================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

                                   ----------


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

                     For the Fiscal Year ended June 30, 1997

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE SECURITIES EXCHANGE ACT of 1934 [NO FEE REQUIRED]

                                   ----------


                         Commission file number 33-75806

                          CAPITOL QUEEN & CASINO, INC.

                                   ----------


                               MISSOURI 43-1652885
                (State or other jurisdiction of (I.R.S. employer
               incorporation or organization) identification no.)

                           740 South Decatur Boulevard
                             Las Vegas, Nevada 89107
                    (Address of Principal Executive Offices)
                  Registrant's telephone number: (702) 258-5200

                                   ----------

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

           Securities registered pursuant to Section 12(g) of the Act:
            12% First Mortgage Notes due November 15, 2000, Series B
                                (Title of class)

     Indicate by check mark whether the Registrant (1) has filed all reports
          required to be filed by Section 13 or 15(d) of the Securities
        Exchange Act of 1934 during the preceding 12 months (or for such
             shorter period that the Registrant was required to file
             such reports), and (2) has been subject to such filing
                       requirements for the past 90 days.

                                Yes X No _______

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

       The aggregate market value of the Registrant's voting stock held by
       non-affiliates of the Registrant at September 15, 1997 was $0. The
        number of shares of the Registrant's Common Stock outstanding as
                         of September 15, 1997 was 100.

                       DOCUMENTS INCORPORATED BY REFERENCE
             Specified exhibits listed in Part IV of this report are
                            incorporated by reference
         to the Registrant's Statement on Form S-4 (33-75806) previously
                                     filed.
================================================================================


      The  Private  Securities  Litigation  Reform Act of 1995  provides a "safe
harbor" for forward-looking  statements.  Certain  information  included in this
Form  10-K and  other  materials  filed or to be filed by the  Company  with the
Securities  and Exchange  Commission  (as well as  information  included in oral
statements  or  other  written  statements  made or to be  made by the  Company)
contains  statements that are  forward-looking,  such as statements  relating to
plans for future expansion and other business development  activities as well as
other  capital  spending,  financing  sources  and  the  effects  of  regulation
(including  gaming and tax regulation) and  competition.  Such forward-  looking
information  involves important risks and uncertainties that could significantly
affect  anticipated  results in the future and,  accordingly,  such  results may
differ from those  expressed  in any  forward-looking  statements  made by or on
behalf of the  Company.  These  risks  and  uncertainties  include,  but are not
limited  to,  those  relating  to  development  and   construction   activities,
dependence  on existing  management,  debt  service  (including  sensitivity  to
fluctuations  in  interest  rates),  domestic  economic  conditions,  changes in
federal  or state tax laws or the  administration  of such laws and  changes  in
gaming laws or  regulations  (including  the  legalization  of gaming in certain
jurisdictions).


Item 1.    Business

      Capitol  Queen & Casino,  Inc.  ("CQC" or the  "Company"),  a wholly owned
subsidiary of Becker Gaming, Inc. ("BGI"), was formed to develop, construct, own
and operate the Capitol  Queen  riverboat  casino in Jefferson  City,  Missouri,
where it was granted a three-year  exclusive franchise by the city pursuant to a
Riverfront Development Agreement dated as of September 1, 1992 (the "Development
Agreement"),  subject  to state  licensing  to  operate a gaming  facility.  CQC
commenced  development  and  construction  work on the Capitol Queen in November
1993.  Such work was  suspended  in August and  September  1994 for the  reasons
discussed below.  CQC's riverboat,  the construction of which was completed,  is
being  stored by the  builder.  Funding for the Capitol  Queen  project had been
raised in November  1993  through  the sale of the CQC Notes and the  concurrent
sale of common stock purchase warrants by the Company, which contributed the net
proceeds therefrom to CQC.

      On September 28, 1994, the Missouri Gaming  Commission (the  "Commission")
denied, without investigative review, CQC's application for a gaming license and
prohibited  CQC from  reapplying for a license for two years.  The  Commission's
ruling  was  based on a  finding  that  CQC  failed  to  disclose  material  and
substantive information on its gaming license application relating to a Purchase
Agreement  dated  September  20,  1993,  pursuant  to which BGI  agreed to issue
promissory notes aggregating $5,925,000 in principal amount to various people in
Missouri  in  consideration  for  development   services  provided  by  them  in
connection with the Capitol Queen project.  The Purchase Agreement was rescinded
by the parties in early 1995.

      CQC believes its Missouri application was complete and accurate. Moreover,
CQC fully disclosed the existence and terms of the Purchase  Agreement,  as well
as the services rendered by the persons to be compensated,  in  post-application
filings and communications with the Missouri Gaming Commission's staff. CQC also
disclosed these matters to the Nevada gaming  authorities,  who investigated and
conducted public hearings on these and other issues relating to applications for
licenses and approvals,  all of which were unanimously granted to the Company in
May 1994. The Nevada gaming  authorities  most recently  reexamined the issue in
connection  with Becker  Gaming  Group and  Innerout,  Inc.'s  applications  for
licenses at Charlie's Bar Down Under,  which were  unanimously  granted in March
1995.  In  addition,  in  anticipation  of  the  pursuit  of a  possible  gaming
development,  the executive  officers of the Company  applied to the Mississippi
Gaming Commission for preliminary  findings of suitability and were subsequently
found  suitable by the Commission to engage in such  activities in  Mississippi.
CQC's then audited  financial  statements  and public  documents  filed with the
Securities and Exchange Commission,  all of which were submitted to the Missouri
Gaming Commission, also made these disclosures.  Management believes that, based
on the  foregoing,  the  Commission's  ruling  was and  remains  without  basis.
Accordingly,  CQC  challenged  the ruling  through  administrative  and judicial
channels,  which challenges have been largely  successful.  See "Item 3. - Legal
Proceedings".

       Notwithstanding  its efforts to seek redress of the Commission's  ruling,
in  December  1994,  CQC,  with the  approval  of the  holders of the CQC Notes,
adopted a two-step  plan (the  "Repayment  Plan") to repay the CQC Notes and any
accrued and unpaid interest thereon.  The first step,  effected in January 1995,
involved the repurchase of $20,000,000 principal amount of the CQC Notes and the
payment of accrued and unpaid  interest  thereon with proceeds then remaining in
the Capitol Queen project escrow account. The second step of the Repayment Plan,
not yet effected,  required CQC, by March 31, 1995, to sell its riverboat,  land
site and other project assets and to use the net proceeds realized upon the sale
of such assets to offer to repurchase additional CQC Notes.

     CQC has  actively  marketed  its  riverboat  and other  assets for sale and
continues to do so,  although such efforts have to date been  unsuccessful  in a
market  that  is  deemed  to be  quite  limited  for  vessels  of the  size  and
configuration  of that of the  Capitol  Queen.  The failure of CQC to effect the
second  step of the  Repayment  Plan  has  resulted  in the  Trustee  under  the
Indenture  issuing  a notice  of  acceleration  of the  debt  and a  demand  for
immediate payment of the debt and accrued interest. Under the CQC Indenture, the
holders  of 25% or more in  principal  amount of the CQC Notes may cause the CQC
Notes to be accelerated  and declared to become  immediately  due and payable in
full. An aggregate of $20,000,000 principal amount of CQC Notes are outstanding.

      On November  7, 1995,  voters in  Jefferson  City  rejected  an  ordinance
permitting  riverboat  gambling,  reversing  the vote of an earlier  election in
which  Jefferson  City  voters  approved  riverboat   gambling.   Because  CQC's
Development  Agreement  with  Jefferson  City was entered  into  pursuant to the
earlier ordinance permitting riverboat gambling,  the Company believes that as a
matter of law the 1995  election did not affect the validity of the  Development
Agreement.  To avoid the cost and  uncertainty of litigation,  however,  CQC and
Jefferson  City in June 1996  entered  into an  agreement  pursuant to which the
Development  Agreement was rescinded and Jefferson City refunded $300,000 of the
$400,000 CQC had paid to the City pursuant to the Agreement.

Claims by Trustee

      Arizona Charlie's, Inc ("AC") currently has outstanding $55,000,000 of 12%
First Mortgages Notes due 2000.  Sunset Coin, Inc.,  ("SC") has issued a limited
guaranty with respect to the AC Notes (the "SC Limited Guaranty"). CQC currently
has outstanding  $20,000,000 of 12% First Mortgage Notes due 2000. AC has issued
a limited  guaranty  with respect to the CQC Notes (the "AC Limited  Guaranty").
The  amount and extent of AC's  guaranty  of the CQC Notes is in dispute  due to
certain  provisions of the Indenture  under which the CQC Notes were issued,  as
well as certain provisions of State and/or Federal Law that may be applicable in
or with respect to financial  restructuring.  It is AC's position that, based on
advice  from legal  counsel,  its  limited  guaranty  does not create a material
liability on its part for the payment of the obligations under the CQC Notes.

      IBJ Schroder Bank & Trust Company,  as Trustee under the Indentures  under
which such Notes are outstanding, has declared the AC Notes and the CQC Notes to
be in default and has declared all such Notes to be immediately due and payable.
The Trustee has also notified AC that the purported  obligations of AC under its
guaranty have been accelerated and has declared the obligations of AC thereunder
to be due.  Management of AC and CQC and the holders of the Notes are discussing
possible  financial  restructuring  of the AC and CQC  obligations,  but no such
restructuring has yet been agreed to. The Trustee has taken no further action to
enforce the Notes or the  purported  guaranties  thereof or to  foreclose on any
assets of AC or CQC. No assurance can be given,  however,  that the Trustee will
not do so.


Item 2.    Properties

      CQC owns a site located  across the Missouri  River from the State capitol
in Jefferson City, Missouri,  on which CQC had intended to construct the Capitol
Queen Square.  The site,  which was originally 80 acres,  currently  consists of
approximately  65 to 75 acres as a result  of land  lost to the  Missouri  River
during  major  flooding  in the  Midwest  in 1993 and  1994.  CQC has  completed
construction of a riverboat  casino that was to be located  adjacent to the land
site.  The  riverboat  vessel  is  approximately  218 feet long and 62 feet wide
providing  approximately  26,000  square  feet  of  interior  space  for  up  to
approximately 1,600 passengers.


Item 3.    Legal Proceedings

      The Company is a party to various  lawsuits  relating  to routine  matters
incidental  to  their  respective  businesses,  in  addition  to the  litigation
discussed  below.  Based on the amounts and issues believed to be in controversy
and management's  evaluation of the merits of the claims after consultation with
counsel, management does not believe that the outcome of such litigation, in the
aggregate,  will have a material  adverse  effect on the results of  operations,
cash  flows,  or  financial  condition  of BGI,  CQC,  or the  Nevada  Operating
Companies.


     On October 31,  1994,  CQC and BGI  petitioned  the Cole  County,  Missouri
Circuit  Court in  Jefferson  City for a writ of  mandamus  with  respect to the
ruling of the Missouri Gaming Commission (the "Commission").  In response to the
petition,  the Circuit  Court issued an order  declaring  that by denying  CQC's
application  for  a  riverboat   gaming  license  without  first  conducting  an
investigation  and by  deliberating  in a closed  session,  the  Commission  had
violated  Missouri  gaming and open  meeting  laws.  The Circuit  Court issued a
preliminary  writ of  mandamus  declaring  the  Commission's  decision  void and
ordering  the  Commission  to  immediately  commence  a full  investigation  and
thereafter to act on CQC's application. The Circuit Court ordered the Commission
to show  cause  within  30 days  why the  preliminary  writ  should  not be made
permanent.

      In response to the Circuit  Court's  order to show cause,  the  Commission
filed two actions,  both unsuccessful,  in the Missouri Court of Appeals for the
Western District.  On November 16, 1994, the Commission  petitioned the Court of
Appeals for a writ of prohibition against the Circuit Court,  contending,  among
other things,  that CQC was not entitled to judicial  relief  because it had not
exhausted  its  administrative  remedy  of an  evidentiary  hearing  before  the
Commission.  The  Court  of  Appeals  initially  issued  a  preliminary  writ of
prohibition  staying further  proceedings in the Circuit Court.  However,  in an
opinion  issued  on April 18,  1995,  the Court of  Appeals  concluded  that its
preliminary  writ of prohibition  had been  improvidently  granted,  quashed the
preliminary  writ,  and denied the  Commission's  request for a permanent  writ,
relegating the Commission to its remedies in the Circuit Court.  On December 13,
1994, the Commission  also filed an appeal of the Circuit  Court's order to show
cause.  On December  23, 1994 CQC moved to dismiss the appeal on the ground that
the  preliminary  writ of mandamus was not a final order and  therefore  was not
appealable.  On January 5, 1995,  the Court of Appeals  granted CQC's motion and
dismissed the appeal.

      On June 26, 1995, the Circuit Court issued a peremptory  (permanent)  writ
of mandamus similar to the preliminary  writ,  declaring the Commission's  order
void and  ordering the  Commission  to proceed  with an  investigation  of CQC's
application  "with all  deliberate  speed."  On July 21,  1995,  the  Commission
appealed the Circuit  Court's  decision to the Missouri Court of Appeals for the
Western District, and on April 30, 1996, a three-judge panel of that Court ruled
that  mandamus  was not the proper  vehicle  for  challenging  the  Commission's
decision.  The Court of Appeals ruled that CQC may obtain  judicial  review only
after an  administrative  proceeding.  The Court of Appeals  also ruled that the
Missouri statutes did not prohibit the Commission from denying a license without
conducting an  investigation,  and that the claim that the Commission  broke its
promise not to deny a license without first investigating  should be raised in a
breach of contract action, not a mandamus petition. The Court of Appeals did not
address the merits;  that is, it did not decide  whether  the  Commission  acted
arbitrarily  or whether its decision was  justified or a breach of its promises.
While CQC then asked the Missouri  Supreme  Court to review the Circuit  Court's
decision,  its ruling had  immediate  consequences  for two  reasons.  First,  a
Missouri  Circuit  Court in a  separate  action  (discussed  below)  voided  the
Commission's  decision for the independent  reason that it was made in violation
of Missouri's open meeting law.  Second,  after the decision in the open meeting
law case, CQC notified the Commission that it was withdrawing its application.

      On  November  1, 1994,  concurrent  with its  efforts  to obtain  judicial
relief,  CQC  (with  BGI as a  co-party)  requested  an  administrative  hearing
pursuant to the Missouri  gaming  statutes,  under which a denied  applicant may
request an evidentiary  hearing before a Commission  appointed  hearing officer.
The hearing officer's  decision is subject to review by the Commission,  and the
Commission's  decision is in turn  subject to judicial  review.  The  Commission
filed an answer on November 29, 1994 alleging,  among other things, that CQC was
not entitled to an administrative hearing because CQC had not been investigated.
On December 22, 1994 because the Commission had not appointed a hearing  officer
or otherwise responded to CQC's request for a hearing,  CQC moved the Commission
to appoint a hearing officer and establish a procedural schedule. The Commission
did not  respond to this  motion.  However,  in March  1995,  CQC's  counsel was
notified  by a member  of the  Commission's  staff  that he had  been  appointed
hearing officer in the case. Because this person appears to have participated in
the staff's  recommendation that CQC's license be denied, CQC moved on March 31,
1995 for the  appointment  of an impartial,  independent  hearing  officer.  The
Commission's attorney filed a response in opposition to this motion on April 12,
1995 but the Commission  failed to respond to it.  Instead,  on August 10, 1995,
the  hearing  officer  issued  an  order  proclaiming  his  ability  to  proceed
impartially  and  purporting to deny the motion.  On April 30, 1996, the hearing
officer reversed himself,  recused himself,  and asked the Commission to appoint
another hearing  officer.  The Commission  never acted on this request.  Hearing
dates were vacated by stipulation, and, after the Circuit Court's orders voiding
the  Commission's  decision  appeared  to  make  the  administrative  proceeding
premature,  the hearing was  postponed  indefinitely.  The  withdrawal  of CQC's
application rendered the administrative hearing moot.

      On March 24, 1995,  CQC filed an action against the Commission in the Cole
County,  Missouri,  Circuit  Court,  alleging that the  Commission  had violated
Missouri's  open meeting law by  deliberating in a closed session before issuing
its decision denying CQC's license.  The petition requested an order voiding the
Commission's  decision.  On March 27,  1995,  as a  protective  measure  against
possible  arguments  that  Cole  County  is not the  proper  venue,  CQC filed a
substantively  identical action in the St. Louis County Circuit Court. In April,
the Commission filed answers to both complaints denying that it had violated the
open  meeting law. On June 1, 1995,  CQC moved for summary  judgment in the Cole
County  case.  In  its  response,   the  Commission  stated  that  it  "did  not
deliberately  intend to circumvent"  the open meeting law but had deliberated in
closed session based on erroneous advice of counsel.  The Commission argued that
the closed session could  nevertheless be justified  under statutory  exceptions
allowing  agencies to meet privately with their lawyers to discuss  confidential
information  and  litigation.  The  Circuit  Court  heard the motion for summary
judgment on December 19, 1995. In an order issued on April 23, 1996, the Circuit
Court rejected the Commission's  arguments and granted CQC's motion, ruling that
the Commission had violated the open meeting law and declaring the  Commission's
order to be void. The  Commission did not appeal the decision,  and the time for
doing so has expired.  Therefore,  the decision declaring the Commission's order
to be void is final.  As a result,  notwithstanding  the other  related  actions
discussed  above,  there  no  longer  exists  any  denial  of  licenses  by  the
Commission.


      On March 23, 1995, the Missouri Attorney General filed misdemeanor charges
against CQC and Bruce Becker  alleging they knowingly  made false  statements on
CQC's gaming  license  application.  CQC and Mr.  Becker  vehemently  denied the
charges and launched a vigorous defense. On July 25, 1995, the Circuit Court for
St. Louis  County,  Missouri,  dismissed  the charges,  ruling that they did not
state an offense,  that the Attorney General lacked authority to bring them, and
that they were filed after the statute of limitations  had expired.  On July 28,
1995, the Attorney  General filed an appeal in the Missouri Court of Appeals for
the Eastern District. CQC's and Bruce Becker's motions to dismiss the appeals as
untimely filed were summarily denied on August 14, 1995. On April 16, 1996, in a
2-1  decision,  a panel of the  Missouri  Court of Appeals  reversed the Circuit
Court's dismissal.

      The Missouri  Supreme Court then  exercised  its  discretion to review the
case,  and on January 27, 1997 the Missouri  Supreme  Court issued its ruling in
favor of CQC and  Bruce  Becker,  holding  that the  prosecutions  sought by the
Attorney  General  were  barred  by  the  applicable   statute  of  limitations.
Accordingly,  the  Attorney  General,  or  any  other  Missouri  prosecutor,  is
precluded from any further pursuit of the misdemeanor charges levied against CQC
and Bruce Becker in this matter.

      By letters dated July 3, 1997 and July 17, 1997, IBJ Schroder Bank & Trust
Company,  the  trustee  on the CQC  Indenture  dated as of  November  15,  1993,
declared all of the  Securities  (as defined in the Indenture) to be immediately
due and  payable,  together  with  all  accrued  and  unpaid  interest  thereon.
Subsequent  letters from IBJ Schroder Bank & Trust Company,  dated  September 5,
1997,  provided  notices  of  defaults  by CQC  and AC  under  their  respective
Indentures  and also served  Notice of  Acceleration  on AC with  respect to its
Securities  and its Limited  Guaranty  of the CQC debt.  AC has 30 days from the
date of the Notice within which to correct such defaults cited in the notice. No
assurance  is given that AC will be able to correct  such  defaults.  CQC and AC
have retained counsel to assist them in dealing with the Bondholders and on July
16,  1997,  a  proposal  for  the  financial  restructuring  of the  CQC  and AC
indebtedness was presented to the Bondholders through the Trustee and Counsel to
one of the major  Bondholders.  The  Bondholders  have orally  responded to such
offer as of  September  10, 1997 and the company is  currently  evaluating  such
responses and the possible actions to be taken by AC and CQC as a result of that
response.  No further  action by the Trustee has been taken to  foreclose on the
assets of CQC or to collect on any claims  against any  purported  guarantees of
the CQC debt issued by AC.




Item 4.    Submission of Matters to a Vote of Security Holders



      None.


                             PART II


Item 5.     Market  for  Registrant's Common  Stock  and  Related
            Stockholder Matters

      There is no established  public  trading  market for the Company's  Common
Stock,  all of which is held by BGI.  The Company  has not  declared or paid any
cash  dividends on its Common Stock and does not  anticipate the payment of cash
dividends in the foreseeable future.


Item 6.   Selected Financial Data


     <TABLE>
================================================================================
                          Capitol Queen & Casino, Inc.
                              Years Ended June 30,
                  (amounts in thousands, except per share data)

================================================================================
<CAPTION>
                                                               1997         1996
                                                              ----         ----

<S>                                                       <C>          <C>
Income Statement Data:
     Operating revenues ..............................    $   --       $   --

     Operating loss ..................................        (413)      (4,996)
     Net loss before extraordinary item ..............      (3,807)      (7,785)
     Extraordinary item-loss early retirement
         of debt (1) .................................        --           --
     Net loss ........................................      (3,807)      (7,785)
     Net loss per share before extraordinary item ....     (38,070)     (77,850)
     Extraordinary item-loss on early
         retirement of debt ..........................        --           --
     Net loss per share (2) ..........................     (38,070)     (77,850)

Other Data:
     Interest expenses, net of amounts capitalized ...       3,395        2,789
     Capital expenditures ............................        --           --



Balances Sheet Data:
     Unrestricted cash and cash equivalents ..........    $   --       $   --

     Cash in restricted escrow account ...............          31           30
     Total assets ....................................       8,257        8,449
     Long-term obligations (3) .......................        --           --
     Stockholders' equity (deficit) (4) ..............     (17,865)     (14,058)


                                                               1995         1994
                                                              ----         ----

Income Statement Data:
     Operating revenues ..............................    $   --       $   --

     Operating loss ..................................      (1,388)      (7,094)
     Net loss before extraordinary item ..............      (5,386)      (9,530)
     Extraordinary item-loss early retirement
         of debt (1) .................................      (4,089)        --
     Net loss ........................................      (9,475)      (9,530)
     Net loss per share before extraordinary item ....     (53,860)     (95,300)
     Extraordinary item-loss on early
         retirement of debt ..........................     (40,890)        --
     Net loss per share (2) ..........................     (94,750)     (95,300)

Other Data:
     Interest expenses, net of amounts capitalized ...       4,608        3,091
     Capital expenditures ............................       1,724       11,212



Balances Sheet Data:
     Unrestricted cash and cash equivalents ..........    $     45     $     33

     Cash in restricted escrow account ...............          30       24,929
     Total assets ....................................      12,986       37,412
     Long-term obligations (3) .......................        --           --
     Stockholders' equity (deficit) (4) ..............      (6,273)       3,202

----------
<FN>
(1)   During 1995, CQC retired $20,000 principal amount of the CQC notes at 101%
      of such principal amount plus accrued and unpaid interest. CQC incurred an
      extraordinary loss of approximately $4,089, reflecting the premium paid to
      retire the debt of $200 and the  write-off  of related,  unamortized  debt
      issue costs and original issue discount in the aggregate of $3,889. No tax
      benefit was available or recognized.
(2)   The number of shares used in the  computation  of loss per share of common
      stock  was 100 for each of the four  years in the  period  ended  June 30,
      1997.  Common stock of 1,000 shares were  authorized at a $1.00 par value,
      but 100 shares were issued and outstanding.
(3)  At June 30, 1997,  1996 and 1995 and 1994,  $17,908,  $17,526,  $17,118 and
     $33,164  respectively  of CQC  notes  (net of  unamortized  original  issue
     discount of $2,092, $2,474, $2,882 and $6,836, respectively) was classified
     as current due to CQC's default of the Indenture governing the CQC Notes.
(4)   The ability of CQC to pay dividends is restricted under the CQC Indenture.
</FN>
</TABLE>


<TABLE>
================================================================================
                 Arizona Charlie's, Inc. Selected Financial Data
                              Years Ended June 30,
                  (amounts in thousands, except per share data)
================================================================================
<CAPTION>
                                                 1997         1996         1995
                                             --------     --------     --------

<S>                                          <C>          <C>         <C>
Income Statement Data:
  Operating revenues ....................    $ 58,084     $ 63,301    $ 57,082
  Operating income (loss)................        (341)       2,199       1,058
  Net income (loss) .....................      (7,145)      (4,559)     (4,936)
  Net income (loss) per share (1) .......      (7,145)      (4,559)     (4,936)

Other Data:
  Interest expense, net of amounts
   capitalized ..........................       7,275        7,095       6,574
  Capital expenditures ..................         501          190      24,253
  Distributions to stockholders (2) .....        --           --          --


Balance Sheet Data:
  Unrestricted cash and cash
   equivalents ..........................    $  5,481     $  4,591    $  5,404
  Cash in escrow account restricted
   for construction .....................          10           10          10
  Total assets ..........................      61,957       62,357      65,273
  Long-term obligations (3)
      Long-term debt (4) (5) ............       6,284        5,000      60,000
      Capitalized lease obligation ......          29           22           4
  Stockholder's equity (deficit) ........     (16,646)      (9,501)     (4,942)
</TABLE>
<TABLE>
<CAPTION>
                                                             1994          1993
                                                           -------       -------
<S>                                                        <C>          <C>
Income Statement Data:
  Operating revenues ...............................       $ 46,447     $45,880
  Operating income (loss)...........................          5,105       6,032
  Net income (loss) ................................          1,134       4,585
  Net income (loss) per share (1) ..................          1,134       4,585

Other Data:
  Interest expense, net of amounts
   capitalized .....................................          4,763       1,440
  Capital expenditures .............................         11,379       1,067
  Distributions to stockholders (2) ................          5,317       2,140



Balance Sheet Data:
  Unrestricted cash and cash equivalents ...........       $  4,014     $ 3,528
  Cash in escrow account restricted for
   construction ....................................          3,613        --
  Total assets .....................................         67,915      27,184
  Long-term obligations (3)
   Long-term debt (4) (5) ..........................         60,000        --
   Capitalized lease obligation ....................              1         778
  Stockholder's equity (deficit) ...................             (6)      5,953

----------
<FN>
(1)   The number of shares used in the  computation of earnings (loss) per share
      of common  stock was 1,000 for each of the five years in the period  ended
      June 30, 1997. A total of 2,500 shares of common stock are  authorized  at
      no par value, 1,000 shares of which are issued and outstanding.
(2)   Because AC elected to be treated as an S corporation for the most of 1994,
      and all of fiscal 1993, a substantial  portion of its income in past years
      was  distributed  to its  stockholders.  In December  1993, AC distributed
      $5,000 of previously  taxed retained  earnings to its  stockholders.  This
      amount was loaned back to AC in exchange for stockholder notes.  Effective
      January 1, 1994, AC terminated its S corporation  tax status.  The ability
      of AC to pay dividends is  restricted  by the Indenture  governing its 12%
      First  Mortgage  Notes  due  November  15,  2000  (the  "AC  Notes").  See
      "Management's  Discussion and Analysis of Financial  Condition and Results
      of Operations_Arizona Charlie's, Inc._General
(3)   Includes subordinated notes to stockholders, non-current obligations under
      capital  leases,  and  excludes  current  maturities.  At June  30,  1993,
      approximately  $16,900 of bank debt was  classified as current,  as it was
      due and payable.  See  Management's  Discussion  and Analysis of Financial
      Condition and Results of  Operations_Arizona  Charlie's,  Inc._General and
      "Notes to Financial Statements__Arizona Charlie's, Inc._ Long Term Debt."
(4)   At June 30, 1996 and June 30, 1997 $55,000 of AC Notes was  classified  as
      current due to certain defaults of the AC Indenture.  See Notes 2 and 6 of
      AC's Notes to Financial Statements.
(5)   At June 30, 1993,  approximately $16,900 of bank debt of AC was classified
      as  current  as it was due and  payable.  Such  amount was paid off from a
      portion of the proceeds from the sale of the AC Notes in November, 1993.
</FN>
</TABLE>

================================================================================



Item 7.     Management's  Discussion and  Analysis  of  Financial
      Condition and Results of Operations

       Analysis of Development Stage Activities for the period January 20,
               1993 (the date of inception) through June 30, 1996

      CQC was  organized  on January  20,  1993 for the  purpose of  developing,
constructing,  owning and operating the Capitol Queen.  Since  inception,  CQC's
activities  have been  limited  to, in  addition  to the  financing  transaction
described below, the acquisition of a land site in Jefferson City,  Missouri and
the rights to develop the Capitol Queen thereon, the preparation and prosecution
of  applications  to become  licensed to own and  operate  the Capitol  Queen in
Missouri and for all other required  permits and approvals,  the  preparation of
preliminary design plans, drawings and budgets for the project,  construction of
a riverboat vessel and other pre-opening  development  activities.  As of August
1994, CQC suspended the development of the Capitol Queen,  other than completion
of the  riverboat.  As a result of a September  28, 1994 ruling by the  Missouri
Gaming Commission denying CQC's license application, CQC subsequently terminated
the Capitol Queen project and is currently  marketing its assets for sale.  Such
assets include its riverboat and the Jefferson City land site.

      As of January 1, 1995,  the CQC  Indenture  was  amended to (i)  eliminate
CQC's  obligation  to  construct  and open the  Capitol  Queen and (ii) permit a
two-step  purchase of the CQC Notes at 101% of principal plus accrued and unpaid
interest with funds remaining in the project escrow account and the net proceeds
from a sale of assets. The repurchase of $20,000,000 principal amount of the CQC
Notes (plus  accrued and unpaid  interest  thereon) was completed on January 17,
1995 with funds from the project escrow account at a total cost of  $20,200,000.
CQC  incurred  an  extraordinary  loss  of  approximately  $4,089,000  in  1995,
reflecting  the premium paid to retire the debt of $200,000 and the write-off of
related,  unamortized  debt  issue  costs and  original  issue  discount  in the
aggregate of $3,889,000. At June 30, 1997, approximately $31,000 remained in the
escrow account and an aggregate of $20,000,000 principal amount of the CQC Notes
remained outstanding. However, the dates by which CQC previously agreed with the
holders of the CQC Notes to effect the sale of its  assets  and  repurchase  the
remaining CQC Notes have passed.

      The CQC Notes outstanding  require annual interest payments of $2,400,000,
payable in equal  installments  semi-annually on May 15 and November 15. CQC was
not  able to make its  scheduled  interest  payments  of  $1,200,000  on each of
November 15, 1995, May 15, 1996, November 15, 1996 and May 15, 1997. Further, AC
does not have available funds to advance on behalf of CQC. See "Item 1. Business
- Capitol Queen & Casino, Inc. - Claims by Trustee".

      During the period from  inception  through  June 30,  1997,  CQC had total
operating expenses of $13,891,000 consisting primarily of an abandonment loss of
$6,034,000  arising from the denial of the  company's  license  application  and
management's subsequent decision to terminate the Capitol Queen project and sell
its assets.  Also,  at March,  1996,  CQC  wrote-down  the cost of the riverboat
assets  to  their  net  realizable  value  based  on  estimates  provided  by  a
shipbuilder and marine brokers which resulted in an additional  abandonment loss
of $4,392,000 in the 1996 fiscal year.  Also included in operating  expenses are
amortization  expense  of  $1,474,000  associated  with  debt  issue  costs  and
$1,991,000  of project  development  costs.  For the same  period,  CQC incurred
$14,566,000  of interest  cost,  of which  $683,000  was  capitalized  by CQC as
required by generally accepted accounting  principles,  as part of the riverboat
construction.  CQC earned  interest  income of  $1,266,000  for the period  from
inception to June 30, 1997.


Liquidity and Capital Resources

      For the period from  inception  through  June 30,  1997,  net cash used in
development  stage  activities  was  $5,245,000.  Cash flows  used in  investing
activities for the period was $13,921,000 which included  $12,936,000 of capital
expenditures related to the construction of the riverboat and acquisition of the
Jefferson  City  land  site.  At June  30,  1997,  CQC had  expended  a total of
approximately  $21,680,000 on the  development  and  construction of the Capitol
Queen project including on-going maintenance and insurance costs.

      CQC's  obligations  consist of the $20,000,000 in principal  amount of the
outstanding  CQC Notes and past due interest  thereon of  $5,646,000 at June 30,
1997,  which  includes  amounts  accrued  on  unpaid  interest.  There can be no
assurance  that CQC,  will be  successful  in its efforts to sell its assets or,
that if a sale  is  effected,  the  proceeds  will be  sufficient  to  fully  or
substantially repay the CQC Notes and accrued interest thereon. Additionally, on
July 3, 1997 CQC received a notice of  acceleration  from the trustee of the CQC
Notes. Moreover,  CQC, because it has not paid certain interest due on its Notes
and has not yet  effected  the  sale of its  assets,  is in  default  of the CQC
Indenture.  As a result of the above items the CQC Notes have been classified as
a current  liability  as of June 30,  1997 and 1996.  See  "Item 1.  Business  -
Capitol Queen & Casino, Inc. Claims by Trustee".


Arizona Charlie's, Inc.
-----------------------

     General
     -------

      AC's  revenues are derived  largely from gaming  activities at its Arizona
Charlie's  casino-hotel,  and,  to a lesser  extent,  from  food  and  beverage,
lodging,  entertainment  and retail  sales.  AC generally  views its  non-casino
operations  as  complementary  to its core casino  operations.  Accordingly,  it
utilizes  entertainment  primarily  as a  casino  marketing  tool.  Further,  AC
maintains  food and  beverage  pricing  structures  designed  to benefit  casino
volumes, often resulting in departmental operating losses, even in periods where
individual  restaurants or bars report operating  profits.  AC seeks to maximize
profits from its hotel operations,  however,  while maintaining  attractive room
rental rates. Gaming revenues represent the net win from gaming wins and losses.
The retail  value of  accommodations,  food and  beverage  provided to customers
without  charge is  included  in gross  revenues  and  deducted  as  promotional
allowance.  See  "Notes to  Financial  Statements  - Arizona  Charlie's,  Inc. -
Summary of Significant  Accounting  Policies." The estimated  costs of providing
such  promotional  allowances have been  classified as gaming  expenses  through
interdepartmental allocations as follows (in thousands):

<TABLE>
<CAPTION>
                                            Years Ended June 30,
                                         1997      1996      1995
                                         ----      ----      ----
           <S>                         <C>       <C>       <C>

           Hotel .........             $  349    $  261    $  164
           Food & Beverage              4,094     3,824     2,260
                                        -----     -----     -----
                                       $4,443    $4,085    $2,424
                                       ======    ======    ======
</TABLE>


      On November 18, 1993,  AC issued  $55,000,000  in principal  amount of 12%
First Mortgage  Notes due November 15, 2000 (the "AC Notes"),  which resulted in
net  proceeds  of  approximately  $51,100,000.  The AC Notes  are  currently  in
default.  See "Item 1.  Business  - Capitol  Queen &  Casino,  Inc.  - Claims by
Trustee".  A  portion  of the net  proceeds  was  used to  retire  approximately
$16,900,000  in bank debt plus  accrued  interest  of  $500,000.  The balance of
approximately  $33,700,000  was  initially  deposited  into a restricted  escrow
account and  subsequently  was used to fund the  expansion  and  enhancement  of
Arizona  Charlie's (the  "Expansion")  through the addition of new casino space,
hotel rooms, specialty restaurants and banquet/meeting room facilities,  and the
expansion  of existing  restaurants,  entertainment  and other  facilities.  See
"Notes to Financial  Statements - Arizona Charlie's,  Inc. - Long-Term Debt." AC
commenced  construction  of the  Expansion in January  1994.  The  Expansion was
completed in February 1995 at an under-budget cost of approximately $35,632,000.

      Concurrent  with the private  placement of the AC Notes,  Capitol  Queen &
Casino,  Inc., a sister company,  issued  $40,000,000 in principal amount of 12%
First  Mortgage  Notes due November 15, 2000,  $20,000,000 in principal of which
currently remain outstanding (the "CQC Notes"). AC has issued a limited guaranty
in respect to the payment of all principal of and interest on the CQC Notes, the
amount and extent of which are  currently  in dispute.  See "Item 1.  Business -
Capitol Queen & Casino,  Inc. - Claims by Trustee".  CQC currently does not have
any means to pay  amounts  owing on the CQC  Notes  which  are in  default.  See
"Liquidity and Capital Resources".  AC, which now operates as a "C" corporation,
was operated as an "S"  corporation  through  December  31, 1993.  See "Notes to
Financial Statements -
  Arizona Charlie's Inc. - Summary of Significant  Accounting  Policies - Income
Taxes." In anticipation of the termination of S corporation  status, in December
1993, AC distributed to its  stockholders an aggregate of $5,000,000 of retained
earnings on which the  stockholders  had  previously  paid federal income taxes.
This  amount  was  loaned  back  to AC in  full  in  exchange  for  subordinated
stockholder  notes  in the  principal  amount  of such  distributions,  which AC
stockholder  notes bear interest payable monthly at the annual rate of 10.0% and
mature in January 2001. See "Notes to Financial  Statements - Arizona Charlie's,
Inc. Related Party Transactions."

<TABLE>
     Results of Operations
<CAPTION>
                                             Years Ended June 30,
                                            (dollars in thousands)

                                        1997        1996         1995
                                        ----        ----         ----

<S> ..............................   <C>         <C>         <C>
Revenues:
   Gaming ........................   $ 47,857    $ 52,831    $ 47,466
   Food/beverage .................     13,583      13,401      10,877
   Hotel .........................      3,352       3,208       2,614
   Gift Shop .....................        553         590         577
   Other (1) .....................        923         948         682

Gross revenues ...................     66,268      70,978      62,216
Less, promotional allowances (2) .     (8,184)     (7,677)     (5,134)

   Net revenues ..................     58,084      63,301      57,082

   Total operating expenses ......     58,425      61,102      56,024

   Total operating income (loss)..   $   (341)   $  2,199    $  1,058

----------
<FN>
(1)  Includes  primarily  revenues  from   entertainment   cover  charges,   PBX
     operations (hotel switchboard and room telephone system) and commissions on
     automated teller machines located in the casino.
(2)  Amounts  represent  the retail  value of rooms,  food,  beverage  and other
     promotional allowances provided to customers without charge.
</FN>
</TABLE>

      Comparison of fiscal years ended June 30, 1997,  1996 and 1995.  Despite a
reduction in operating  expenses,  results from  operations for fiscal 1997 were
lower  than the  prior  year as a result of  decreased  gaming  revenues  caused
primarily by lesser patron play at the gaming machines.  Results from operations
for  fiscal  1996  were  higher  than  fiscal  1995  due to  increased  revenues
reflecting a full year of operations with the expanded casino-hotel  facilities.
The Expansion  added new gaming  machines and table games,  an expanded race and
sports book,  a new hotel tower,  a remodeled  coffee  shop,  two new  specialty
restaurants and a new delicatessen,  an expanded buffet room, a remodeled floor-
level entertainment lounge and new second-floor showroom/banquet facility.

     Net revenues at AC for fiscal years 1997,  1996 and 1995 were  $58,084,000,
$63,301,000  and  $57,082,000  respectively.  Operating  expenses for these same
fiscal  periods were  58,425,000,  $61,102,000  and  $56,024,000.  As such,  the
operating loss for fiscal 1997 was $341,000,  with a corresponding  negative net
operating  margin of 0.6%.  Operating income for fiscal 1996 and fiscal 1995 was
$2,199,000 and $1,058,000, respectively, resulting in operating margins for such
years of 3.5% and 1.9%.  For fiscal 1997, the decrease in revenues and resulting
decline in operating margin,  despite decreases in operating expenses, is due to
decreased  gaming  revenues  reflecting  lesser  patron  play.  The  increase in
operating  expenses and  resulting  decline in operating  margin for fiscal 1996
resulted  principally from increased  gaming  department  expense,  amounting to
$3,253,000,  costs  attributable  to CQC in the  amount  of  $601,000,  and  the
addition  of  staff  personnel,   equipment  and  related   operating   expenses
transferred to AC.

       For fiscal 1997, AC had total gaming revenues of $47,857,000, as compared
to  $52,831,000  and  $47,466,000  for fiscal 1996 and 1995,  respectively.  The
decrease  of 9.4% in fiscal  1997 is  primarily  attributed  to  gaming  machine
revenues which decreased $3,426,000, or 7.7% from $44,612,000 for fiscal 1996 to
$41,186,000 for fiscal 1997,  reflecting lesser play from patrons.  In addition,
table  game  revenues   decreased  $281,000  or  5.8%.  Other  gaming  revenues,
consisting  of  revenues  from  bingo,  poker and race and sports  decreased  by
$1,267,000  for fiscal 1997 largely due to race and sports book  revenues  which
decreased  $548,000 or 18.6% from  $2,957,000  to $2,408,000  reflecting  lesser
pari-mutuel  horse race play from  patrons.  Such  decrease is a result of fewer
televised  races  arising  from a dispute  over  increased  fees  that  began in
November  1996,  between  the  Nevada  Pari-Mutuel   Association  and  both  the
Thoroughbred  Owners of  California  and the  California  Horse Racing Board who
provide and authorize televised  disseminator services to Race & Sports books in
Nevada.  Such  dispute  was  eventually  resolved  and AC  was  able  to  resume
pari-mutuel horse race wagering beginning in August 1997. The increase in gaming
revenues of 11.3% for fiscal 1996 is  primarily  attributable  to  increases  in
gaming machine  revenues of 11.1% to  $44,612,000  from  $40,140,000  for fiscal
1995. The increase in gaming revenues for fiscal 1996 is primarily the result of
increased  levels of play by patrons in response to additional slot  promotional
events.  Other gaming  revenues for fiscal 1996 increased by 34.0% to $3,346,000
primarily as a result of the added  pari-mutuel  race  facilities  and increased
sports book revenues from the expanded  race and sports  facilities.  For fiscal
1997, 1996 and 1995, 86.1%,  84.4% and 84.6%,  respectively,  of gaming revenues
were  attributable  to gaming  machine play,  compared to 9.6%,  9.2% and 10.2%,
respectively, attributable to table games and 4.3%, 6.4% and 5.2%, respectively,
attributable to other gaming revenues.

     Food and beverage  revenues  increased 1.4% to $13,583,000 for fiscal 1997,
after  increasing  23.2% to  $13,401,000  for fiscal 1996 from  $10,877,000  for
fiscal  1995.  The fiscal 1997 and fiscal 1996  increases  are due to  increased
complimentary sales in the food and beverage department. Such sales are included
in revenues at retail value and are then  deducted as a  promotional  allowance.
Increased complimentary sales in food and beverage departments are the result of
casino promotion and marketing  efforts  designed to attract,  reward and retain
qualified patrons.

     Hotel revenues increased to $3,352,000 for fiscal 1997, from $3,208,000 and
$2,614,000 for fiscal 1996 and 1995, respectively.  The 4.5% and 22.7% increases
for  fiscal  1997 and  fiscal  1996,  respectively,  are the  result of a slight
decrease  in average  occupancy  rate from 86.9 % to 86.1% in fiscal 1997 and an
increase from 84.3% to 86.9% in fiscal 1996  combined with a larger  increase in
the average  room rate from $39.81 to $43.00 in fiscal 1997 and $37.27 to $39.81
in fiscal 1996.
     Gift shop  revenues  decreased  6.3% to  $553,000  in fiscal  1997 due to a
lesser  number of  patrons  in the  hotel/casino  facility.  Gift shop  revenues
increased  2.3% to $590,000 in fiscal 1996 due primarily to the  remodeling  and
expansion  of the gift shop area,  which was  re-opened in January  1995.  Other
revenues  decreased  $25,000  or 2.6%  during  fiscal  1997 as a result of fewer
banquets and entertainment  events including musical concerts and boxing events.
Other  revenues  increased  $266,000 or 39.0% during  fiscal 1996 as a result of
increases in entertainment cover charge revenues attributable to the addition of
a new showroom facility that opened in December 1994.

      Gaming  expenses  decreased  $1,383,000 or 7.4% to $17,229,000  for fiscal
1997  primarily  due to  management  and staff  reductions in the slot and table
games  departments  and  fewer  slot  department  promotions.   Gaming  expenses
increased  by 21.2% to  $18,612,000  for  fiscal  1996.  The  increased  expense
includes  higher slot  promotional  expense of $638,000;  higher  gaming tax and
license  fees of  $406,000;  increased  salary  and  wages of  $468,000  and the
additional  expense of a newly  created  casino  marketing  department  totaling
$479,000, all associated with the expansion of gaming facilities in 1995. Gaming
expenses  represented 36.0%, 35.2% and 32.4% of gaming revenues for fiscal 1997,
1996 and 1995, respectively.

     Food and beverage  expenses  decreased 1.4% to $12,337,000  for fiscal 1997
due to staff  reductions  in both the food and  beverage  departments.  Food and
beverage expenses increased 9.9% to $12,511,000 for fiscal 1996 from $11,388,000
for fiscal 1995 due to salary and wage increases  associated with increasing the
hours of  operation  at one  specialty  restaurant  and  normal  salary and wage
increases for food and beverage employees.

      Hotel expenses decreased 1.6% to $1,390,000 for fiscal 1997 as a result of
the staff  reductions of room and laundry  attendants,  front desk personnel and
reservation clerks.  Hotel expenses increased 2.6% to $1,413,000 for fiscal 1996
from $1,377,000 for fiscal 1995 as a result of normal salary and wage increases.
Net  contribution by the hotel  department  (hotel revenues less hotel operating
expenses) improved to $1,962,000 for fiscal 1997 from $1,795,000 for fiscal 1996
and $1,237,000 for fiscal 1995.

      Gift shop expenses  increased by 9.3% to $519,000 for fiscal 1997 and 5.6%
to $475,000  for fiscal 1996 due to increased  costs of  inventory  items in the
gift shop, combined with normal salary and wage increases.

      General  and  administrative   expenses  decreased  $197,000  or  1.1%  to
$17,463,000  for fiscal 1997  resulting  from staff  reductions in the security,
entertainment and internal  maintenance  departments  during the last quarter of
the fiscal year and a reduction in expense  associated  with the  operation of a
jet airplane which was sold in July, 1996. General and  administrative  expenses
increased by 15.0% to $17,660,000  for fiscal 1996 from  $15,358,000  for fiscal
1995.  The  increases  resulted  from  additional  staffing  in the  accounting,
payroll,  personnel  and  technical  services  departments  and the  transfer of
executive  personnel (and related  departmental  costs) in March 1995 to AC from
BGI. Other expenses  transferred  from BGI to AC include  maintenance  and other
operating expenses  associated with an airplane and two boats. Other general and
administrative expenses included payments made on behalf of CQC in the amount of
$220,000 for fiscal 1997 and $601,000 for fiscal 1996 and  $1,592,000 for fiscal
1995 for insurance,  maintenance and interest payments made on the CQC bonds. AC
accrued  management  fees payable to BGI of $664,000,  $1,396,000 and $3,099,000
for fiscal  1997,  1996 and 1995,  respectively.  Due to a  decision  to suspend
development of CQC's riverboat casino project and sell its assets,  the majority
of BGI's management and administrative services are anticipated to benefit AC in
the future.  Accordingly,  in late March 1995, BGI transferred  approximately 40
employees involved in accounting and administrative functions from BGI to AC. In
connection  with this  transfer,  in October 1995, BGI  temporarily  reduced the
amount of AC's management fee to 1.0% of AC's gross revenues (previously 5.0% of
gross  revenues)  based on the reduction in services it will receive from BGI in
the future. (See Note 9 of AC's Notes to Financial Statements).  As a percentage
of net revenues, general and administrative expenses were 30.1%, 27.9% and 26.9%
for fiscal 1997, 1996 and 1995, respectively.

     Advertising and promotion  expenses increased $87,000 or 1.8% to $4,813,000
due to additional  newspaper  advertising  associated with the computerized slot
club  and  player  tracking  system   purchased  and  installed  in  May,  1997.
Advertising and promotion  expenses were $4,726,000 for fiscal 1996, as compared
to  $3,837,000  for fiscal 1995.  The  increase of $889,000,  or 23.1% is due to
additional television  advertising of $466,000, new casino related promotions of
$166,000,  and salary and wage increases of $116,000. The additional advertising
and  promotions  were  conducted in an effort to increase  casino  patronage and
compete with other "local"  casinos  opened in western Las Vegas in fiscal 1995,
including Texas Station and the Fiesta. Management anticipates that it will need
to  maintain  advertising  expenditures  at the 1997 level in order to  continue
attracting  customers  and to promote  entertainment  events and the  restaurant
facilities in its expanded facilities.

      Depreciation and amortization  expense increased by 2.2% to $3,568,000 for
fiscal 1997. Also,  depreciation and amortization  expense  increased by 3.5% to
$3,491,000 for fiscal 1996 from $3,373,000 for fiscal 1995.  These increases are
attributable  to  additional  depreciation  expense  associated  with the  newer
expansion assets.

      AC had other  expenses (net of other income) of $6,804,000 for fiscal 1997
compared to $6,758,000 and $5,994,000 for fiscal years 1996 and 1995. The fiscal
1997 increase is due to additional  interest expense of $180,000 on the SC notes
and the financing of the computerized slot club and player tracking system and a
decrease in interest  income of $14,000  offset by an increase in other  income,
primarily  a gain on sale of assets of  $129,000.  The fiscal  1996  increase of
$764,000  is due to a  reduction  of  capitalized  interest  in  the  amount  of
$676,000,  a decrease  of  interest  income of  $294,000  partially  offset by a
decrease of interest  expense in the amount of $155,000  and a increase in other
income of $51,000.

     Income Taxes
     ------------

     As a result  of the  termination  of its  election  to be  treated  as an S
corporation,  AC is liable  (as part of the BGI  consolidated  group) for income
taxes  on  income  earned  from  and  after  January  1,  1994.  Prior  to  such
termination,  AC did not incur or pay income taxes but  distributed  cash to its
stockholders in amounts  sufficient to pay their income tax liability in respect
to income of AC. See "Notes to Financial Statements - Arizona Charlie's,  Inc. -
Summary of  Significant  Accounting  Policies - Income  Taxes;  - Related  Party
Transactions."  Since  terminating its S corporation  status, AC generated a net
operating loss for income tax purposes of approximately $17,165,000.  Due to low
operating margins and high interest and depreciation costs,  management does not
anticipate that AC will generate taxable income in the foreseeable future.

<TABLE>
     Liquidity and Capital Resources
<CAPTION>
                                        As of or for the years ended June 30,
                                            1997        1996        1995
                                            ----        ----        ----

<S>                                     <C>         <C>         <C>
Cash and cash equivalents ...........   $  5,481    $  4,591    $  5,404
Working capital (deficit) (1) .......    (62,380)    (58,530)      2,920


Cash provided by operating activities      1,200       1,639       2,772
Cash used for investing activities ..     (1,003)     (2,240)     (3,401)
Cash provided by (used for)
  financing activities ..............        693        (212)      2,019

----------
<FN>
(1)  At June 30,  1997  and  1996,  the AC  Notes  are  reflected  as a  current
     liability in the amount of $55,000 due to default under Covenants.
</FN>
</TABLE>

      For fiscal 1997, cash provided by operating  activities decreased $439,000
to $1,200,000  from  $1,639,000 in fiscal 1996. The 26.8% decrease is the result
of a higher  net loss,  a  decrease  in  accounts  payable  and an  increase  in
management fees, partially offset by a significant increase in accrued expenses,
which consists primarily of $3,300,000 in accrued interest on the AC Notes, that
was due on May 15, 1997. For fiscal 1996, cash provided by operating  activities
decreased  to  $1,639,000  from  $2,772,000  for fiscal  1995.  The  decrease is
attributable to a reduction in net income,  prior to consideration of management
fees and other  non-cash  items,  and changes in operating  assets and operating
liabilities.

     For fiscal 1997,  cash flows used in investing  activities was  $1,003,000,
down from  $2,240,000 in 1996.  The decrease was due to a small  increase in BGI
receivables  compared  to the prior  year,  partially  offset by an  increase in
capital  expenditures.  Cash flows used in investing  activities for fiscal 1996
were  $2,240,000  compared to $3,401,000 for fiscal 1995. The decrease is due to
(i) a reduction in cash advances to BGI resulting in decreased  receivables from
BGI of $4,154,000,  (ii) a reduction in notes issued to CQC of  $1,200,000,  and
(iii) a  reduction  in  capital  expenditures  of  $24,063,000  (reflecting  the
completion  of the  majority of the  construction  of the  expanded  facility in
fiscal 1995), partially offset by a $26,102,000 net reduction in restricted cash
which was utilized for the expansion in fiscal 1995).  Cash flows from investing
and  financing  activities  for fiscal 1995 were  significantly  impacted by the
November 1993 issuance of the AC Notes.

      Cash flows  provided by financing  activities  increased in fiscal 1997 to
$693,000 from ($212,000) in fiscal 1996, as a direct result of additional  loans
from related parties in the amount of $900,000. Cash flows provided by financing
activities  for fiscal 1996 decreased to ($212,000)  from  $2,019,000 for fiscal
1995. The decrease is due to a reduction of proceeds from borrowing,  marginally
offset by a decrease in principal  payments on notes and an increase in payments
under capital lease obligations.


     AC is  currently  in default  under the  Indenture  governing  the AC Notes
because it has not made its required  semi-annual interest payment in the amount
of  $3,300,000  due on May 15,  1997 and has  neither  maintained  the  required
minimum  level of  consolidated  tangible net worth nor offered to  repurchase a
portion  of the AC Notes  as  required  if such  minimum  level of  consolidated
tangible net worth is not maintained. In addition, AC has failed to maintain the
minimum  consolidated  fixed charge  coverage ratio required under the Indenture
and has  advanced  funds to BGI in  excess  of the  amounts  permitted  to be so
advanced under the Indenture. Also, AC incurred new notes payable (in the amount
of approximately $1,748,000) for the purchase of an on-line reporting and player
club system in excess of the $1,000,000 allowed. See "Item 1. Business - Capitol
Queen & Casino, Inc. Claims by Trustee".

      The AC Notes are  reflected  as a current  liability  at June 30, 1997 and
1996 as a result of the above default. AC's long-term obligations, approximately
$6,313,000 at June 30, 1997,  consist of the  stockholder  notes and capitalized
equipment  notes  and  leases.  AC  has  annual  interest  expense   aggregating
$6,600,000 and $500,000 with respect to the AC Notes and the stockholder  notes,
respectively.  Beginning May 1, 1997 the stockholders have voluntarily postponed
the receipt of interest  payments on the AC Notes.  As of June 30, 1997,  unpaid
interest on the AC Notes and the  stockholder  notes  amount to  $3,300,000  and
$85,000, respectively. In addition, AC is expected to have future annual capital
expenditure requirements of approximately $1,000,000.

      AC has a contingent obligation resulting from a limited guaranty issued by
it on the CQC Notes,  an aggregate of $20,000,000  in principal  amount of which
remain outstanding.  The amount and extent of such guaranty are in dispute.  See
"Item 1.  Business  - Capitol  Queen & Casino,  Inc. - Claims by  Trustee"  As a
result of a September  1994 ruling of the  Missouri  Gaming  Commission  denying
CQC's gaming license application,  CQC has adopted a plan to sell its assets for
the purpose of repaying,  to the extent possible,  the outstanding CQC Notes and
accrued interest  thereon.  See "Business - Capitol Queen & Casino,  Inc." There
can be no  assurance  that CQC will be  successful  in its  efforts  to sell its
assets or, that if a sale is effected,  the proceeds will be sufficient to fully
or substantially repay the CQC Notes and accrued interest thereon. To the extent
any funds CQC may  realize  from the sale of its  assets are not  sufficient  to
repay the CQC Notes and accrued interest thereon,  AC may be obligated under the
AC Limited Guaranty of the CQC Notes to fund the a portion of shortfall.

      Moreover,  because it has failed to pay  interest  due on the Notes and it
has not yet effected the sale of its assets, CQC is in default of the CQC Notes.
CQC is not able to pay the outstanding CQC Notes without an infusion of capital,
which is not expected to be available.  If AC is obligated  under the AC Limited
Guaranty  to pay a  portion  of the CQC  Notes  it is not  expected  to have the
resources to satisfy such obligation should it materialize.  If the AC Notes and
the CQC Notes are  accelerated,  substantial  doubt exists about AC's ability to
continue  as a going  concern.  See  "Notes to  Financial  Statements  - Arizona
Charlie's,  Inc. - CQC Gaming License,  Default Under Indebtedness  Management's
Plans, and Going Concern".

      AC's ability to obtain  capital,  is  significantly  restricted  under the
Indentures  governing  the AC Notes  and the CQC  Notes.  The  ability  of AC to
service its debt obligations  (and to comply with the consolidated  tangible net
worth covenant) will be dependent upon its future performance, which performance
will be influenced by prevailing economic conditions and financial, business and
competitive factors, many of which are beyond AC's control.

     Competitive Environment
     -----------------------

      Various forms of  casino-style  gaming have been legalized in numerous new
jurisdictions   within  the  past  few  years,   including  casino   riverboats,
limited-stakes   frontier   town   gambling,   full-scale   casinos   on  Indian
reservations, card rooms and video lottery terminals, which resemble AC's gaming
machines. In addition,  several major casino-hotels were completed and opened in
Las Vegas in the past year,  continuing the  transformation of Las Vegas into an
entertainment destination offering much more than gaming. Management expects the
legalization of gaming to continue to spread and that Las Vegas will continue to
experience  at least  limited  expansion.  See "Item 1.  Business  - Market  and
Competition."

      In fiscal 1997,  casino  revenues at Arizona  Charlie's (and for Las Vegas
generally)  have  declined.  Lesser  play from  patrons  at AC are the result of
increased  competition  from  surrounding  hotels/casinos  that  appeal  to AC's
"local" patron.  However,  management  believes that AC has and will continue to
benefit  from the  expansion  of the Las Vegas  market,  which has  resulted  in
continued  growth in the  residential  population  from which AC  generates  the
majority of its revenues. There can be no assurance, however, that the spread of
legalized  gaming,  or the construction of new  casino-hotels in Las Vegas, will
not have an adverse impact on future revenues.

     Inflation
     ---------

     AC believes  that its results of  operations  are not  dependent  upon,  or
materially affected by, the rate of inflation.


Item 8.   Financial Statements and Supplementary Data

      The  Index to  Financial  Statements  and  Schedules  appears  at page F-1
hereof,  the Report of  Registrant's  Independent  Auditors  appears at page F-2
hereof,  and the Financial  Statements and Notes to Financial  Statements of the
Registrant  and AC appear at page F-3 through  F-18 hereof and page F-19 through
F-44 hereof, respectively.

Item 9.     Changes  in  and  Disagreements with  Accountants  on
      Accounting and Financial Disclosure

     Not applicable.

                            PART III

Item 10.   Director and Executive Officers of the Registrant

      The  following  table sets forth certain  information  with respect to the
directors and executive officers of the Company and each of its subsidiaries.

<TABLE>
<CAPTION>
     Name              Age                Position(s) Held
     ----              ---                ----------------
<S>                     <C>       <C>
Bruce F. Becker         46        President, Chief Executive
                                  Officer, Treasurer and Sole
                                    Director
Barry W. Becker         52        Secretary
</TABLE>


      Bruce  F.  Becker  has  served  as  President,  Chief  Executive  Officer,
Treasurer,  Sole Director of the Company since its inception. He has served each
of the Nevada  subsidiaries as President and Chief Executive  Officer since July
1989. Mr. Becker has also served as President, Chief Executive Officer, director
and Chairman of CQC since its  inception in January  1993 and  President,  Chief
Executive  Officer and  Chairman of the Board of  Directors  of SC and BGG since
their inceptions in 1984, 1980 and 1986,  respectively.  Mr. Becker also sits on
the Board of Directors of the Nevada Resort Owners Association.

     Barry W. Becker has served as Secretary of the Company since its inception.
He has served  each  Nevada  subsidiary  as a Director  since  their  respective
inceptions  and as  Secretary  since  July  1989.  Mr.  Becker is also the Sales
Manager for Becker Enterprises,  a Becker family-owned  company which purchases,
sells and leases residential and commercial property.  He is a past president of
the Southern Nevada Builders Association and serves the community as a member on
the Board of Directors of the Rotary Club,  Las Vegas Chamber of Commerce,  Boys
Club of Clark County and the Boy Scouts of America.  Mr. Becker was appointed by
the then Governor of the State of Nevada to the State Environment Commission and
was an  Environmental  Commissions  Representative  on the  State  Multiple  Use
Advisory Land Committee.


Item 11.   Executive Compensation

      The Company was incorporated on January 20, 1993. No compensation was paid
by the Company for  services  rendered  to the Company  during the fiscal  years
ended June 30, 1995, 1996 or 1997.

Compensation of Directors

     The directors of the Company do not receive any compensation for serving in
such capacities.



Item 12.  Security Ownership of Certain Beneficial  Owners  and
          Management

      The  Company  is  a  wholly  owned  subsidiary  of  Becker  Gaming,   Inc.
Accordingly, there are no sole beneficial owners of the company's common stock.


Item 13.   Certain Relationships and Related Transactions

      AC currently has outstanding  $55,000,000 of 12% First Mortgages Notes due
2000.  SC has issued a limited  guaranty  with  respect to the AC Notes (the "SC
Limited  Guaranty").  CQC currently  has  outstanding  $20,000,000  of 12% First
Mortgage  Notes due 2000.  AC has issued a limited  guaranty with respect to the
CQC Notes (the "AC Limited Guaranty"). The amount and extent of AC's guaranty of
the CQC Notes is in dispute due to certain  provisions  of the  Indenture  under
which the CQC Notes were issued,  as well as certain  provisions of State and/or
Federal  Law  that  may  be   applicable   in  or  with   respect  to  financial
restructuring. It is AC's position that, based on advice from legal counsel, its
limited  guaranty  does not  create  a  material  liability  on its part for the
payment of the obligations under the CQC Notes.

      IBJ Schroder Bank & Trust Company,  as Trustee under the Indentures  under
which such Notes are outstanding, has declared the AC Notes and the CQC Notes to
be in default and has declared all such Notes to be immediately due and payable.
The Trustee has also notified AC that the purported  obligations of AC under its
guaranty have been accelerated and has declared the obligations of AC thereunder
to be due.  Management of AC and CQC and the holders of the Notes are discussing
possible  financial  restructuring  of the AC and CQC  obligations,  but no such
restructuring has yet been agreed to. The Trustee has taken no further action to
enforce the Notes or the  purported  guaranties  thereof or to  foreclose on any
assets of AC or CQC. No assurance can be given,  however,  that the Trustee will
not do so.

In May, 1995, CQC borrowed $1,200,000 from AC in order to have funds to make the
semi-annual interest payment due on the CQC Notes. The borrowing was executed as
an  uncollateralized  note payable to AC due May, 1996 with interest at the rate
of  5.56%.  Due to the  current  financial  condition  of  CQC,  management  has
determined  that  collectibility  of the note, and of other advances of $301,000
(1995),   $692,000  (1996)  and  $220,000  (1997)  made  to  CQC,  is  doubtful.
Accordingly, provisions were made to fully reserve the advances and note payable
and losses  have been  recorded  in the  accompanying  financial  statements  as
payments under guarantee obligations.




                             PART IV

Item 14.    Exhibits, Financial Statement Schedules  and  Reports
      on Form 8-K

     The following are filed as part of this Report:

     (a)1.     Financial Statements
          An Index to Financial Statements appears at page F-1
          hereof

     (b)2.     Financial Statement Schedules
          An Index to Financial Statement Schedules appears at
page F-1 hereof

     (a)3.     Exhibits

 2.1    Agreement of Reorganization dated November 16, 1993,
           by and among Becker Gaming, Inc. ("BGI"), Arizona
           Charlie's, Inc. ("Arizona Charlie's"), Sunset
           Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
           ("Becker Gaming Group"), Capitol Queen & Casino, Inc.
           ("Capitol Queen"), Charlie's Land Company ("CLC") ,
           and each of Ernest A. Becker, III, Ernest A. Becker,
           IV, Barry W. Becker and Bruce F. Becker
           (collectively, the "Beckers").*

    3.1    Articles of Incorporation of Capitol Queen.*

    3.2    First Amended By-Laws of Capitol Queen.*

    3.3    Articles of Incorporation of Arizona Charlie's.*

    3.4    Amended and Restated By-Laws of Arizona Charlie's.*

    10.1   Purchase  Agreement  dated  November  15,  1993  among  BGI,  Arizona
           Charlie's,  Capitol  Queen,  Sunset  Coin  and the  purchasers  named
           therein (the "Purchasers).*

    10.2   Indenture  dated  November 15, 1993 among Capitol  Queen,  as issuer,
           Arizona  Charlie's,  as  guarantor,  and  IBJ  Schroder  Bank & Trust
           Company ("IBJ"), as trustee.*

    10.3   Deed of Trust,  Assignment of Leases,  Security Agreement and Fixture
           Filing  dated  November  15, 1993 by Capitol  Queen,  as grantor,  to
           Charles W. Riley, as trustee,  for the benefit of IBJ , as collateral
           agent.*

    10.4   Vessel Construction Agreement dated October 23, 1993
           between Leevac Shipyards, Inc. and Capitol Queen, as
           amended by Amendment No. 1 to Vessel Construction
           Agreement dated November 15 and 17, 1993.*

    10.5   Form of First Preferred Ship Mortgage Securing an
           Indenture between Capitol Queen and IBJ.*

    10.6   Security  Agreement dated November 15, 1993 between Capitol Queen and
           IBJ, as collateral agent.*

    10.7   Stock Pledge  Agreement dated November 15, 1993 between Capitol Queen
           and IBJ, as collateral agent.*

    10.8   Collateral  Agency  Agreement  dated  November 15, 1993 among Capitol
           Queen and IBJ, as trustee and collateral agent.*

    10.9   Disbursement  and Escrow  Agreement  dated  November  15,  1993 among
           Capitol  Queen  and IBJ,  as escrow  agent,  trustee  and  collateral
           agent.*

    10.10  Registration Rights Agreement dated November 15, 1993
           among Capitol Queen, Arizona Charlie's and the
           Purchasers.*

    10.11  Form of Management  Agreement to be entered into between BGI and each
           of Arizona  Charlie's,  Capitol Queen,  Sunset Coin and Becker Gaming
           Group. Included at Exhibit I to Exhibit 2-1 hereof.*

    10.12  Form of Tax  Allocation  Agreement to be entered into between BGI and
           each of Arizona  Charlie's,  Sunset  Coin,  Becker  Gaming  Group and
           Capitol Queen. Included at Exhibit J to Exhibit 2-1 hereof.*

    10.13  Letter   Agreement  dated  September  10,  1993  among  BGI,  Arizona
           Charlie's,  Capitol  Queen and  Ladenburg,  Thalmann & Co.,  Inc., as
           placement agent.*

    10.14  Land Purchase Option Contract dated January 4, 1993 between Linda Ann
           and  Harvey L.  McCray  and  Vernon M. and  Joyce G.  Burkhalter,  as
           seller, and R.Q.  Enterprises,  as buyer; and Wire Transfer Order and
           Closing  Document dated July 26, 1993 between  Arizona  Charlie's and
           First Interstate Bank of Nevada.*

    10.15  Letter of Understanding dated January 26, 1993
           between Jefftel, Inc. and JCR Hotel, Inc. and River
           Queen Enterprises, Inc. and Capitol Queen.*

    10.16  Purchase  Agreement  dated  September  20, 1993 among BGI and Cathryn
           Simmons, Public Issue Management, Inc., Byron Neal Fox and Cynthia L.
           Pegner, Richard Moore, Byron Neal Fox, P.C., David Chernoff, Oscar B.
           Goodman,  Eckley M. Keach, Ronald E. Partee and Carol Partee, and Fox
           & Partee.*

    10.17  Riverfront  Development  Agreement  dated  as of  September  1,  1993
           between Capitol Queen, the Company and Jefferson City, Missouri.*

    10.18  First  Supplemental  Indenture  dated  January 1, 1995 among  Capitol
           Queen,  as issurer,  Arizona  Charlie's,  as  guarantor,  and IBJ, as
           trustee.

    10.19  Assets  Purchase   agreement  dated  April  10,  1995  between  Aerie
           Riverboat  Casino of Missouri,  Inc., as buyer, and Capitol Queen, as
           seller.

    10.20  Letter  agreement  dated  December  5,  1994  among  BGI and  Cathryn
           Simmons, Public Issue Management, Inc., Byron Neal Fox and Cynthia L.
           Pegner, Richard Moore, Byron Neal Fox, P.C., David Chernoff, Oscar B.
           Goodman,  Eckley M. Keach, Ronald E. Partee and Carol Partee, and Fox
           & Partee.*

----------
* All Exhibits are  incorporated  by  reference  to the  Company's  Registration
Statement  on Form S-4  (33-75806)  declared  effective  by the  Securities  and
Exchange Commission on May 20, 1994.

     (b)  Reports on Form 8-K
          None.

--------------------------------------------------------------------------------
                           SIGNATURES


      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                   CAPITOL QUEEN & CASINO, INC.


Dated: September 26, 1997          By: /s/ Bruce F. Becker
                                      --------------------------
                                      Bruce F. Becker, President
                                      and Chief Executive Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant in the capacities indicated on the 26th day of September, 1997.


        Signature                  Title
        ---------                  -----


/s/ Bruce F. Becker
-------------------
Bruce F. Becker                    President, Chief Executive Officer
                                   (Principal Executive Officer) and Sole
                                    Director


/s/ Jerry Griffis
-----------------                  Controller (Principal Financial and
Jerry Griffis                      Accounting Officer)



  Supplemental  Information to be Furnished  With  Reports  Filed
Pursuant  to Section 15(d) of the Act by Registrants  Which  Have
Not Registered Securities Pursuant to Section 12 of the Act

      The  Company has not and does not intend to send to its  security  holders
any annual  report with respect to the  Registrant's  most recent fiscal year or
any proxy  statement,  form of proxy or other  proxy  soliciting  material  with
respect to a meeting of security holders.

================================================================================
           INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


CAPITOL QUEEN & CASINO, INC.
     Report of Independent Accountants ..............................
     Balance Sheets as of June 30, 1997 and 1996 ....................
     Statements of Loss Incurred During the Development Stage
     for the Years Ended June 30, 1997, 1996  and 1995 and
     for the period from January 20, 1993 (the date of
     inception) through June 30, 1997 ...............................
     Statements of Stockholder's Equity (Deficit) for the years
     ended June 30, 1997, 1996 and 1995 and for period from
     January 20, 1993 (the date of inception) through June 30, 1997 .
     Statements of Cash Flows for the Years Ended June 30, 1997,
     1996 and 1995 and for the period from January 20, 1995
     (the date of inception) through June 30, 1997 ..................
     Notes to Financial Statements ..................................


ARIZONA CHARLIE'S, INC.
     Report of Independent Accountants ..............................
     Balance Sheets as of June 30, 1997 and 1996 ....................
     Statements of Operations for the Years Ended June 30, 1997,
     1996 and 1995 ..................................................
     Statements of Stockholder's Equity (Deficit) for the Years
     Ended 1997, 1996 and 1995 ......................................
     Statements of Cash Flows for the Years Ended June 30, 1997,
     1996 and  1995 .................................................
     Notes to Financial Statements ..................................


CAPITOL QUEEN & CASINO, INC.

     Schedule II    Valuation and Qualifying Accounts as of and
                     for the Years Ended June 30, 1997, 1996
                and 1995 ........................................

ARIZONA CHARLIE'S, INC.

     Schedule II    Valuation and Qualifying Accounts as of and
                     for the Years Ended June 30, 1997, 1996
                and 1995 ........................................


Schedules  other  than  those  listed  above are  omitted  because  they are not
required or are not applicable,  or because the required information is shown in
the financial statements or notes to the financial  statements.  Columns omitted
from  schedules   filed  have  been  omitted  because  the  information  is  not
applicable.

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

                        REPORT OF INDEPENDENT ACCOUNTANTS
                                   ----------

To the Board of Directors
Capitol Queen & Casino, Inc.


We have audited the financial statements and the financial statement schedule of
Capitol  Queen & Casino,  Inc. (a  development  stage company and a wholly owned
subsidiary of Becker Gaming, Inc.) listed in Item 14(a) of this Form 10-K. These
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Capitol Queen & Casino, Inc. as
of June 30, 1997 and 1996, and its loss incurred  during the  development  stage
and its cash  flows for each of the three  years in the  period  ended  June 30,
1997,  and for the period from January 20, 1993 (the date of inception)  through
June 30, 1997, in conformity with generally accepted accounting  principles.  In
addition,  in our opinion,  the financial  statement schedule referred to above,
when considered in relation to the basic financial  statements taken as a whole,
presents  fairly,  in all  material  respects,  the  information  required to be
included therein.

The accompanying financial statements and financial statement schedule have been
prepared  assuming  that Capitol  Queen & Casino,  Inc. will continue as a going
concern.  As more fully described in Notes 2 and 4, the Company is in default of
certain  debt  covenants  and has  received  a notice of  acceleration  from the
trustee for this debt  resulting  in  classification  of such debt as  currently
payable.   The  Company  does  not  have  sufficient   resources  to  repay  its
indebtedness.  Management's  plans  with  respect  to  these  matters  are  also
described in Note 2. These matters raise  substantial  doubt about the Company's
ability to continue as a going  concern.  The final  outcome of these matters is
not presently  determinable  and the June 30, 1997  financial  statements of the
Company do not include any adjustment that might result from the outcome of this
uncertainty.


/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.

Las Vegas, Nevada
August 22, 1997, except for Note 2,
as to which the date is
September 5, 1997
================================================================================

                          CAPITOL QUEEN & CASINO, INC.
           (A Development Stage Company And A Wholly Owned Subsidiary
                             Of Becker Gaming, Inc.)

                                 BALANCE SHEETS
                          As Of June 30, 1997 And 1996
                             (Dollars In Thousands)
================================================================================


                                     ASSETS

                                                              1997          1996
                                                           -------       -------
Current assets:

   Restricted cash, in escrow account ..............       $    31       $    30
                                                           -------       -------
      Total current assets .........................            31            30
                                                           -------       -------


Other assets:
  Assets held for sale .............................         7,754         7,754

  Financing costs, net of accumulated
    amortization of $445 (1997) and
    and $312 (1996), respectively ..................           472           605
  Deposits and other assets ........................            -             60
                                                           -------       -------

      Total other assets ...........................         8,226         8,419
                                                           -------       -------


       Total assets ................................       $ 8,257       $ 8,449
                                                           =======       =======



                  LIABILITIES & STOCKHOLDER'S EQUITY(DEFICIT)


                                                               1997         1996
                                                          --------     --------
Current liabilities:
Advances from related parties ........................    $  1,226     $  1,006
Accrued interest .....................................       5,788        2,775

Notes payable to related parties .....................       1,200        1,200
Long-term debt classified as current due to
    default under covenants, net of unamortized
    original issue discount of $2,092 (1997)
    and $2,474 (1996) ................................      17,908       17,526
                                                          --------     --------
        Total current liabilities ....................      26,122       22,507
                                                          --------     --------
        Total liabilities ............................      26,122       22,507
                                                          --------     --------

Commitments and contingencies


Stockholder's equity (deficit):
  Common stock, $1.00 par value, 1,000 shares
   authorized, 100 shares issued and outstanding .....        --           --
  Additional paid-in capital .........................      12,732       12,732
  Deficit accumulated during development stage .......     (30,597)     (26,790)
                                                          --------     --------
        Total stockholder's equity (deficit) .........     (17,865)     (14,058)
                                                          --------     --------

       Total liabilities and stockholder's
        equity(deficit) ..............................    $  8,257     $  8,449
                                                          ========     ========

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

================================================================================

                          CAPITOL QUEEN & CASINO, INC.
           (A Development Stage Company And A Wholly Owned Subsidiary
                             Of Becker Gaming, Inc.)
            STATEMENTS OF LOSS INCURRED DURING THE DEVELOPMENT STAGE
                             (Dollars In Thousands)
================================================================================


                                                                  For The Period
                                                                January 20, 1993
                                                                    (The Date Of
                                                                      Inception)
                                                                         Through
                                           Year Ended June 30,          June 30,
                                       1997        1996        1995        1997
                                   --------    --------    --------    --------


Revenues .......................   $   --      $   --      $   --      $   --

Operating expenses:
 Amortization of financing
  and other costs ..............        133         100         202       1,474
 Abandonment losses and
 write-downs of assets held
 for sale ......................       --         4,392        --        10,426
 Development costs .............        280         504       1,186       1,991
                                   --------    --------    --------    --------
     Total operating expenses ..        413       4,996       1,388      13,891
                                   --------    --------    --------    --------

Operating loss .................       (413)     (4,996)     (1,388)    (13,891)

Other income (expenses):
 Interest income ...............          1        --           610       1,266
 Interest expense ..............     (3,395)     (2,789)     (4,608)    (14,566)
 Interest capitalized ..........       --          --          --           683
                                   --------    --------     --------    --------
Total other expenses ...........     (3,394)     (2,789)     (3,998)    (12,617)
                                   --------    --------     --------    --------

Net loss before
 extraordinary item ............     (3,807)     (7,785)     (5,386)    (26,508)

Extraordinary item:
 Loss on early retirement
  of debt (no income tax
  benefit available) ...........       --          --        (4,089)     (4,089)
                                   --------    --------    --------    --------

Net loss .......................   $ (3,807)   $ (7,785)   $ (9,475)   $(30,597)
                                   ========    ========    ========    ========


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

================================================================================

                          CAPITOL QUEEN & CASINO, INC.
           (A Development Stage Company And A Wholly Owned Subsidiary
                             Of Becker Gaming, Inc.)

                  STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)

                      For The Period From January 20, 1993
                  (The Date Of Inception) Through June 30, 1997
              And For The Years Ended June 30, 1997, 1996 And 1995
                             (Dollars In Thousands)
================================================================================


                                                   Common Stock
                                         --------------------------------

                                      Shares      Amount         Subscribed
                                    -----------   -----------    -----------

Balances, January 20,
  1993 (the date of inception) ...   $     --      $     --       $     --
Issuance of common stock .........          100          --             --
                                    -----------   -----------    -----------

Balances, June 30, 1993 ..........          100          --             --

Cash contribution from Becker
  Gaming, Inc. relating to sale
  of warrants ....................         --            --             --
Common stock subscribed ..........         --            --              788
Contribution by Becker Gaming,
  Inc. relating to liability
  incurred under development
  agreement ......................         --            --             --
Write-off of common stock
  subscribed due to abandonment
  of development project .........         --            --             (788)

Net loss .........................         --            --             --
                                    -----------   -----------    -----------

Balances, June 30, 1994 ..........          100          --             --

Net loss .........................         --            --             --
                                    -----------   -----------    -----------

Balances, June 30, 1995 ..........          100          --             --
                                    -----------   -----------    -----------

Net loss .........................         --            --             --
                                    -----------   -----------    -----------

Balances, June 30, 1996 ..........          100          --             --
                                    -----------   -----------    -----------

Net loss .........................         --            --             --
                                    -----------   -----------    -----------

Balances, June 30, 1997 ..........   $      100    $     --       $     --
                                    ===========   ===========    ===========

<PAGE>

                                                                         Deficit
                                                                     Accumulated
                                              Additional             During The
                                               Paid-In              Development
                                               Capital      Stage       Total
                                               --------    --------    --------

Balances, January 20,
  1993 (the date of inception) .............      $--         $--         $--
Issuance of common stock ...................       --          --          --
                                               --------    --------    --------

Balances, June 30, 1993 ....................       --          --          --

Cash contribution from Becker
  Gaming, Inc. relating to sale
  of warrants ..............................      7,500        --         7,500
Common stock subscribed ....................       --          --           788
Contribution by Becker Gaming,
  Inc. relating to liability
  incurred under development
  agreement ................................      5,232        --         5,232
Write-off of common stock
  subscribed due to abandonment
  of development project ...................       --          --          (788)

Net loss ...................................       --        (9,530)     (9,530)
                                               --------    --------    --------

Balances, June 30, 1994 ....................     12,732      (9,530)      3,202

Net loss ...................................       --        (9,475)     (9,475)
                                               --------    --------    --------

Balances, June 30, 1995 ....................     12,732     (19,005)     (6,273)
                                               --------    --------    --------

Net loss ...................................       --        (7,785)     (7,785)
                                               --------    --------    --------

Balances, June 30, 1996 ....................     12,732     (26,790)    (14,058)

Net loss ...................................       --        (3,807)     (3,807)
                                               --------    --------    --------

Balances, June 30, 1996 ....................   $ 12,732    $(30,597)   $(17,865)
                                               ========    ========    ========


The  accompanying  notes  are  integral  part of  these  consolidated  financial
statements.
================================================================================

                          CAPITOL QUEEN & CASINO, INC.
           ( A Development Stage Company And A Wholly Owned Subsidiary
                             Of Becker Gaming, Inc.)

                            STATEMENTS OF CASH FLOWS
                             (Dollars In Thousands)

================================================================================



                                                       Year Ended June 30,
                                              ---------------------------------

                                                  1997        1996        1995
                                              --------    --------    --------
Cash flows from development stage activities:
  Net loss ................................   $ (3,807)   $ (7,785)   $ (9,475)
                                              --------    --------    --------
  Adjustments to reconcile net loss
   to net cash used in development
   stage activities:
  Amortization of financing and other costs        133         100         202
  Amortization of original issue discount .        382         408         834
  Abandonment losses and write-downs of
   assets held for sale ...................         60       4,392         --
  Extraordinary loss on retirement of debt        --          --         4,089
  Increase(decrease) in accounts payable
   and accruals, net of amounts for
   capital expenditures ...................      3,013       2,238        (216)
  Increase in advances from related
    party payable .........................        220         602         392
                                              --------    --------    --------
        Total adjustments .................      3,808       7,740       5,301
                                              --------    --------    --------
        Net cash provided by (used in)
         development stage activities .....          1         (45)     (4,174)
                                              --------    --------    --------

Cash flows from investing activities:
  Capital expenditures, net of
   construction accounts payable ..........       --          --        (1,724)
  Deposits and other assets ...............       --          --            12
  Capitalization of preopening costs ......       --          --           --
  Development costs .......................       --          --           --
  Net (additions to) reductions in
   restricted cash equivalents ............        (1)        --        24,898
                                              --------    --------    --------
       Net cash provided by (used in)
        investing activities ..............        (1)        --        23,186
                                              --------    --------    --------

Cash flows from financing activities:
  Principal payments on First Mortgage
   Notes ..................................       --          --       (20,200)
  Proceeds from issuance of First
   Mortgage Notes, net of financing costs .       --          --          --
  Proceeds from borrowings under
   notes payable to related parties .......       --          --         1,200
  Equity contribution from Becker
   Gaming, Inc.relating to sale of
   warrants ...............................       --          --          --
                                              --------    --------    --------
       Net cash (used in) provided by
        financing activities ..............       --          --       (19,000)
                                              --------    --------    --------

       Net increase (decrease) in cash
        and cash equivalents ..............       --           (45)         12

Cash and cash equivalents, beginning
  of period ...............................       --            45          33
                                              --------    --------    --------

Cash and cash equivalents, end of period ..   $   --      $   --      $     45
                                              ========    ========    ========
Supplemental cash flow disclosures:
  Interest paid, net of amounts capitalized   $   --      $   --      $  4,020
                                              ========    ========    ========
  Original issue discount that did not
   affect cash ............................   $   --      $   --      $   --
                                              ========    ========    ========
  Equity contribution by Becker Gaming that
   did not affect cash ....................   $   --      $   --      $   --
                                              ========    ========    ========



                                     (The Date Of Inception)Through June 30,
                                     ---------------------------------------

                                                      1996
                                                  --------
Cash flows from development stage activities:
  Net loss ....................................   $(30,597)
                                                  --------
  Adjustments to reconcile net loss
   to net cash used in development
   stage activities:
  Amortization of financing and other costs ...      1,474
  Amortization of original issue discount .....      2,289
  Abandonment losses and write-downs of
   assets held for sale .......................     10,486
  Extraordinary loss on retirement of debt ....      4,089
  Increase(decrease) in accounts payable
   and accruals, net of amounts for
   capital expenditures .......................      5,800
  Increase in advances from related
    party payable .............................      1,214
                                                  --------
        Total adjustments .....................     25,352
                                                  --------
        Net cash provided by (used in)
         development stage activities .........     (5,245)
                                                  --------

Cash flows from investing activities:
  Capital expenditures, net of
   construction accounts payable ..............    (12,936)
  Deposits and other assets ...................        (60)
  Capitalization of preopening costs ..........       (340)
  Development costs ...........................       (553)
  Net (additions to) reductions in
   restricted cash equivalents ................        (32)
                                                  --------
       Net cash provided by (used in)
        investing activities ..................    (13,921)
                                                  --------

Cash flows from financing activities:
  Principal payments on First Mortgage
   Notes ......................................    (20,200)
  Proceeds from issuance of First
   Mortgage Notes, net of financing costs .....     30,666
  Proceeds from borrowings under
   notes payable to related parties ...........      1,200
  Equity contribution from Becker
   Gaming, Inc.relating to sale of
   warrants ...................................      7,500
                                                  --------
       Net cash (used in) provided by
        financing activities ..................     19,166
                                                  --------

       Net increase (decrease) in cash
        and cash equivalents ..................       --

Cash and cash equivalents, beginning of period        --
                                                  --------

Cash and cash equivalents, end of period ......   $   --
                                                  ========
Supplemental cash flow disclosures:
  Interest paid, net of amounts capitalized ...   $  5,807
                                                  ========
  Original issue discount that did not
   affect cash ................................   $  7,500
                                                  ========
  Equity contribution by Becker Gaming that did
       not affect cash ........................   $  5,233
                                                  ========

The  accompanying  notes  are  integral  part of  these  consolidated  financial
statements.
================================================================================


                          CAPITOL QUEEN & CASINO, INC.
          (A Development Stage Company And A Wholly Owned Subsidiary Of
                              Becker Gaming, Inc.)

                          NOTES TO FINANCIAL STATEMENTS



1.   Summary Of Significant Accounting Policies:

     Basis Of Presentation

     Capitol Queen & Casino, Inc. ("CQC" or the "Company"),  a development stage
     company, was incorporated in Missouri on January 20, 1993, and had acquired
     a  franchise  from  the  City  of  Jefferson  City,  Missouri  to  develop,
     construct,  own and  operate a  riverboat  casino  (the  "Capitol  Queen"),
     subject to state  licensure.  The Company has  abandoned  the Capitol Queen
     project,  as more fully described in Note 2.  Subsequent to  incorporation,
     the stockholders of the Company  exchanged all of the outstanding  stock of
     the Company for common stock of a Nevada  holding  company,  Becker Gaming,
     Inc.  ("BGI"),  in a tax-free  exchange.  BGI is wholly owned by the Becker
     family  and  serves as a  holding  company  for the  Becker  family  gaming
     interests, which include CQC and the following wholly owned subsidiaries:

     *     Sunset  Coin, Inc. ("SC"), a Nevada corporation  which
       operates a Las Vegas gaming machine route and service business.

     * Becker Gaming Group ("BGG"),  a Nevada  corporation  which (together with
       its wholly owned subsidiary Innerout, Inc.) owns and operates restaurants
       and bars in Las Vegas under the  "Charlie's"  name,  each of which offers
       gaming machines.

     *    Arizona Charlie's, Inc. ("AC"), a Nevada corporation which
       operates a Las Vegas hotel and casino.


     Cash Equivalents And Concentration Of Credit Risk
     -------------------------------------------------

     The  Company  considers  all highly  liquid  investments  with an  original
     maturity of three  months or less to be cash  equivalents.  The Company has
     cash on deposit with financial  institutions in excess of federally insured
     amounts.

     Property And Equipment
     ----------------------

     Property  and  equipment   are  recorded  at  cost  and  include   interest
     capitalized  during the  construction  period.  The Company's  policy is to
     compute  depreciation  using the straight-line  method. No depreciation has
     been recorded while the Company is in the development stage.

     Debt Issue Costs
     ----------------

     Costs  associated with the issuance of debt are deferred and amortized over
     the life of the related indebtedness using the effective interest method.

     Federal Income Taxes
     --------------------

     The Company  accounts  for income  taxes in  accordance  with  Statement of
     Financial  Accounting  Standards  No. 109,  "Accounting  for Income  Taxes"
     ("SFAS  109").  Under SFAS 109,  deferred  tax assets and  liabilities  are
     recognized  for  the  expected  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. Under SFAS 109, 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  adopted SFAS
     109 at inception (January 20, 1993).

     The  Company is  included in the  consolidated  federal  income tax returns
     filed by BGI.  CQC's tax  allocation is based on the amount of tax it would
     incur if it filed a separate return.

     Use of Estimates in the Preparation of Financial Statements
     -----------------------------------------------------------

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the amounts  reported in the financial  statements
     and accompanying  notes.  Actual results could differ from those estimates,
     particularly with respect to the matters described in Notes 2 and 3.

2.   Missouri Gaming License,  Default Under  Indebtedness,  Management's Plans,
     and Going Concern:

     CQC was formed to develop,  own and operate the "Capitol  Queen"  riverboat
casino and  related  land-based  facilities  in  Jefferson  City,  Missouri.  On
September 28, 1994, CQC was notified that its  application  for a gaming license
was rejected by the Missouri Gaming Commission (the  "Commission").  At the time
CQC was notified of the  Commission's  decision,  construction  of the riverboat
under contract with a shipbuilder  was almost  completed.  CQC had also obtained
the necessary permits for the land-based  development portion of the project and
performed  certain  dredging  and  other  site  preparation  work.   Immediately
following the Commission's  decision,  management  temporarily suspended further
development of the Capitol Queen project,  pending an appeal of the decision and
legal remedies potentially  available to the Company.  Costs associated with the
development of the project which had been deferred during the development  stage
were written-off in the fourth quarter of the fiscal year ended June 30, 1994.

     On  November  7, 1995,  voters in  Jefferson  City  rejected  an  ordinance
     permitting riverboat gambling, reversing the vote of an earlier election in
     which Jefferson City voters  approved  riverboat  gambling.  Management has
     abandoned the project,  and is currently  looking for alternative  uses for
     the  riverboat,  including  opportunities  to sell or lease  it to  another
     operator.

     CQC financed the Capitol Queen project  through the issuance of $40,000,000
     in principal  amount of 12% First Mortgage Notes due November 15, 2000 (the
     "CQC Notes").  As of January 1, 1995, the indenture governing the CQC Notes
     was amended to (i)  eliminate  CQC's  obligation  to construct and open the
     Capitol Queen and (ii) permit a two-step  purchase of the CQC Notes at 101%
     of principal  plus accrued and unpaid  interest from a sale of assets.  The
     first step  repurchase  of  $20,000,000  principal  amount of the CQC Notes
     (plus accrued and unpaid  interest) was completed on January 17, 1995, with
     unexpended  funds from the project  escrow  account,  and an  aggregate  of
     $20,000,000  principal  amount  of  the  CQC  Notes  remained  outstanding.
     However,  the dates by which CQC previously  agreed with the holders of the
     CQC Notes to effect the sale of its assets and repurchase the remaining CQC
     Notes have passed, and CQC is thus in default of the amended covenants.

     The remaining CQC Notes require  annual  interest  payments of  $2,400,000,
     payable in equal installments  semi-annually on May 15 and November 15. CQC
     was not able to make its  scheduled  interest  payments  of  $1,200,000  on
     November 15, 1995, May 15, 1996,  November 15, 1996 and May 15, 1997 and AC
     (which has guaranteed  the CQC Notes as more fully  described in below) did
     not have available funds to advance on behalf of CQC.

     Concurrent  with the  issuance  of the CQC Notes,  AC  completed  a private
     placement debt  financing of  $55,000,000 in principal  amount of 12% First
     Mortgage Notes due November 15, 2000 (the "AC Notes"). The AC Notes require
     annual  interest  payments  of  $6,600,000,  payable in equal  installments
     semi-annually  on May 15 and  November  15.  AC was not  able  to make  its
     scheduled  interest payment of $3,300,000 on May 15, 1997 and SC (which has
     guaranteed  the AC  Notes  as more  fully  described  below)  did not  have
     available  funds to  advance  on behalf of AC).  AC is also in  default  of
     certain  covenants under the AC Notes. AC is restricted from selling assets
     under the  covenants  governing the AC Notes and  management  believes that
     access to  additional  capital from other sources is restricted as a result
     of the above-described circumstances. AC does not have sufficient financial
     resources  including  a  guarantee  of the AC Notes by SC,  (as more  fully
     described  below) to repay the AC Notes on a current  basis and satisfy its
     guarantee  obligation (as more fully  described  below) with respect to the
     CQC Notes.

     The CQC Notes are  guaranteed by AC (which  guarantee is subject to release
     only upon  licensing of the Capitol Queen,  which is not expected).  The AC
     Notes are  guaranteed  by SC (which  guarantee  is subject to release  upon
     completion of the Expansion,  which management believes has been satisfied,
     and the attainment of a  fixed-coverage  ratio by AC of 2.25 to 1 following
     the completion of the Expansion,  which has not been satisfied). The amount
     and extent of AC's  guaranty of the CQC Notes is in dispute.  Legal counsel
     has advised  management  that,  under the terms of CQC indenture  regarding
     fraudulent conveyance,  the guarantee liability of AC is not expected to be
     material.

     On July 3,  1997  the  Company  received  a  notice  of  acceleration  (the
     "Notice") from the trustee and collateral agent for the CQC Notes. Pursuant
     to  section  6.02  of the  Indenture,  due  to  certain  violations  of the
     Indenture by the Company (as more fully  described above and in Note 4) all
     of the outstanding CQC Notes are immediately due and payable, together with
     all accrued and unpaid interest  thereon.  Accordingly,  the CQC Notes have
     been classified as currently payable at June 30, 1997.

     On September 5, 1997, AC received a notice of acceleration from the trustee
     and  collateral  agent for the AC Notes.  Pursuant  to section  6.02 of the
     indenture  governing  the  AC  Notes,  due  to  certain  violations  of the
     indenture,  all of the outstanding AC Notes are immediately due and payable
     together with all accrued and unpaid interest thereon.

     In  connection  with the decision to abandon the  project,  CQC had entered
     into an Asset Purchase  Agreement dated April 10, 1995, for the sale of its
     assets to Aerie Riverboat Casinos of Missouri,  Inc. at a purchase price of
     $18,000,000,  which price  exceeded the  carrying  value of the CQC assets.
     However,  the  consummation of the Aerie purchase  agreement was subject to
     the satisfaction of several conditions which could not be satisfied timely,
     including,  among others,  that Jefferson City consent to the assignment of
     its  Development  Agreement  with CQC,  that  Aerie be found  preliminarily
     suitable to hold a Missouri  gaming license,  and that riverboat  gaming is
     legally permitted in Jefferson City. As a result,  the agreement with Aerie
     was terminated  without  penalty when the December 31, 1995 expiration date
     passed.  As more fully  described  in Note 3, a further  write-down  in the
     carrying  value of the  riverboat was  recognized in the fourth  quarter of
     1996,  after the election in Jefferson  City,  the  expiration of the Aerie
     contract, and due to deteriorating market conditions.

      CQC  continues  to market  its  riverboat  assets to  prospective  buyers.
     Management of the Company, AC and CQC are currently undergoing  discussions
     with an informal committee representing the holders of the AC Notes and CQC
     Notes (the "Bondholder Committee") regarding a proposed restructuring plan.
     Based on current  market  conditions,  management  does not expect that CQC
     will generate sufficient funds through the sale of its assets to repurchase
     all of the outstanding CQC Notes. The proposed restructuring plan therefore
     contemplates,  amongst other terms and conditions, (i) liquidation of CQC's
     remaining  assets for the  benefit of the CQC  bondholders,  (ii) a limited
     cash payment by AC as full and complete  satisfaction  of AC's  guaranty of
     the CQC Notes,  and (iii) AC's issuance of a reduced amount of new notes as
     full and  complete  satisfaction  of the  existing  AC Notes.  However,  no
     satisfactory  offers for the  riverboat  are  currently  available,  and no
     agreement  has been reached with the  Bondholder  Committee  regarding  the
     proposed restructuring plan.  Accordingly,  these matters raise substantial
     doubt about the ability of CQC to  continue as a going  concern.  The final
     outcome of these  matters is not  presently  determinable  and the June 30,
     1997 financial  statements of CQC do not include any adjustment  that might
     result from the outcome of this uncertainty.


3.   Construction Project And Related Contingencies:

     Capitol Queen Project
     ---------------------

     The Capitol Queen project, as originally  contemplated by the Company,  was
     to include the  riverboat,  dockside  facilities,  restaurants  and related
     ancillary  facilities  to be built on land  acquired by the Company in July
     1993.  As a result of the decision to  discontinue  the project,  all costs
     associated  with the design and  development of the facilities were written
     off in the fourth  quarter of the  Company's  1994  fiscal  year,  with the
     exception of the  historical  cost of the land and the riverboat  which was
     reclassified to assets held for sale.

     The Company had  contracted  with a  shipbuilder  to construct  the Capitol
     Queen riverboat. The total cost of the riverboat was $11,892,000, including
     construction period interest and other assets.  During the third quarter of
     the year ended June 30,  1996,  based on  deteriorating  market  conditions
     after the expiration of the Aerie contract,  the Company  recognized a loss
     of  $4,392,000  and  wrote-down  the  carrying  value of the  riverboat  to
     $7,500,000.  Such  revised  carrying  value  represents  management's  best
     estimate of the  riverboat's  current net realizable  value in a cash sale,
     based on  information  obtained  from  shipbuilders,  marine  brokers,  and
     purchase offers made to the Company from third parties.

     Jefferson City Development Agreement
     ------------------------------------

     The Company  acquired  the  franchise  rights to operate the Capitol  Queen
     under a development  agreement  with the City of Jefferson  City,  Missouri
     (the "Development Agreement"),  beginning September 1, 1993 for a period of
     seven years.  The Company's  rights and  obligations  under the Development
     Agreement were contingent upon receiving a gaming license which,  until the
     occurrence  of the events  described  in Note 2,  management  believed  was
     probable.

     On  November  7, 1995,  voters in  Jefferson  City  rejected  an  ordinance
     permitting  riverboat  gambling,  reversing the vote an earlier election in
     which  Jefferson City voters  approved  riverboat  gambling.  Because CQC's
     Development  Agreement with Jefferson City was entered into pursuant to the
     earlier ordinance permitting riverboat gambling,  the Company believes that
     as matter of law the 1995  election  does not  affect the  validity  of the
     Development  Agreement.  However,  to avoid  the cost  and  uncertainty  of
     litigation,  CQC and Jefferson  City in June 1996 entered into an agreement
     pursuant to which the  Development  Agreement  was  rescinded and Jefferson
     City refunded  $300,000 of the $400,000 CQC had originally paid to the City
     under the Development Agreement.


     Other Development Agreement
     ---------------------------

     As discussed  below,  the Company and BGI have each entered into additional
     agreements in connection with the development of the Capitol Queen project,
     which have been  terminated  as a result of the  decision  by the  Missouri
     Gaming Commission.

     In January 1993,  prior to  incorporation,  the stockholders of the Company
     agreed that, upon being licensed in Missouri to own and operate the Capitol
     Queen,  the  Company  would  issue  shares  of its  common  stock  to three
     individuals  who assisted the then existing  stockholders of the Company in
     obtaining  the  rights  to  develop  the  Capitol  Queen  (the  "CQC  Stock
     Agreement").  The  aggregate  amount  of  stock  subject  to the CQC  Stock
     Agreement  represents 5.25% of the outstanding common stock of the Company,
     and was  subject to  increase to 8.25% if the  convention  center  required
     under the  Development  Agreement was not constructed on land controlled by
     the  parties  to the CQC Stock  Agreement.  The  Company  had the option to
     repurchase any or all of such stock, except for 25% held by one individual,
     for a period of three years from issuance at an aggregate purchase price of
     $750,000  ($1,200,000 if the additional shares were issued). In addition to
     the above requirements of the CQC Stock Agreement,  the Company also agreed
     to pay a lump-sum  fee of  $350,000 to two of the above  individuals  after
     receiving  a license  and the  commencement  of  operations  of the Capitol
     Queen.

     At the time CQC was  awarded  the  Development  Agreement,  and  until  the
     occurrence of the events  described in Note 2, the Company  believed it was
     probable it would  receive a gaming  license in Missouri.  Accordingly,  to
     reflect the CQC Stock Agreement,  CQC recorded subscribed stock of $788,000
     (using  the  $750,000  value  described  above  for  5.0% of the  stock  to
     determine  the  value of the  remaining  25%  interest),  recorded  amounts
     payable under the agreement for $350,000 and recorded a corresponding total
     charge of $1,138,000 to development costs, to be amortized over the life of
     the  Development  Agreement.  As a result of the  decision by the  Missouri
     Gaming  Commission  and  the  abandonment  of the  Capitol  Queen  project,
     management  believes  that  it has  been  relieved  of  these  obligations.
     Accordingly,  the subscribed stock, the $350,000  liability and the related
     deferred  costs (net of  amortization  from  September  1, 1993 to June 30,
     1994) were written-off in the fourth quarter of fiscal 1994.

     In  September  1993,  the  Company's  parent,  BGI,  agreed  that it  would
     repurchase  certain  rights  to  acquire  equity  in CQC  (the  "Repurchase
     Agreement")  which  it had  previously  granted  to  various  parties  (the
     "Sellers").  The  Sellers  assisted  BGI and the  Company,  through the BGI
     stockholders,  in obtaining  the  approval to develop,  own and operate the
     Capitol  Queen  in  Jefferson  City.  Under  the  terms  of the  Repurchase
     Agreement, BGI agreed to pay the Sellers an aggregate amount of $5,925,000,
     payable in  installments  through July 1, 1997 and bearing  interest at 10%
     per annum from the date the  Capitol  Queen  opens for  business.  BGI also
     agreed that if prior to  maturity,  BGI  proposed to sell any of its common
     stock in an underwritten public offering, the Sellers may accept registered
     shares in lieu of the payments  required based on the public offering price
     of  such  shares  (less  any  underwriters  discount)  subject  to  certain
     underwriter limitations.

     The  Repurchase  Agreement  provided  that in the  event  the  development,
     ownership  or operation of a riverboat  gaming  business in Jefferson  City
     becomes  unlawful  or CQC is  declined  a gaming  license,  the  Repurchase
     Agreement  becomes  null and void.  At the time BGI entered the  Repurchase
     Agreement,  and until the occurrence of the events described in Note 2, the
     Company  believed  it was  probable  it would  receive a gaming  license in
     Missouri. Accordingly, the assumption of the liability under the Repurchase
     Agreement  was treated as an  additional  investment in CQC by BGI, and the
     related  present  value  of the  costs to the  Sellers  of  $5,232,000  was
     recorded as deferred development costs to be amortized over the life of the
     Development Agreement.

     As a result of the  decision  by the  Missouri  Gaming  Commission  and the
     abandonment  of the Capitol  Queen  project,  BGI believes that it has been
     relieved of its obligations  under the Repurchase  Agreement.  Accordingly,
     the deferred costs under the Repurchase Agreement (net of amortization from
     September 1, 1993 to June 30, 1994) were  written-off in the fourth quarter
     of fiscal 1994.

     In  addition  to the above,  in the  fourth  quarter  of fiscal  1994,  CQC
     wrote-off previously capitalized expenditures of $1,375,000 and capitalized
     pre-opening  expenses of $340,000  associated  with the  development of the
     Capitol Queen project.


4.   Long-Term Debt:

     On November  18,  1993,  the Company  completed  a private  placement  debt
     financing of $40,000,000  principal  amount of 12% First Mortgage Notes Due
     November 15, 2000 (the " CQC Notes").  The offering  generated net proceeds
     of approximately  $30,666,000  (after deducting  original issue discount of
     $7,500,000  and  debt  issue  costs).  Interest  on the  Notes  is  payable
     semi-annually.  The Notes are guaranteed by AC (which  guarantee is subject
     to release only upon licensing of the Capitol Queen, which is not expected)
     and are  collateralized  by a first  mortgage on  substantially  all of the
     assets of the Company.

     As  described  in Note 2, the  Company  was  unable  to make  the  interest
     payments  due under the CQC  Notes on  November  15,  1995,  May 15,  1996,
     November  15,  1996 and May 15,  1997.  Such past due  interest,  including
     accrued interest on unpaid  interest,  in the amount of $5,788,000 has been
     accrued in the accompanying financial statements.

     As of January 1, 1995, CQC's obligations under the Indenture  governing the
     CQC Notes were amended with the requisite consent of the holders of the CQC
     Notes.  CQC's  previous  obligations to complete and open the Capitol Queen
     have been eliminated and CQC has agreed to a two-step plan to repay the CQC
     Notes. The first step, which was consummated on January 17, 1995,  involved
     the repurchase of $20,000,000  principal amount of the CQC Notes at 101% of
     such principal  amount plus accrued and unpaid  interest with funds held in
     the  restricted   project   escrow   account.   The  Company   incurred  an
     extraordinary  loss of  approximately  $4,089,000 in 1995,  reflecting  the
     premium paid to retire the debt of $200,000  and the  write-off of related,
     unamortized  debt issue costs and original  issue discount in the aggregate
     of  $3,889,000.  The second  step  permitted a purchase of the CQC Notes at
     101% of principal  plus accrued and unpaid  interest from a sale of assets.
     However,  the dates by which CQC previously  agreed with the holders of the
     CQC Notes to effect the sale of assets and  repurchase  the  remaining  CQC
     Notes have passed, and CQC is thus in default of the amended covenants.

     Concurrent  with the placement of the Notes,  BGI sold  2,500,000  warrants
     (the  "Warrants")  exercisable  for BGI common stock for gross  proceeds of
     $7,500,000.  The  gross  proceeds  from  the  sale  of  the  Warrants  were
     contributed to the Company.

     The Indenture  governing the CQC Notes (the "Indenture")  limits the use of
     the net proceeds from the offering and the sale of the Warrants to fund the
     cost of the development and construction of the Capitol Queen project,  the
     development of a convention center in Jefferson City,  Missouri and initial
     interest  payments.  The  proceeds  were  placed in  escrow  with a trustee
     pending  drawdowns  for  qualifying  project  expenditures.  As more  fully
     explained above and in Note 2, certain of the proceeds were used in January
     1995 in connection  with the first step of the plan to repay the CQC Notes.
     Prior to the receipt of the Notice on July 3, 1997,  the CQC Notes were not
     subject to mandatory redemption,  except upon a change of control, or other
     circumstances  as defined in the  Indenture.  The Company had the option to
     redeem the Notes at a premium  of 106%  beginning  on  November  15,  1997,
     declining to par value on November 15, 1999. If prior to November 15, 1997,
     BGI consummated an initial public offering of its common stock, the Company
     may also have redeemed the CQC Notes, at a premium of 108%.

     The  Indenture  contains  covenants  that,  among other  things,  limit the
     ability of the  Company  and, in certain  cases,  AC, to pay  dividends  or
     management fees, or incur additional indebtedness.

5.   Related-Party Transactions:

     Prior to the inception of CQC and through  November 18, 1993, AC advanced a
     total of approximately  $1,090,000 to fund  development  costs of CQC which
     was fully  repaid on  November  18,  1993 with  proceeds  from the  private
     placement financing transaction.  As of June 30, 1997 and 1996, the amounts
     payable to AC by the Company for  additional  advances were  $1,213,000 and
     $993,000, respectively. The advances are non-interest bearing.

     In May,  1995,  CQC  borrowed  $1.2  million  from AC in  order to make the
     semi-annual  interest  payment  due on the CQC  Notes.  The  borrowing  was
     executed as an uncollateralized  note payable to AC due June 30, 1998, with
     interest at an annual rate of 5.56%.  Interest expense incurred in relation
     to the note payable to AC was $67,000,  $67,000 and $8,000 during the years
     ended June 30, 1997, 1996 and 1995, respectively.  The Company has not paid
     any interest to AC for this obligation.


6.   Income Taxes:

     For the fiscal years June 30, 1997, 1996 and 1995, the Company incurred net
     operating losses for federal income tax purposes,  and  accordingly,  these
     financial  statements  do not  include  provision  for  federal  income tax
     purposes.

     The components  included in determining  the provision for income taxes for
     the years ended June 30, 1997, 1996, and 1995, net of extraordinary  items,
     are shown below:

<TABLE>
<CAPTION>
                                            1997           1996           1995
                                            ----           ----           ----
<S>                                  <C>            <C>            <C>
Tax provision (benefit) at federal
 income tax statutory rate .......   $(1,294,000)   $(2,647,000)   $(1,831,000)
Unrecognized tax benefit from net
 operating losses ................     1,294,000      2,574,000      1,831,000
Other ............................          --           73,000           --
                                     -----------    -----------    -----------
         Income tax provision ....   $      --      $      --      $      --
                                     -----------    -----------    -----------
</TABLE>




     Deferred income taxes reflect the net tax effects of temporary  differences
     between  the  carrying  amounts of assets  and  liabilities  for  financial
     reporting purposes, and the amounts used for income tax purposes. The major
     components of deferred taxes as of June 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>

                                                  1997           1996
                                                  ----           ----
<S>                                        <C>            <C>
Liabilities:                               $      --      $      --
                                           -----------    -----------
Assets:

Federal net operating loss carryforwards     5,877,000      5,500,000
  Valuation allowance for assets held
    for sale ...........................     1,494,000      1,494,000
                                             ---------      ---------
  Total deferred tax assets ............     7,371,000      6,994,000
                                             ---------      ---------
  Valuation allowance ..................    (7,371,000)    (6,994,000)
                                            ----------     ----------
  Net deferred taxes ...................   $      --      $      --
                                           -----------    -----------
</TABLE>


     As of  June  30,  1997,  the  Company  had a  federal  net  operating  loss
     carryforward of  approximately  $17,285,000  which expires between 2009 and
     2012.

7.   Fair Value of Financial Instruments:

     The estimated fair value of the Company's  financial  instruments have been
     determined  by  the  Company  using   available   market   information  and
     appropriate valuation methodologies.  The carrying amounts of cash and cash
     equivalents,   accounts   receivable,   accounts  payable,   capital  lease
     obligations  and  notes  approximate  fair  values  due to  the  short-term
     maturities and approximate market interest rates of these instruments.

     Management  is  unable  to  determine  a fair  value  for  the  outstanding
     $20,000,000 principal amount ($17,908,000 carrying amount at June 30, 1997)
     of 12% First  Mortgage  Notes due  November  15, 2000 of Capitol  Queen and
     Casino,  Inc. (the "CQC Notes"). As of June 30, 1997 the effective interest
     rate of the CQC Notes was 16%. It is not  practicable to determine the fair
     value of these financial  instruments  due to the debt covenant  violations
     and related uncertainties  involved in negotiations with the holders of the
     AC Notes and CQC Notes, as more fully discussed in Note 2.



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



                REPORT OF INDEPENDENT ACCOUNTANTS
                          ------------

To the Board of Directors
Arizona Charlie's, Inc.


We have audited the financial statements and the financial statement schedule of
Arizona  Charlie's,  Inc. (a wholly owned  subsidiary  of Becker  Gaming,  Inc.)
listed in Item 14(a) of this Form 10-K. These financial statements and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial statement schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Arizona Charlie's,  Inc. as of
June 30, 1997 and 1996, and the results of its operations and its cash flows for
each of the three  years in the period  ended June 30, 1997 in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial  statement  schedule referred to above, when considered in relation to
the  basic  financial  statements  taken as a  whole,  presents  fairly,  in all
material respects, the information required to be included therein.

The accompanying  financial  statements have been prepared assuming that Arizona
Charlie's, Inc. ("AC") will continue as a going concern. As more fully described
in  Note 2, AC is in  default  of debt  covenants,  resulting  in a  demand  for
immediate  payment  of the debt and  classification  of such  debt as  currently
payable. AC is also obligated as a guarantor under indebtedness of an affiliated
company,  and such indebtedness is also in default.  AC does not have sufficient
resources to repay the  indebtedness  or honor its guarantee on a current basis.
Management's  plans with respect to these matters are also  described in Note 2.
These matters raise  substantial  doubt about the ability of Arizona  Charlie's,
Inc. to continue as a going  concern.  The final outcome of these matters is not
presently determinable and the June 30, 1997 financial statements of the Arizona
Charlie's, Inc. do not include any adjustment that might result from the outcome
of this uncertainty.


/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.


Las Vegas, Nevada
August 22, 1997, except for Note 2,
as to which the date is
September 5, 1997
================================================================================
                             ARIZONA CHARLIE'S, INC.
               (A Wholly Owned Subsidiary Of Becker Gaming, Inc.)

                                 BALANCE SHEETS
                          As Of June 30, 1997 and 1996
                             (Dollars In Thousands)
                                   ----------
================================================================================

                                     ASSETS

                                                           1997            1996
                                                       --------        --------
Current assets:

   Cash and cash equivalents....................       $  5,481        $  4,591
   Restricted cash, in escrow account...........             10              10
   Trade and other accounts receivable..........            240             473
   Receivable from related parties..............          2,665           1,539
   Inventories .................................            529             575
   Prepaid expenses ............................            985           1,118
                                                       --------        --------
      Total current assets......................          9,910           8,306
                                                       --------        --------
Property and equipment:
   Building and improvements ...................         37,490          37,488
   Furniture and equipment......................         23,916          22,575
   Land improvements ...........................          1,629           1,628
                                                       --------        --------
                                                         63,035          61,691
   Less, accumulated depreciation ..............        (18,303)        (16,218)
                                                       --------        --------
                                                         44,732          45,473
   Land ........................................            208             208
                                                       --------        --------
        Net property and equipment..............         44,940          45,681
                                                       --------        --------
Other assets:
   Receivable from related party, noncurrent....            210             987
   Deposits and other ..........................            544             460
   Notes receivable from related party .........          4,416           4,416
   Financing costs, less accumulated
     amortization of $1,923 (1997)
     and $1,366 (1996)                                    1,937           2,507
                                                       --------        --------

        Total other assets......................          7,107           8,370
                                                       --------        --------

        Total assets ...........................       $ 61,957        $ 62,357
                                                       ========        ========

<PAGE>


            LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

                                                          1997             1996
                                                      --------         --------

Current liabilities:
  Trade accounts payable......................        $  1,047         $  1,452
  Accounts payable to related parties.........            --                  4
  Accrued expenses ...........................           2,642            2,329
  Accrued interest ...........................           4,522              994
  Management fees due Becker Gaming, Inc......           5,347            4,682
  Notes payable, current portion..............             106              110
  Notes payable to related party..............           3,150            2,250
  Current portion of
     obligations under capital leases.........              12               15
  Current portion of long-term debt ..........             464             --
  Long-term debt classified as
     current due to default
     under covenants .........................          55,000           55,000
                                                      --------         --------

         Total current liabilities............          72,290           66,836

Long-term debt, less current portion..........           1,284             --
Subordinated notes payable to prior
  stockholders ...............................           5,000            5,000
Obligations under capital leases,
  less current portion .........                            29               22
                                                      --------         --------

         Total liabilities....................          78,603           71,858
                                                      --------         --------

Commitments and contingencies

Stockholder's equity (deficit):
  Common stock, no par value, 2,500
     shares authorized, 1,000 shares
     issued and outstanding...................             469              469
  Retained earnings (deficit).................         (17,115)          (9,970)
                                                      --------         --------
         Total stockholder's equity
          (deficit).................                   (16,646)          (9,501)
                                                      --------         --------

         Total liabilities and
         stockholder's equity (deficit).......        $ 61,957         $ 62,357
                                                      ========         ========

The accompanying notes are an integral part of these financial statements.
================================================================================
                             ARIZONA CHARLIE'S, INC.
               (A Wholly Owned Subsidiary Of Becker Gaming, Inc.)

                            STATEMENTS OF OPERATIONS
                             (Dollars In Thousands)
================================================================================

                                                   Year Ended June 30,
                               ------------------------------------------------
                                             1997        1996        1995
                                             ----        ----        ----
Revenues:
  Gaming .............................   $ 47,857    $ 52,831    $ 47,466
  Food and beverage ..................     13,583      13,401      10,877
  Hotel ..............................      3,352       3,208       2,614
  Gift shop ..........................        553         590         577
  Other ..............................        923         948         682
                                         --------    --------    --------

      Gross revenues .................     66,268      70,978      62,216

Less, promotional allowances .........     (8,184)     (7,677)     (5,134)
                                         --------    --------     --------

      Net revenues ...................     58,084      63,301      57,082
                                         --------    --------    --------

Operating expenses:
  Gaming .............................     17,229      18,612      15,359
  Food and beverage ..................     12,337      12,511      11,388
  Hotel ..............................      1,390       1,413       1,377
  Gift shop ..........................        519         475         450
  Advertising and promotion ..........      4,813       4,726       3,837
  General and administrative .........     17,463      17,660      15,358
  Provision for losses on related
   party receivlables ................        220         601       1,592
  Management fees - Becker Gaming,
   Inc., net                                  664       1,396       3,099
  Rent expense paid to related party .        222         217         191
  Depreciation and amortization ......      3,568       3,491       3,373
                                         --------    --------    --------

      Total operating expenses .......     58,425      61,102      56,024
                                         --------    --------    --------
      Operating income (loss).........       (341)      2,199       1,058
                                         --------    --------    --------

Other income (expenses):
  Interest income ....................        272         286         580
  Interest expense ...................     (7,275)     (7,095)     (7,250)
  Interest capitalized ...............        -           -           676
  Other, net .........................        199          51         -
                                         --------    --------    --------
      Total other expenses ...........     (6,804)     (6,758)     (5,994)
                                         --------    --------    --------

    Net (loss)income before income tax     (7,145)     (4,559)     (4,936)

    Provision for income taxes                -           -           -
                                         --------    --------    --------

    Net (loss) income ................   $ (7,145)   $ (4,559)   $ (4,936)
                                         ========    ========    ========


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

================================================================================

                             ARIZONA CHARLIE'S, INC.
               (A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
                  STATEMENTS  OF  STOCKHOLDER'S  EQUITY  (DEFICIT) For The Years
                Ended June 30, 1997, 1996 And 1995
                             (Dollars In Thousands)
================================================================================

                                                           Additional
                                         Common Stock      Paid-in
                                         ------------
                                      Shares     Amount    Capital
                                      ------    -------    ------

Balances, June 30, 1994 ............   1,000    $   469      $-

 Net loss ..........................    --         --        --
                                      ------    -------    ------

Balances, June 30, 1995 ............   1,000        469      --


 Net loss ..........................    --         --        --
                                      ------    -------    ------

Balances, June 30, 1996 ............   1,000        469      --

 Net loss ..........................    --         --        --
                                      ------    -------    ------

Balances, June 30, 1997 ............   1,000    $   469      $-
                                      ======    =======    ======


                                    Retained
                                    Earnings
                                      (Deficit)    Total
                                      -------    -------

Balances, June 30, 1994 ............  $  (475)   $    (6)

 Net loss ..........................   (4,936)    (4,936)
                                      -------    -------

Balances, June 30, 1995 ............   (5,411)    (4,942)

 Net loss ..........................   (4,559)    (4,559)
                                      -------    -------

Balances, June 30, 1996 ............  $(9,970)   $(9,501)

 Net loss ..........................   (7,145)    (7,145)
                                      -------    -------

Balances, June 30, 1997 ............ $(17,115)  $(16,646)
                                      =======    =======

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

================================================================================
                             ARIZONA CHARLIE'S, INC.
               (A Wholly Owned Subsidiary Of Becker Gaming, Inc.)
                            STATEMENTS OF CASH FLOWS
                             (Dollars In Thousands)
================================================================================

                                                       Year Ended June 30,
                                                            --------
                                                    1997       1996       1995
                                                 --------   --------   --------
Cash flows from operating activities:
 Net income (loss) ............................  $ (7,145)  $ (4,559)  $ (4,936)
                                                 --------   --------   --------
 Adjustments  to  reconcile  net  income
   (loss) to net  provided  by (used by)
   operating activities:
  Provision for losses on related
   party receivables ..........................       220        601      1,592

  Depreciation and amortization ...............     3,568      3,491      3,373
  (Gain) loss on sale of equipment ............      (129)        11         (2)
(Increase) decrease in operating assets:
  Receivables .................................       233        185       (387)
  Inventories .................................        46         86       (108)
  Prepaid expenses ............................       322        241       (339)
  Deposits and other ..........................       (12)       (41)       (92)

Increase (decrease) in operating liabilities:
  Accounts payable, net of amounts
   for capital expenditures....................      (409)         3       (144)
  Accrued interest ............................     3,528        (21)       135
  Accrued expenses ............................       313        247        581
  Management fees due to Becker Gaming, Inc. ..       665      1,395      3,099
                                                 --------   --------   --------

    Total adjustments .........................     8,345      6,198      7,708
                                                 --------   --------   --------

    Net cash provided by operating activities .     1,200      1,639      2,772
                                                 --------   --------   --------

Cash flows from investing activities:
  Note receivable issued to CQC ...............      --         --       (1,200)
  Capital expenditures, net of amounts in
   accounts payable ...........................      (501)      (190)   (24,253)
  Increase in receivable from Becker Gaming,
   Inc. ........................................     (569)    (2,065)    (4,154)
  Net (additions to) reductions in restricted
    cash equivalents ..........................      --         --       26,102
  Proceeds from assets sales ..................        67         15        104
                                                 --------   --------   --------

    Net cash used in investing activities .....    (1,003)    (2,240)    (3,401)
                                                 --------   --------   --------

Cash flows from financing activities:
  Proceeds from borrowing under notes payable .       900        --       2,250
  Principal payments on notes payable .........      (193)      (208)      (199)
  Payments under capital lease obligations ....       (14)        (4)       (32)
                                                  --------   --------   --------

    Net cash provided by  (used in) financing
   activities .................................       693       (212)     2,019
                                                 --------   --------   --------
    Net increase (decrease) in cash and cash
   equivalents ................................       890       (813)     1,390

Cash and cash equivalents, beginning of
  the year ....................................     4,591      5,404      4,014
                                                 --------   --------   --------

Cash and cash equivalents, end of the year ....  $  5,481   $  4,591   $  5,404
                                                 ========   ========   ========

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

================================================================================

                             ARIZONA CHARLIE'S, INC.
               (A Wholly Owned Subsidiary Of Becker Gaming, Inc.)

                          NOTES TO FINANCIAL STATEMENTS



1.Summary Of Significant Accounting Policies:

Nature Of Operations
--------------------

Arizona Charlie's, Inc. ("AC" or the "Company") owns and operates
a casino and related hotel in Las Vegas, Nevada.

In connection with the financing transaction more fully discussed in Note 6, the
stockholders  of AC  exchanged  all of their  stock in the  Company for stock of
Becker Gaming, Inc. ("BGI") (the  "Reorganization") and, effective June 1, 1994,
AC became a wholly owned  subsidiary of BGI. BGI has no  independent  activities
other than providing  management and  administrative  services to, and exploring
and developing  business  opportunities  for its  subsidiaries,  and serves as a
holding company for AC and the following entities:

     *    Capitol Queen & Casino, Inc. ("CQC"), a Missouri corporation
       formed to develop a riverboat casino in Jefferson City, Missouri
       (the "Capitol Queen").

     *     Sunset  Coin, Inc. ("SC"), a Nevada corporation  which
       operates a Las Vegas gaming machine route and service business.

     * Becker Gaming Group ("BGG"), a Nevada  corporation  which,  together with
       its wholly owned subsidiary Innerout, Inc., owns and operates restaurants
       and bars in Las Vegas under the  "Charlie's"  name,  each of which offers
       gaming machines.


Subsequent  to the  Reorganization,  certain  overhead  expenses  of the Company
(primarily related to executive  compensation),  have been eliminated.  However,
effective  June 1, 1994,  the Company is required to pay a management fee to BGI
in connection  with  executive  services  equal to a percentage of the Company's
gross  operating  revenues.  Under the AC Indenture,  no management fees will be
paid by AC until AC has attained a specified fixed charge coverage ratio of 2.25
to 1. However, such fees accrue without interest, until paid. See Note 9 of AC's
Notes to Financial Statements.


Gaming Revenue
--------------

In accordance with industry  practice,  the Company recognizes as gaming revenue
the net win from gaming activities,  which is the difference between gaming wins
and losses.


Promotional Allowances
----------------------

The retail  value of hotel  accommodations,  food,  beverage and gift shop items
provided to  customers  without  charge is included in gross  revenues  and then
deducted as  promotional  allowances  to arrive at net  revenues.  The estimated
costs of providing such  promotional  allowances  have been classified as gaming
expenses through interdepartmental allocations, as follows:
<TABLE>
                                                Years Ended June 30,
<CAPTION>
                                          1997             1996             1995
                                          ----             ----             ----
<S>                                 <C>              <C>              <C>
Hotel .......................       $  349,000       $  261,000       $  164,000
Food and Beverage ...........        4,094,000        3,824,000        2,260,000
                                     ---------        ---------        ---------

                                    $4,443,000       $4,085,000       $2,424,000
                                    ==========       ==========       ==========
</TABLE>

Cash Equivalents And Concentration Of Credit Risk
-------------------------------------------------

The Company considers all highly liquid investments with an original maturity of
three  months or less to be cash  equivalents.  The  Company has cash on deposit
with financial institutions in excess of federally insured amounts.

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

Inventories are valued at the lower of cost (first-in, first-out) or market.

Property And Equipment
----------------------

Property and equipment are stated at cost.  Maintenance  and repairs are charged
to expense when incurred.  Upon  retirement or disposal of assets,  the cost and
accumulated depreciation are eliminated from the accounts and the resulting gain
or loss is credited or charged to income, as appropriate.

Building,  building improvements and land improvements are depreciated using the
straight-line method over estimated useful lives of 5 to 40 years. Furniture and
equipment are depreciated using straight-line and declining balance methods over
estimated useful lives of 5 to 10 years.

Financing Costs
---------------

Costs  associated  with the issuance of debt are deferred and amortized over the
life of the related indebtedness using the effective interest method.

Preopening Expense
------------------

Certain preopening costs,  consisting  principally of personnel costs,  training
and other costs directly  associated  with the opening of a new  hotel-casino or
significant  expansions of the existing hotel-casino are capitalized and charged
to expense over a period not to exceed one year  following the  commencement  of
related operations. During the year ended June 30, 1994, the Company capitalized
$27,000 of preopening  costs which were amortized during the year ended June 30,
1995 after the expansion was completed. During the years ended June 30, 1997 and
1996, the Company did not capitalize any preopening costs.

Federal Income Taxes
--------------------

Effective January 1, 1994, the Company terminated its S corporation election and
adopted  Statement of Financial  Accounting  Standards No. 109,  "Accounting for
Income Taxes" ("SFAS 109").  Under SFAS 109 deferred tax assets and  liabilities
are  recognized  for  the  expected  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.  Under SFAS 109,  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.

In connection  with the  Reorganization,  beginning June 1, 1994, the Company is
included in the  consolidated  federal income tax returns filed by BGI. AC's tax
allocation  is based on the amount of tax it would  incur if it filed a separate
return.

Reclassifications
-----------------

Certain amounts in the 1995 and 1996 financial statements have been reclassified
to conform with the 1997 presentation.

Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates,  particularly  with respect to
the matters discussed in Note 2.


2.CQC Gaming License, Default Under Indebtedness,  Management's Plans, And Going
  Concern:

CQC was formed to develop,  own and operate the "Capitol Queen" riverboat casino
and related land-based  facilities in Jefferson City, Missouri. On September 28,
1994, CQC was notified that its application for a gaming license was rejected by
the Missouri Gaming Commission (the "Commission").  At the time CQC was notified
of the Commission's decision,  construction of the riverboat under contract with
a shipbuilder was almost completed.  CQC had also obtained the necessary permits
for the  land-based  development  portion of the project and  performed  certain
dredging and other site preparation work. Immediately following the Commission's
decision,  management  temporarily  suspended further development of the Capitol
Queen project,  pending an appeal of the decision and legal remedies potentially
available to the Company.

On November 7, 1995,  voters in Jefferson City rejected an ordinance  permitting
riverboat gambling, reversing the vote of an earlier election in which Jefferson
City voters approved riverboat gambling.  Management  subsequently abandoned the
project  and is  currently  looking  for  alternative  uses  for the  riverboat,
including opportunities to sell or lease it to another operator.

CQC financed the Capitol Queen project  through the issuance of  $40,000,000  in
principal  amount of 12% First  Mortgage  Notes due  November 15, 2000 (the "CQC
Notes").  As of January  1,  1995,  the  indenture  governing  the CQC Notes was
amended to (i)  eliminate  CQC's  obligation  to construct  and open the Capitol
Queen and (ii) permit a two-step  purchase of the CQC Notes at 101% of principal
plus  accrued  and  unpaid  interest  from a sale  of  assets.  The  first  step
repurchase of  $20,000,000  principal  amount of the CQC Notes (plus accrued and
unpaid  interest) was completed on January 17, 1995, with unexpended  funds from
the project escrow account, and an aggregate of $20,000,000  principal amount of
the CQC Notes remained  outstanding.  However, the dates by which CQC previously
agreed  with the  holders  of the CQC Notes to effect the sale of its assets and
repurchase  the remaining  CQC Notes have passed,  and CQC is thus in default of
the amended covenants.

The remaining CQC Notes require annual interest payments of $2,400,000,  payable
in equal installments  semi-annually on May 15 and November 15. CQC was not able
to make its scheduled  interest payments of $1,200,000 on November 15, 1995, May
15, 1996,  November 15, 1996 and May 15, 1997 and AC (which has  guaranteed  the
CQC Notes as more fully described below) did not have available funds to advance
on behalf of CQC.

Concurrent with the issuance of the CQC Notes, AC completed a private  placement
debt financing of  $55,000,000  in principal  amount of 12% First Mortgage Notes
due November 15, 2000 (the "AC Notes").  The AC Notes  require  annual  interest
payments of $6,600,000,  payable in equal  installments  semi-annually on May 15
and  November  15. AC was not able to make its  scheduled  interest  payment  of
$3,300,000  on May 15,  1997 and SC (which has  guaranteed  the AC Notes as more
fully described  below) did not have available funds to advance on behalf of AC.
AC is also in  default  of  certain  covenants  under the AC Notes as more fully
described in Note 6. AC is  restricted  from selling  assets under the covenants
governing the AC Notes and management believes that access to additional capital
from other sources is restricted as result of the above-described circumstances.
AC does not have sufficient financial resources (including a guarantee of the AC
Notes by SC, as more fully  described  below) to repay the AC Notes on a current
basis and satisfy its guarantee  obligation (as more fully described below) with
respect to the CQC Notes.

The CQC Notes are  guaranteed by AC (which  guarantee is subject to release only
upon  licensing of the Capitol Queen,  which is not expected).  The AC Notes are
guaranteed by SC (which  guarantee is subject to release upon  completion of the
Expansion, which management believes has been satisfied, and the attainment of a
fixed-coverage  ratio  by AC of  2.25  to 1  following  the  completion  of  the
Expansion, which has not been satisfied). The amount and extent of AC's guaranty
of the CQC Notes is in dispute. Legal counsel has advised management that, under
the  terms of CQC  indenture  regarding  fraudulent  conveyance,  the  guarantee
liability of AC is not expected to be material.

On July 3, 1997 CQC received a notice of  acceleration  (the  "Notice") from the
trustee and collateral agent for the CQC Notes.  Pursuant to section 6.02 of the
indenture  governing the CQC Notes,  due to certain  violations of the indenture
(as  more  fully  described  above),  all  of  the  outstanding  CQC  Notes  are
immediately  due and  payable  together  with all  accrued  and unpaid  interest
thereon.

On September 5, 1997, AC received a notice of acceleration  from the trustee and
collateral  agent for the AC Notes.  Pursuant to section  6.02 of the  indenture
governing  the AC Notes,  due to certain  violations  of the  indenture (as more
fully  described in Note 6), all of the outstanding AC Notes are immediately due
and payable together with all accrued and unpaid interest thereon.

CQC continues to market its riverboat assets to prospective  buyers.  Management
of the Company, AC and CQC are currently undergoing discussions with an informal
committee  representing  the  holders  of  the  AC  Notes  and  CQC  Notes  (the
"Bondholder  Committee")  regarding  a  proposed  restructuring  plan.  Based on
current  market  conditions,  management  does not expect that CQC will generate
sufficient  funds  through  the  sale of its  assets  to  repurchase  all of the
outstanding CQC Notes. The proposed  restructuring plan therefore  contemplates,
amongst other terms and conditions,  (i)  liquidation of CQC's remaining  assets
for the benefit of the CQC  bondholders,  (ii) a limited  cash  payment by AC as
full and complete satisfaction of AC's guaranty of the CQC Notes, and (iii) AC's
issuance of a reduced amount of new notes as full and complete  satisfaction  of
the existing AC Notes.  However,  no  satisfactory  offers for the riverboat are
currently  available,  and no agreement  has been  reached  with the  Bondholder
Committee regarding the proposed restructuring plan. Accordingly,  these matters
raise  substantial doubt about the ability of AC to continue as a going concern.
The final outcome of these matters is not  presently  determinable  and the June
30, 1997  financial  statements of AC do not include any  adjustment  that might
result from the outcome of this uncertainty.



3.Supplemental Cash Flow Information:

The following are  supplemental  disclosures  of cash flow  information  for the
years ended June 30, 1997, 1996 and 1995:


<TABLE>
<CAPTION>
                                               1997         1996         1995
                                               ----         ----         ----
<S> ..................................   <C>          <C>          <C>
Interest paid, net of amounts
  capitalized ........................   $3,747,000   $7,116,000   $7,115,000
                                         ==========   ==========   ==========

Capitalized lease obligations
  incurred ...........................   $   17,000   $   34,000   $    9,000
                                         ==========   ==========   ==========
Assets acquired through issuance of
  long-term debt ................ ....   $1,748,000   $     --     $     --
                                         ==========   ==========   ==========
Net transfer of assets and related
  liabilities from Becker Gaming, Inc.   $     --     $     --     $   25,000
                                         ==========   ==========   ==========
</TABLE>

4.Accrued Expenses:

Major classes of accrued  expenses  consist of the following as of June 30, 1997
  and 1996:

<TABLE>
<CAPTION>
                                                1997         1996
                                                ----         ----

     <S>                                  <C>          <C>
     Wages payable and accrued salaries   $  824,000   $  811,000
     Accrued vacation .................      336,000      306,000
     Group insurance ..................      447,000      352,000
     Gaming taxes .....................      221,000      239,000
     Payroll and other taxes ..........      356,000      405,000
     Charlie Card slot club liability .      221,000            -
     Progressive slot and table games .
      liability .......................      124,000       88,000
     Other accrued expenses ...........      113,000      128,000
                                             -------      -------
                                          $2,642,000   $2,329,000
                                          ==========   ==========
</TABLE>


5.Notes Payable:

Notes payable consist of the following as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                           1997         1996
                                                           ----         ----
<S>                                                  <C>          <C>
 Related parties:
      Notes payable to SC with interest at 5.56%
      uncollateralized and due May 1998 ............ $2,250,000   $2,250,000

      Note payable to SC with interest at 4.50%
      uncollateralized and due January, 1998 .....      900,000         -

 Nonrelated parties:
      5.96% note payable in monthly
      installments of $21,616, including interest,
      through December, 1997, uncollateralized ....  $  106,000   $  110,000
                                                     ----------   ----------

                                                      3,256,000    2,360,000

                   Less current portion ...........  (3,256,000)  (2,360,000)

                                                     $    -       $     -
                                                     ==========   ==========
</TABLE>

6.Long-Term Debt:

Long-term debt consists of the following as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                      1997          1996
                                                      ----          ----
<S>                                            <C>           <C>
12.75% note payable with interest and
     principle due in monthly installments
     through May, 2002 collateralized by
     various slot equipment of AC and
     personal guarantees of the
     stockholders BGI ......................   $ 1,540,000   $     -

Othernotes  payable due in monthly  principle  
     only  installments  through June,
     1998 collateralized by slot
     machine equipment of the company ......       208,000         -

12%  First  Mortgage  Notes Due November 15, 
     2000 (the "AC Notes") with interest
     payable semiannually classified as 
     currently payable due to defaults under
     covenants (see below) .................    55,000,000    55,000,000
                                                ----------    ----------
                                                56,748,000    55,000,000

                    Less current portion ...   (55,464,000)  (55,000,000)

                                               $ 1,284,000   $     -
                                               ===========   ============
</TABLE>


On November 18, 1993, the Company completed a private placement of the AC Notes.
The  offering  generated  net  proceeds  of  approximately   $33,684,000  (after
deducting  debt  financing  costs and  approximately  $16,791,000  used to repay
principal  and accrued  interest to a bank which was due and payable on November
18,  1993).  The AC Notes are  guaranteed  by SC (which  guarantee is subject to
release upon  completion of the  Expansion  which  management  believes has been
satisfied and the attainment of a fixed coverage ratio by the Company of 2.25 to
1, following the completion of the Expansion,  which has not been satisfied) and
are  collateralized  by a first mortgage on  substantially  all of assets of the
Company, including the Expansion.

As of June 30,  1997,  AC is in  default  of certain  debt  covenants  under the
Indenture  governing  the AC Notes.  These  covenant  violations  include  (i) a
failure  to meet a minimum  Fixed  Charge  Coverage  ratio,  as  defined  in the
Indenture;  (ii)  advances by AC to Becker  Gaming,  Inc.  which exceed  amounts
allowed for under the Indenture  (which advances remain  outstanding at June 30,
1997);  (iii)  beginning  in the fourth  quarter of fiscal 1997,  exceeding  the
amount of new indebtedness allowed for under the Indenture;  (iv) beginning with
the quarter  ending  December 31, 1995, AC has not met the Minimum  Tangible Net
Worth Ratio of 1.5 to 1.0, as defined in the Indenture;  and (v) AC did not make
its required  semi-annual  interest  payment of  $3,300,000  on May 15, 1997. In
addition,  beginning with the quarter  ending  December 31, 1995, AC has not met
the Minimum Tangible Net Worth requirement  defined in the Indenture.  Under the
terms  of the  Indenture,  AC is  technically  required  to  offer  to buy  back
$33,000,000  of the  outstanding AC Notes at June 30, 1997 due to the failure to
meet this covenant,  increasing by $5,500,000  each fiscal  quarter.  AC has not
made such  offer and does not  intend  to do so while the  discussions  with the
Bondholder  Committee  are in  process.  As a  result  of these  defaults  under
covenants  and demand for payment  made by the  Trustee,  the AC Notes have been
classified  as  currently  payable  in the  accompanying  financial  statements.
Management's plans are more fully described in Note 2.

The Indenture governing the AC Notes limits the use of the net proceeds from the
offering to fund the cost of the  Expansion.  The proceeds were placed in escrow
with a trustee pending draw- downs for qualifying  project  expenditures and are
classified as restricted cash, in escrow account, in the accompanying  financial
statements. The AC Notes are not subject to mandatory redemption,  except upon a
change of control,  decline in tangible net worth, or certain assets sales,  all
as defined in the  Indenture.  The Company has the option to redeem the AC Notes
at a premium of 106%  beginning on November 15, 1997,  declining to par value on
November 15, 1999.

The Indenture contains covenants that, among other things,  limit the ability of
the Company and, in certain cases,  SC, to pay dividends or management  fees, or
incur additional  indebtedness.  The Indenture also requires the Expansion to be
completed in a specified manner and time frame,  which  management  believes has
been achieved.

In connection with AC's guarantee of the CQC Notes, the Indenture  governing the
CQC Notes  imposes  certain  restrictive  covenants  on the  Company,  including
minimum cash flow and net worth  requirements  and  restrictions  on  additional
borrowings and distributions of earnings.

Maturities of long-term debt at June 30, 1997 (including the AC Notes which have
been classified as current) are as follows:


<TABLE>
<S>                     <C>
      1998              $55,464,000
      1999                  270,000
      2000                  304,000
      2001                  348,000
      2002                  362,000
Thereafter                      -
                        -----------

                        $56,748,000
                        ===========
</TABLE>


7.Income Taxes:

For the fiscal years ended June 30, 1997,  1996 and 1995,  the Company  incurred
net operating  losses for federal income tax purposes,  and  accordingly,  these
financial statements do not include a provision for federal income taxes.

The components  included in determining the provision for income taxes are shown
below for the years ended June 30, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                             1997           1996           1995
                                             ----           ----           ----
<S>                                   <C>            <C>            <C>
Tax provision at federal income tax
     statutory rate ...............   $(2,429,000)   $(1,550,000)   $(1,678,000)

Increase (decrease) in taxes
     resulting from:
     Unrecognized tax benefit from
     net operating losses .........     2,373,000      1,489,000      1,633,000
     Other ........................        56,000         61,000         45,000
                                           ------         ------         ------

     Income tax provision             $      --      $      --      $      --
                                      ===========    ===========    ===========
</TABLE>


Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes,  and the amounts used for income tax purposes. The major components of
deferred  tax  liabilities  and  assets  as of June 30,  1997  and 1996  were as
follows: <TABLE> <CAPTION>
                                                  1997           1996
                                                  ----           ----
Liabilities
-----------
<S>                                        <C>            <C>
Depreciation ...........................   $   960,000    $   542,000
                                           -----------    -----------


Assets
------
Allowances for bad debts ...............       820,000        745,000
Federal net operating loss carryforwards     5,836,000      3,119,000
                                             ---------      ---------

         Total deferred tax assets .....     6,656,000      3,864,000

Valuation allowance ....................    (5,696,000)    (3,322,000)
                                            ----------     ----------

         Net deferred taxes ............   $      --      $      --
                                           ===========    ===========
</TABLE>

As of June 30, 1997, the Company had a federal net operating  loss  carryforward
of approximately $17,165,000 which expires between 2009 and 2012.

8.Leases And Commitments:

The Company has entered into capital lease agreements whereby the Company leases
various equipment under three-and five-year leases which expire at various dates
through 2001.

Property and  equipment  includes the  following  property  leased under capital
leases as of June 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                    1997        1996
                                    ----        ----
<S>                             <C>         <C>
Equipment ...................   $ 60,000    $ 43,000
Less accumulated depreciation     (9,000)     (3,000)
                                  ------      ------

                                $ 51,000    $ 40,000
                                ========    ========
</TABLE>


The Company leases office space under a 10-year  operating lease,  which expires
in 1998, from Charleston  Heights  Shopping Center  ("CHSC"),  a company related
through common ownership, as more fully described in Note 9.

Future  minimum  lease  payments,  by year and in the  aggregate,  under capital
leases and  noncancellable  operating  leases with initial or remaining terms of
one year or more consist of the following at June 30, 1997:

<TABLE>
<CAPTION>
                                                 Capital Lease  Operating Leases
                                                 -------------  ----------------
<S>                                                    <C>          <C>
1998                                                   15,000       $226,000
1999                                                   15,000           --
2000                                                   14,000           --
2001                                                    4,000           --
----                                                    -----          -----

       Total minimum lease payments ..........       $ 48,000       $226,000
                                                                    ========

Less amount representing interest ............         (7,000)
                                                        -----
       Present value of net minimum
        lease payments .......................         41,000

Less current portion .........................        (12,000)
                                                      -------

       Obligations under capital leases              $ 29,000
                                                     ========
</TABLE>

Aggregate  rental  expense under  operating  leases for the years ended June 30,
1997, 1996 and 1995 was $222,000, $217,000 and $191,000, respectively.

The  following  balances due to or from related  parties  existed as of June 30,
1997 and 1996. The identified related parties are stockholders of the Company or
affiliated companies related through common ownership.

<TABLE>
                                  June 30, 1997
================================================================================
<CAPTION>
                                   Current     Noncurrent      Notes
                               Receivables    Receivables    Receivable
                               -----------    -----------   -----------
<S>                            <C>            <C>           <C>
Former Stockholders of the
Company .....................  $    22,000    $   165,000          --
BGI .........................    2,584,000           --     $ 4,416,000
Sunset Coin .................      (63,000)          --            --
Becker Vending ..............      (15,000)          --            --
Becker Enterprises ..........        1,000           --            --
CQC .........................    1,213,000           --       1,200,000
BGG:
    Charlie's Lakeside ......        5,000           --            --
    Charlie's Bar ...........       16,000           --            --
    Cantina Charlie's .......       19,000           --            --
    Cariba Charlie's ........       26,000         45,000          --
    Charlie's Saloon ........       11,000           --            --
    Charlie's Down Under ....       59,000           --            --

                               -----------    -----------   -----------
Total .......................    3,878,000        210,000     5,616,000

Less:  Allowance for doubful
        collection of amounts
        due from CQC ........   (1,213,000)          --      (1,200,000)
                               -----------    -----------   -----------


                               $ 2,665,000    $   210,000   $ 4,416,000
                               ===========    ===========   ===========
</TABLE>
<TABLE>
<CAPTION>
                                   Management
                                    Fee and                  Subordinated
                                    Accounts      Notes        Notes
                                    Payable      Payable      Payable
                                    ----------   ----------   ----------
<S>                                <C>          <C>          <C>
Former Stockholders of the
Company .........................   $     --     $     --     $5,000,000
BGI .............................    5,347,000         --           --
Sunset Coin .....................         --      3,150,000         --
Becker Vending ..................         --           --           --
Becker Enterprises ..............         --           --           --
CQC .............................         --           --           --
BGG:
    Charlie's Lakeside ..........         --           --           --
    Charlie's Bar ...............         --           --           --
    Cantina Charlie's ...........         --           --           --
    Cariba Charlie's ............         --           --           --
    Charlie's Saloon ............         --           --           --
    Charlie's Down Under ........         --           --           --

                                    ----------   ----------   ----------
Total ...........................    5,347,000    3,150,000    5,000,000

Less:  Allowance for doubful
        collection of amounts
        due from CQC ............         --           --           --

                                    ----------   ----------   ----------
                                    $5,347,000   $3,150,000   $5,000,000
                                    ==========   ==========   ==========
</TABLE>
<TABLE>
                                  June 30, 1996
================================================================================
<CAPTION>
                                     Current        Noncurrent       Notes
                                    Receivables     Receivables    Receivable
                                    -----------    -----------   -----------

<S>                                 <C>            <C>           <C>
Former Stockholders of the
Company ..........................  $    14,000    $   165,000   $      --
BGI ..............................    1,400,000        747,000     4,416,000
Sunset Coin ......................       47,000           --            --
Becker Vending ...................         --             --            --
Becker Enterprises ...............        1,000           --            --
CQC ..............................      993,000           --       1,200,000
BGG:
    Charlie's Lakeside ...........       (7,000)          --            --
    Charlie's Bar ................       10,000           --            --
    Cantina Charlie's ............       11,000           --            --
    Cariba Charlie's .............       13,000         75,000          --
    Charlie's Saloon .............        6,000           --            --
    Charlie's Down Under .........       44,000           --            --
                                    -----------    -----------   -----------
Total ............................    2,532,000        987,000     5,616,000
Less:  Allowance for doubful
        collection of amounts
        due from CQC .............     (993,000)          --      (1,200,000)
                                    -----------    -----------   -----------
                                    $ 1,539,000    $   987,000   $ 4,416,000
                                    ===========    ===========   ===========
</TABLE>
<TABLE>
<CAPTION>

                                     Management Fee             Subordinated
                                      and Accounts    Notes        Notes
                                         Payable     Payable      Payable
                                      ----------   ----------   ----------

<S>                                   <C>          <C>          <C>
Former Stockholders of the
Company ...........................   $    4,000   $     --     $5,000,000
BGI ...............................    4,682,000         --           --
Sunset Coin .......................         --     $2,250,000         --
Becker Vending ....................         --           --           --
Becker Enterprises ................         --           --           --
CQC ...............................         --           --           --
BGG:
    Charlie's Lakeside ............         --           --           --
    Charlie's Bar .................         --           --           --
    Cantina Charlie's .............         --           --           --
    Cariba Charlie's ..............         --           --           --
    Charlie's Saloon ..............         --           --           --
    Charlie's Down Under ..........         --           --           --

                                      ----------   ----------   ----------
Total .............................    4,686,000    2,250,000    5,000,000

Less:  Allowance for doubful
        collection of amounts
        due from CQC ..............         --           --           --
                                      ----------   ----------   ----------


                                      $4,686,000   $2,250,000   $5,000,000
                                      ==========   ==========   ==========
</TABLE>


CHSC owns the land on which the  Company's  administrative  offices  are located
and,  prior to the  Reorganization,  CLC owned  the land on which the  Company's
operations  are  located.  Rent  expense  paid to CHSC and CLC and  included  in
results of operations of the Company was $222,000, $217,000 and $191,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.  The rental fees include
the cost of insurance, taxes and common area maintenance on the land.

Receivables from BGG, stockholders of the Company and BGI bear interest at 8.0%,
4.5% and 6.0%, respectively.  Interest income from related parties was $265,000,
$245,000  and  $168,000  for the  years  ended  June 30,  1997,  1996 and  1995,
respectively.

In  anticipation  of  the  January  1,  1994  termination  of  the  Company's  S
corporation election,  on December 24, 1993, the Company distributed  $5,000,000
to its stockholders,  representing previously taxed,  undistributed income. This
distribution  was immediately  loaned back to the Company by the stockholders in
the form of subordinated notes payable, which bear interest at an annual rate of
10%, payable monthly, with the entire principal amount due on January 1, 2001.

During the years ended June 30, 1995 and 1997, the Company  borrowed  $2,250,000
and $900,000,  respectively  from SC for general  working capital  purposes.  As
described in Note 5 these  obligations are due in 1998 with interest  payable at
5.56% and 4.50%, respectively.

Interest expense  incurred under related party notes was $651,000,  $633,000 and
$550,000 for the years ended June 30, 1997, 1996 and 1995,  respectively.  As of
June 30, 1997 and 1996 accrued  interest  expense  under related party notes was
$397,000 and $169,000, respectively.

In May, 1995, CQC borrowed $1,200,000 from AC in order to have funds to make the
semi-annual interest payment due on the CQC Notes. The borrowing was executed as
an  uncollateralized  note payable to AC due May, 1996 with interest at the rate
of  5.56%.  Due to the  current  financial  condition  of  CQC,  management  has
determined  that  collectibility  of the note, and of other advances of $301,000
(1995),   $692,000  (1996)  and  $220,000  (1997)  made  to  CQC,  is  doubtful.
Accordingly, provisions were made to fully reserve the advances and note payable
and losses  have been  recorded  in the  accompanying  financial  statements  as
payments under guarantee obligations.

The Company has advanced to BGI an aggregate of approximately $6,364,000 to fund
BGI's  operating  expenses from June 1994 through June 1997 of which  $4,416,000
represented  notes receivable that are interest bearing and have been classified
as noncurrent  based on  management's  expectation  for the timing of repayments
from BGI. At June 30, 1997, accrued interest  receivable on the interest bearing
portion of the advances to BGI totaled $636,000. The matters described in Note 2
raise substantial doubt about the ability of BGI's principal  subsidiaries (and,
thus BGI) to continue as a going concern. Accordingly, management of the Company
believes it is reasonably possible that a portion, or the entire balance, of the
notes  receivable from BGI will be  uncollectible.  However,  an estimate of the
loss cannot  presently  be  determined  and no  adjustment  has been made to the
carrying value or classification of the notes receivable at June 30, 1997.

At June 30,  1997,  the Company  owed BGI  approximately  $5,347,000  in accrued
management fees. Under the terms of the indenture  governing the AC Notes, these
fees  cannot be paid to BGI until a specified  fixed  charge  coverage  ratio is
achieved.

Due to the decision to suspend development of CQC's riverboat casino project and
sell its assets,  the majority of BGI's management and  administrative  services
are  anticipated to benefit AC in the future.  Accordingly,  in late March 1995,
BGI  transferred   approximately   40  employees   involved  in  accounting  and
administrative  functions  from  BGI  to AC.  These  employees  were  originally
employees  of  AC  and  were   transferred  to  BGI  in  June  1994,   when  the
Reorganization  became effective.  In connection with this transfer,  in October
1995, the Company  temporarily reduced the amount of the BGI management fee to a
net 1.0% of AC's gross revenues (previously 5.0% of gross revenues) based on the
reduction  in services it will  receive  from BGI in the  future.  Such  reduced
management fees continue to be in effect at June 30, 1997.

The Company's  president operates a sole  proprietorship  under the name "Becker
Vending" which places  arcade,  cigarette,  music and other vending  machines at
Arizona  Charlie's.  The Company  provides  nominal  collection  and  accounting
services to Becker Vending in connection with these  machines.  The Company does
not receive any rental fee or other  payment from Becker  Vending in  connection
with these  agreements.  Becker  Vending  retains all amounts  deposited  in its
vending machines. Becker Vending also sells to the Company cigarettes, candy and
similar items for resale in the Arizona Charlie's gift shop.


10.Contingencies:

The  Company  is subject to various  litigation  and claims  which  arise in the
ordinary  course  of  its  business.   In  the  opinion  of  management,   after
consultation with legal counsel,  the disposition of all such pending litigation
and  claims  will  not  have a  material  effect  on the  Company's  results  of
operations, cash flows, or financial position.

11.    Defined Contributions Plan:

The Company has adopted a 401(k) Defined Contribution Plan (the "Plan") covering
substantially all of its employees.  Eligible employees may contribute up to 10%
of their annual compensation to the Plan, up to certain limits prescribed by the
Internal  Revenue Service.  The Company matches 25% of each eligible  employee's
contributions up to a maximum of 6% of their individual  earnings.  In addition,
the Company  contributes an amount equal to 2% of each  participant's  earnings.
The Plan went into effect July 1, 1990.

The Company  recorded  charges  for  contributions  of  $548,000,  $495,000  and
$395,000 for the years ended June 30, 1997, 1996 and 1995, respectively.


12.  Fair Value of Financial Instruments:

The  estimated  fair  value of the  Company's  financial  instruments  have been
determined by the Company using  available  market  information  and appropriate
valuation  methodologies.  The  carrying  amounts of cash and cash  equivalents,
accounts  receivable,  accounts  payable,  capital lease  obligations  and notes
payable   approximate  their  respective  fair  values  due  to  the  short-term
maturities and approximate market interest rates of these instruments.

Management is unable to determine a fair value for the  outstanding  $55,000,000
principal  amount of 12% First  Mortgage  Notes due November 15, 2000 of Arizona
Charlie's, Inc. (the "AC Notes") or the outstanding $20,000,000 principal amount
($17,908,000  carrying  amount at June 30, 1997) of 12% First Mortgage Notes due
November 15, 2000 of Capitol Queen and Casino, Inc. (the "CQC Notes"), which are
guaranteed  by AC. As of June 30,  1997 the  effective  interest  rate of the AC
Notes  was 12%.  It is not  practicable  to  determine  the fair  value of these
financial   instruments  due  to  the  debt  covenant   violations  and  related
uncertainties  involved  in  negotiations  with the  holders of AC Notes and CQC
Notes, as more fully discussed in Note 2.

--------------------------------------------------------------------------------
                                                                     SCHEDULE II

                          CAPITOL QUEEN & CASINO, INC.

              VALUATION   AND  QUALIFYING  ACCOUNTS For The Years Ended June 30,
                          1997, 1996 And 1995
<TABLE>
<CAPTION>

                                                                       Additions
                                                     ------------------------

                                        Balance at    Charged to    Charged to
                                        Beginning     Costs and     Other
                 Description            of Year       Expenses      Accounts
--------------------------------------  -----------   -----------   -----------

Deferred tax asset valuation allowance
<S>                                     <C>           <C>           <C>
 Year ended June 30, 1997 ............  $ 6,994,000   $      --     $   377,000
                                        ===========   ===========   ===========

 Year ended June 30, 1996 ............  $ 4,420,000   $      --     $ 2,574,000
                                        ===========   ===========   ===========

 Year ended June 30, 1995 ............  $ 1,181,000   $      --     $ 3,239,000
                                        ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                      Balance at
                                                      End of
                 Description            Deductions    Year
--------------------------------------  -----------   --------
<S>                                     <C>           <C>
Deferred tax asset valuation allowance

 Year ended June 30, 1997 ............  $      --     $ 7,371,000
                                        ===========   ===========

 Year ended June 30, 1996 ............  $      --     $ 6,994,000
                                        ===========   ===========

 Year ended June 30, 1995 ............  $      --     $ 4,420,000
                                        ===========   ===========
</TABLE>

--------------------------------------------------------------------------------
<TABLE>
                                                                     SCHEDULE II

                             ARIZONA CHARLIE'S, INC.
                        VALUATION AND QUALIFYING ACCOUNTS

                For The Years Ended June 30, 1997, 1996 And 1995

<CAPTION>
                                                                       Additions
                                                          ----------------------
                                             Balance at  Charged to   Charged to
                                             Beginning   Costs and    Other
               Description                   of Year     Expenses     Accounts
               -----------                   -------     --------     --------

<S>                                        <C>          <C>          <C>
Allowance for doubtful accounts:

  Year ended June 30, 1997 ..............  $2,193,000   $  220,000   $     --
                                            ==========   ==========   ==========
  Year ended June 30, 1996 ..............  $1,592,000   $  601,000   $     --
                                            ==========   ==========   ==========

  Year ended June 30, 1995 ..............  $     --     $1,592,000   $     --
                                            ==========   ==========   ==========
</TABLE>
<TABLE>
<CAPTION>
                                                            Balance at
                                                            End of
               Description                     Deductions   Year
               -----------                     ----------   ----
<S>                                            <C>          <C>
Allowance for doubtful accounts:

  Year ended June 30, 1997 .............       $     --     $2,413,000
                                               ==========   ==========

  Year ended June 30, 1996 .............       $     --     $2,193,000
                                               ==========   ==========

  Year ended June 30, 1995 .............       $     --     $1,592,000
                                               ==========   ==========
</TABLE>
<TABLE>

Deferred Tax Asset Valuation Allowance:
<S>                                        <C>          <C>          <C>
  Year ended June 30, 1997 ..............  $3,322,000   $     --     $2,374,000
                                            ==========   ==========   ==========

  Year ended June 30, 1996 ..............  $1,840,000   $     --     $1,482,000
                                            ==========   ==========   ==========

  Year ended June 30, 1995 ..............  $  213,000   $     --     $1,627,000
                                            ==========   ==========   ==========
</TABLE>
<TABLE>

Deferred Tax Asset Valuation Allowance:
<S>                                            <C>          <C>
  Year ended June 30, 1997 .............       $     --     $5,696,000
                                               ==========   ==========

  Year ended June 30, 1996 .............       $     --     $3,322,000
                                               ==========   ==========

  Year ended June 30, 1995 .............       $     --     $1,840,000
                                               ==========   ==========
</TABLE>

--------------------------------------------------------------------------------
                                    EXHIBITS
                                    --------

 2.1    Agreement of Reorganization dated November 16, 1993,
           by and among Becker Gaming, Inc. ("BGI"), Arizona
           Charlie's, Inc. ("Arizona Charlie's"), Sunset
           Coin, Inc. ("Sunset Coin"), Becker Gaming Group, Inc.
           ("Becker Gaming Group"), Capitol Queen & Casino, Inc.
           ("Capitol Queen"), Charlie's Land Company ("CLC") ,
           and each of Ernest A. Becker, III, Ernest A. Becker,
           IV, Barry W. Becker and Bruce F. Becker
           (collectively, the "Beckers").*

    3.1    Articles of Incorporation of Capitol Queen.*

    3.2    First Amended By-Laws of Capitol Queen.*

    3.3    Articles of Incorporation of Arizona Charlie's.*

    3.4    Amended and Restated By-Laws of Arizona Charlie's.*

    10.1   Purchase  Agreement  dated  November  15,  1993  among  BGI,  Arizona
           Charlie's,  Capitol  Queen,  Sunset  Coin  and the  purchasers  named
           therein (the "Purchasers).*

    10.2   Indenture  dated  November 15, 1993 among Capitol  Queen,  as issuer,
           Arizona  Charlie's,  as  guarantor,  and  IBJ  Schroder  Bank & Trust
           Company ("IBJ"), as trustee.*

    10.3   Deed of Trust,  Assignment of Leases,  Security Agreement and Fixture
           Filing  dated  November  15, 1993 by Capitol  Queen,  as grantor,  to
           Charles W. Riley, as trustee,  for the benefit of IBJ , as collateral
           agent.*

    10.4   Vessel Construction Agreement dated October 23, 1993
           between Leevac Shipyards, Inc. and Capitol Queen, as
           amended by Amendment No. 1 to Vessel Construction
           Agreement dated November 15 and 17, 1993.*

    10.5   Form of First Preferred Ship Mortgage Securing an
           Indenture between Capitol Queen and IBJ.*

    10.6   Security  Agreement dated November 15, 1993 between Capitol Queen and
           IBJ, as collateral agent.*

    10.7   Stock Pledge  Agreement dated November 15, 1993 between Capitol Queen
           and IBJ, as collateral agent.*

    10.8   Collateral  Agency  Agreement  dated  November 15, 1993 among Capitol
           Queen and IBJ, as trustee and collateral agent.*

    10.9   Disbursement  and Escrow  Agreement  dated  November  15,  1993 among
           Capitol  Queen  and IBJ,  as escrow  agent,  trustee  and  collateral
           agent.*

    10.10  Registration Rights Agreement dated November 15, 1993
           among Capitol Queen, Arizona Charlie's and the
           Purchasers.*

    10.11  Form of Management  Agreement to be entered into between BGI and each
           of Arizona  Charlie's,  Capitol Queen,  Sunset Coin and Becker Gaming
           Group. Included at Exhibit I to Exhibit 2-1 hereof.*

    10.12  Form of Tax  Allocation  Agreement to be entered into between BGI and
           each of Arizona  Charlie's,  Sunset  Coin,  Becker  Gaming  Group and
           Capitol Queen. Included at Exhibit J to Exhibit 2-1 hereof.*

    10.13  Letter   Agreement  dated  September  10,  1993  among  BGI,  Arizona
           Charlie's,  Capitol  Queen and  Ladenburg,  Thalmann & Co.,  Inc., as
           placement agent.*

    10.14  Land Purchase Option Contract dated January 4, 1993 between Linda Ann
           and  Harvey L.  McCray  and  Vernon M. and  Joyce G.  Burkhalter,  as
           seller, and R.Q.  Enterprises,  as buyer; and Wire Transfer Order and
           Closing  Document dated July 26, 1993 between  Arizona  Charlie's and
           First Interstate Bank of Nevada.*

    10.15  Letter of Understanding dated January 26, 1993
           between Jefftel, Inc. and JCR Hotel, Inc. and River
           Queen Enterprises, Inc. and Capitol Queen.*

    10.16  Purchase  Agreement  dated  September  20, 1993 among BGI and Cathryn
           Simmons, Public Issue Management, Inc., Byron Neal Fox and Cynthia L.
           Pegner, Richard Moore, Byron Neal Fox, P.C., David Chernoff, Oscar B.
           Goodman,  Eckley M. Keach, Ronald E. Partee and Carol Partee, and Fox
           & Partee.*

    10.17  Riverfront  Development  Agreement  dated  as of  September  1,  1993
           between Capitol Queen, the Company and Jefferson City, Missouri.*

    10.18  First  Supplemental  Indenture  dated  January 1, 1995 among  Capitol
           Queen,  as issurer,  Arizona  Charlie's,  as  guarantor,  and IBJ, as
           trustee.

    10.19  Assets  Purchase   agreement  dated  April  10,  1995  between  Aerie
           Riverboat  Casino of Missouri,  Inc., as buyer, and Capitol Queen, as
           seller.

    10.20  Letter  agreement  dated  December  5,  1994  among  BGI and  Cathryn
           Simmons, Public Issue Management, Inc., Byron Neal Fox and Cynthia L.
           Pegner, Richard Moore, Byron Neal Fox, P.C., David Chernoff, Oscar B.
           Goodman,  Eckley M. Keach, Ronald E. Partee and Carol Partee, and Fox
           & Partee.*

----------
* All Exhibits are  incorporated  by  reference  to the  Company's  Registration
Statement  on Form S-4  (33-75806)  declared  effective  by the  Securities  and
Exchange Commission on May 20, 1994.

     (b)  Reports on Form 8-K
          None.

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