstanding at beginning of year    710,000       $.45        210,000       $.80
 Granted                               -            -         500,000        .30
 Exercised                             -            -            -            -
 Cancelled                             -            -            -            -
                                    -------       ----        -------       ----
Outstanding at end of year          710,000       $.45        710,000       $.45
                                    -------       ----        -------       ----
 
Exercisable at end of year          710,000                   710,000
                                    =======                   =======
</TABLE>

The fair value of the 1996 options at the grant date, using the Black-Scholes
Valuation Model, was approximately $125,000, using the following assumptions:
(i) no common stock dividends, (ii) expected volatility of 344%, and (iii) risk-
free interest rate of 6.10%.

Had compensation cost for the company's 1996 options been determined consistent
with SFAS 123, the Company's net income, net income applicable to common
stockholders' and net income per common share for 1996 would approximate the pro
forma amounts below:

<TABLE>
<CAPTION>
                                        As Reported  Pro Forma
                                        -----------  ---------
<S>                                     <C>          <C>
Net income                                $312,355    $321,114
Net income applicable to common stock     $112,355    $ 31,114

Net income per common share                 $.01        $.00
</TABLE>

There was no similar pro forma effect for 1997 as the Company issued no options
during the year.

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts.  SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.

9.  GAMING CONTRACTS:
    ---------------- 

The Company has five gaming establishments as well as video poker route
operations in Louisiana as of December 31, 1997.  The Company operated two
additional gaming establishments during the year ended December 31, 1996 whose
operations were discontinued by the Company during 1996.  The Company's gaming
contracts assign various percentages of gaming revenues of these establishments.
When the Company enters into a contract with an establishment, it acquires the
right to place gaming devices in its truck stop facilities or bars.  These
agreements provide the establishments and route operators a percentage of the
net gaming income.  In addition, the Company has a revenue sharing agreement on
a single location (Gold Rush) which operates similar to the other gaming
contracts, but the Company owns the truck stop facility.  Below is a listing of
the gaming contracts the Company has at December 31, 1997, and a definition of
terms used.



                                      F-15
<PAGE>
 
NET GAMING INCOME - Video poker revenue less franchise fees and device fees.

ROUTE OPERATORS - Individuals who count, report, and deposit the gaming income.

Route Operations
----------------

The Company has contracts with several bars and restaurants.  These contracts
provide the establishment's owners with 50% of the net gaming income, and the
route operator with 25% of the net gaming income.  These contracts were signed
from June 1992 through December 1992, and are for a period of five years each,
and will not be renewed.

King's Lucky Lady
-----------------

In April 1992, the Company signed an agreement for the lease of the King's Truck
Stop in Port Barre, Louisiana.  Total rent expense in 1997 and 1996 for this
lease was $318,901 and $316,351, respectively.  This lease is for a term of five
years beginning on May 1, 1992, with monthly rental payments of 20% of the net
revenue from the video poker machines.  The Company has an option to renew the
lease for three additional five-year terms, subject to the parties negotiating a
percentage rental for the renewal period acceptable to both parties.  Minimum
future rentals cannot be estimated since future revenues are not known.

See discussion at Note 7 of the Company's possible loss of the right to operate
the video poker casino at King's Lucky Lady effective April 30, 1997.

The Longhorn Club
-----------------

During 1993, the Company purchased the right to operate the gaming devices of
this establishment.  Revenue interest rights in the accompanying balance sheets
are related to this purchase.  (See Note 1.)  The Company is bound by the terms
of an agreement signed on June 2, 1992, which is for a period of ten years and
provides for the establishment's owners to receive 50% of the net gaming income
(see Note 7).

Stelly's
--------

The establishment's owners signed an agreement with a related party of the
Company and another individual (the grantees) with the following terms.

<TABLE>
<CAPTION>
                                      Grantee's % of
                Establishment's % of    Net Gaming
    Income       Net Gaming Income        Income
    ------      --------------------  --------------
<S>              <C>  <C>
    Years 1 - 2         30%                 70%
    Years 3 - 5         40%                 60%
    Thereafter          50%                 50%
</TABLE>

The grantees are responsible for all start up and renovation costs, and repair
and maintenance costs on the machines.  The contract was effective in December
1993, and is for a period of five years, with three options to renew the
agreement for an additional five years each.

The grantees assigned their rights and obligations to the Company in return for
10% interest in the net gaming revenue.  The grantees also have a 10% interest
in the net profit of the premise's operations.

As discussed in Note 7, Stelly's was temporarily closed on January 1, 1996,
reopened in November, 1996, and was permanently closed in May, 1997.

Video gaming devices were removed from Stelly's during 1997 due to failure of
the property to generate insufficient sales volumes to meet state requirements.



                                      F-16
<PAGE>
 
Pelican Palace
--------------

The Company lent approximately $1,450,000 to Curray Corporation during 1994 for
the construction of a truck stop in Vinton, Louisiana.  Curray Corporation
started construction in 1993 and the Company began operating 50 video poker
machines during 1994.  Under the agreement with Curray, 70% of the net profit of
the premise's operations are dedicated to repayment of the loan from the Company
with the remainder split 50%/50% to each party.  After the note was paid in
full, the revenues were split 50%/50%.  The agreement has an initial term of
five years with three options to renew for an additional five years each.  The
note was paid in full during 1996.

Gold Rush
---------

The Gold Rush is located in Opelousas, Louisiana, at the intersection of
Interstate Highway 49 and U.S. Highway 167, approximately 20 miles from
Lafayette, Louisiana.  The Company owns this truck stop facility in addition to
operating the gaming devices.

In December 1992, Ozdon Investments, Inc. (Ozdon) entered into a loan agreement
that required, upon repayment of the loan, the creditor be paid a percentage
(10%) of net gaming income as long as Ozdon continues to operate the gaming
establishment in St. Landry Parish, Louisiana.  In addition, in the event that
Ozdon is sold to an unrelated party, the agreement provides for the creditor to
receive 10% of the proceeds from the sale in excess of $265,000.  Because the
stated interest rate on the loan (6%) was substantially lower than Ozdon's
effective borrowing rate at the time of the loan, the note was recorded at a
discount at Ozdon's effective rate of interest. The difference between the face
value of the note and the discounted value was recorded as a capital
contribution to Ozdon to reflect the purchase of the revenue and liquidation
rights of the creditor. Ozdon repaid the loan in October 1993, and the resulting
distributions of net gaming income under this contract are included in video
poker cost of revenues. Because the Company and Ozdon were related parties at
the time of the sale, the agreement remains in effect after the acquisition of
Ozdon by the Company.

Diamond Jubilee
---------------

The Company issued 450,000 shares of the Company's common stock to New Orleans
Video Poker, Inc. (NOVP) on July 1, 1996 in exchange for the right to operate
the gaming devices of this establishment.  The common stock issued in
conjunction with the acquisition was recorded as the amount of net assets
acquired of $81,459 which were recorded of the historical basis of NOVP because
the Company and NOVP were related parties at the time of the acquisition.  The
Company subleases the facility from NOVP.  The sublease agreement requires that
the Company pay NOVP an amount equal to 50% of the net operating cash flow from
the truck stop and casino after deductions for (i) all cash costs and expenses
paid by the Company and (ii) interest and principal on any indebtedness of the
Company on any furniture, fixtures, and equipment placed in the video poker
casino, bar, or parking lot.

  River Port
 -----------

The Company is currently in the process of procuring financing and designing a
new video gaming facility located in Port Allen, Louisiana.  The facility, which
operates as a wholly-owned subsidiary of North American Gaming currently
consists of a convenience store and truck stop.  The Company has yet to
determine whether cash flows will be sufficient to complete construction of the
video gaming portion of the property as of March 12, 1998.  Additionally, the
agreement with the lessor of the subject property requires completion of a video
poker facility by September 30, 1998.  As of March 12, 1998, the Company's
investment in River Port was approximately $200,000.

10.  ACQUISITIONS:
     -------------

On June 10, 1996 the Company acquired 100% of the issued and outstanding capital
stock of GalaxSea and 100% of the issued and outstanding capital stock of IT
Cruise from International.  Both corporations were wholly-owned subsidiaries of
International.



                                      F-17
<PAGE>
 
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 series "B" preferred stock to
International.  The 8,000,000 shares of series "B" preferred stock are entitled
to one vote for each share issued and will vote together with the common stock
as one class, and not as a separate class.  Simultaneous to the closing of the
merger, 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 the 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 two years of the
closing date.  In the event of any such forced conversion, International was
granted anti-dilution protection and will, upon the issuance of such shares of
common stock to the former holders of Class A preferred stock, be entitled to an
additional 5,452,854 shares of common stock without further consideration, in
order to maintain its percentage ownership of voting stock at 44%.  The common
and preferred stock issued in conjunction with the acquisition were recorded at
$.01 per share which approximated fair value of the stock, as of the date of
acquisition.  The $780,000 of dividends on the Class A preferred stock
accumulated and accrued through May 31, 1996 exists as accrued dividends
payable.  IT 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 IT Cruise.

GalaxSea is an Oklahoma corporation that was formed in September 1995.
Effective October 1, 1995, GalaxSea acquired substantially all of the operating
assets of GalaxSea Associates, Inc. ("GAI"), a Florida corporation.  GAI had
been in the business of franchising "cruise only" retail travel stores since
1988.  The principal business of GalaxSea will continue to be the granting of
franchises for the operation of travel vacation stores that specialize in the
marketing and selling of cruise travel, tours and related travel arrangements
according to the concept and business system developed by GalaxSea and GAI.

IT Cruise is an Oklahoma corporation that was formed in 1993.  IT Cruise has
served as the cruise marketing division of International since that time.  The
principal business of IT Cruise is to coordinate cruise marketing programs
between the various major cruise lines and International's network of
approximately 900 travel agency locations.

Following is a summary of the assets and liabilities of GalaxSea and IT Cruise
acquired by the Company:

<TABLE>
<S>                                           <C>
  Assets:
    Accounts Receivable                        $ 72,856
 
    Notes Receivable                            133,460
 
    Property and Equipment, net                     325
 
    Intangible assets                           257,535
                                               --------
 
                                                464,176
                                               --------
 
  Liabilities:
    Accounts payable and accrued liabilities     25,954
 
    Notes payable                               133,460
                                               --------
 
                                                159,414
                                               --------
 
    Net assets acquired                        $304,762
                                               ========
</TABLE>

The intangible assets in the above acquisitions comprise primarily of trade
name, software development, and organization costs, and will be amortized by the
Company over 5 years.  The Company recognized $1,323,766 in Goodwill from this
transaction, which is also being amortized over 5 years.



                                      F-18