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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                  FORM 10-KSB
(MARK ONE)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
                    FOR THE FISCAL YEAR ENDED: JUNE 30, 1997
 
[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
          FOR THE TRANSITION PERIOD FROM ____________ TO ____________
 
                        COMMISSION FILE NUMBER: 0-11532
 
                           INLAND CASINO CORPORATION
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
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                     UTAH                                       33-0618806
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
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         4225 EXECUTIVE SQUARE, SUITE 1650, LA JOLLA, CALIFORNIA 92037
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
                   ISSUER'S TELEPHONE NUMBER: (619) 546-9383
 
      SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
 
         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                         COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)
 
     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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    [ ]
 
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [ ]
 
     State issuer's revenues for its most recent fiscal year: $16,665,350
 
     As of September 25, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant (based on the closing sale price of
such stock on such date) was approximately $7,402,675.
 
     State the number of shares outstanding of each of the registrant's classes
of common equity as of the latest practicable date: At September 25, 1997, there
were 3,854,548 shares outstanding of the registrants common stock, $.001 par
value per share (the only class of common equity).
 
     Transitional Small Business Disclosure Format (check one)  Yes [ ] No [X]
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     (1) Portions of the Proxy Statement prepared in connection with the Annual
         Meeting of Shareholders to be held in 1997 -- Part III.
================================================================================
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                               TABLE OF CONTENTS
 
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PART I
  ITEM 1:    DESCRIPTION OF BUSINESS..................................................     1
  ITEM 2:    DESCRIPTION OF PROPERTY..................................................    16
  ITEM 3:    LEGAL PROCEEDINGS........................................................    16
  ITEM 4:    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................    16
 
PART II
  ITEM 5:    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................    16
  ITEM 6:    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................    17
  ITEM 7:    FINANCIAL STATEMENTS.....................................................    22
  ITEM 8:    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
               DISCLOSURE.............................................................    40
 
PART III
  ITEM 9:    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
               WITH SECTION 16(a) OF THE EXCHANGE ACT.................................    40
  ITEM 10:   EXECUTIVE COMPENSATION...................................................    40
  ITEM 11:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........    40
  ITEM 12:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................    40
  ITEM 13:   EXHIBITS AND REPORTS ON FORM 8-K.........................................    40
 
SIGNATURES............................................................................    43
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                                       (i)
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                                     PART I
 
ITEM 1.  DESCRIPTION OF BUSINESS
 
     Inland Casino Corporation, a Utah corporation ("Inland Casino" or the
"Company") is a gaming management and consulting company in the Indian gaming
industry. Inland Casino is the successor to a corporation organized in June
1994, also known as Inland Casino Corporation, a Delaware corporation ("ICC
II"), to consolidate various entities which were owned by the shareholders of
ICC II.
 
     Effective May 22, 1995, ICC II was merged (the "Merger") into a public
reporting company named Twin Creek Exploration Co., Inc. ("Twin Creek"). Twin
Creek was incorporated on March 6, 1980 under the laws of the State of Utah and
organized for the purpose of engaging primarily in the oil and gas exploration
industry and the acquisition of oil and gas producing properties. Although it
retained some oil and gas interests, it was no longer active in the oil and gas
exploration business at the time of the Merger. Since 1990, it had been involved
in the research, development and marketing of English language instruction
courses for Spanish-speaking and Japanese-speaking people. In anticipation of
the Merger with ICC II, all of the assets of Twin Creek were assigned to
Linguistix, Inc., the sole subsidiary of Twin Creek and subsequently the stock
of Linguistix, Inc. was distributed pro rata to the persons who were
shareholders of Twin Creek prior to the Merger. Following the Merger, the name
of Twin Creek was changed to Inland Casino Corporation.
 
     ICC II was incorporated in the State of Delaware on June 6, 1994 and
commenced operations on July 1, 1994. ICC II was formed to consolidate various
entities which were owned by the shareholders of Inland Casino and which were
engaged in providing gaming operations services and consulting services for the
Barona Group of Capitan Grande Band of Mission Indians (the "Barona Tribe") at
the Barona Casino on the Barona Tribe's reservation land located approximately
30 miles east of San Diego, California. ICC II was capitalized pursuant to the
terms of an Incorporation Agreement (the "Incorporation Agreement") by and among
ICC II, Inland Casino Corporation, a Nevada corporation ("ICC I"), Eagle Edge
Partners, a California limited partnership ("EEP"), Inland Casino Partners, a
California general partnership ("ICP"), Redwood Gaming, Inc., a California
corporation ("Redwood"), L. Donald Speer, II, Jonathan Ungar, Alan Woods, Jack
Smith, Karol M. Schoen and Duncan Edwards. The Incorporation Agreement sets
forth the terms whereby ICC I, EEP, and ICP, each of which was directly or
indirectly involved in the existing operations of ICP, were rolled-up (the
"Roll-Up Transaction") into ICC II.
 
     References to Inland Casino with respect to periods prior to the Merger
should be deemed references to ICC II or its predecessor entities, as the
context requires.
 
     The Company's executive offices are located at 4225 Executive Square, Suite
1650, La Jolla, California 92037. Its telephone number is (619) 546-9383.
 
BUSINESS OF ISSUER
 
     Overview.  During the past three years ended June 30, 1997, the Company and
its predecessors have devoted substantially all of their efforts to provide
operating and consulting services to the Barona Tribe at the Barona Casino. The
Barona Casino consists of the "Barona Big Top," a turn-of-the-century circus
theme casino which includes 994 video games, 32 table games, a 1,500-seat bingo
parlor, a 200-seat buffet restaurant and a 150-seat off-track betting facility,
which is operated by the Barona Tribe. The complex exceeds 100,000 square feet
and is located on approximately 15 acres, including parking for approximately
2,000 cars. The Barona Casino is open 24 hours a day, 365 days a year.
 
     During the last three fiscal years, with the exception of approximately
$46,000 and $118,000 billed to other Indian tribes for consulting services in
the fiscal years ended June 30, 1996 ("Fiscal 1996") and June 30, 1997 ("Fiscal
1997"), respectively, all fee revenue relates to services performed for the
Barona Tribe in connection with the Barona Casino.
 
     In May 1996, the Company entered into a Marketing Consulting Agreement with
the Confederated Tribes of Siletz Indians of Oregon (the "Siletz Tribe") to
provide marketing and consulting services in connection with the operation by
the Siletz Tribe of the Chinook Winds Gaming and Convention Center (the
 
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"Chinook Winds Property") located in Lincoln City, Oregon. In October 1996, the
Company advised the Siletz Tribal Council of the Company's intent to terminate
the Marketing Consulting Agreement pursuant to its terms. During Fiscal 1996,
the Company earned approximately $35,000 in consulting fees for services
provided to the Siletz Tribes. During Fiscal 1997, the Company did not receive
consulting fees from the Siletz Tribe.
 
     In June 1996, the Company entered into a Consulting Agreement with the
Klamath and Modoc Tribes and the Yahooskin Band of Snake Indians (collectively,
the "Klamath Tribes") to provide consulting services in connection with the
Kla-Mo-Ya Casino, located in south-central Oregon. In May 1997, the Consulting
Agreement was terminated by mutual agreement of the Klamath Tribes and the
Company. The Kla-Mo-Ya Casino was opened to the public in mid-summer 1997. The
Company received no revenues in either Fiscal 1996 or Fiscal 1997 from the
Klamath Tribes. The Company agreed to provide a portion of the financing
required for the construction and development of the casino, including a net
investment of $500,000 principal amount of revenue bonds. In addition, the
Company agreed to pledge a bank certificate of deposit for $1,518,000 as
collateral for the Klamath Tribes' borrowings to finance certain preopening
costs and expenses of the casino.
 
     The Company also entered into a short-term Marketing Consulting Agreement
with the Associated Tribes of Northwest Indians ("ATNI") in June 1996 to promote
Indian gaming in the Pacific Northwest, and in August 1996, the Company entered
into a small, short-term consulting engagement with the Pueblo of Sandia in New
Mexico regarding legislative and public relations matters. The Company received
approximately $11,000 pursuant to the ATNI agreement in Fiscal 1996. The Company
received no revenue from the Sandia Tribe in Fiscal 1996, but received
approximately $118,000 in Fiscal 1997.
 
     In connection with serving its Indian gaming clients, the Company has
entered into contracts with Kenny Rogers and his production company for the use
of his services in promotional events, commercials and performances at the
Barona Casino and in connection with other potential Indian gaming clients of
the Company.
 
     Business Strategy/New Business Direction.  The Company's basic strategy is
to continue to (i) provide consulting services to the Barona Tribe, (ii) offer
consulting and marketing services to other Native American tribes, and (iii)
explore new business opportunities as they develop. In addition to its
activities in Indian gaming, late in Fiscal 1997, the Company began exploring
new business opportunities, including researching, reviewing and evaluating
other services and products that the Company may develop and market, as well as
potential acquisitions of existing businesses. Although the Company from time to
time evaluates potential acquisitions of businesses, technologies, services and
products, it currently has no understandings, commitments or agreements with
respect to such transactions. Based upon its investigation to date, the Company
believes that its expertise in casino operations may be of use in the
development of publications, games and information services which could be
offered in electronic format, including the Internet. The Company's
diversification strategy has resulted from the continued uncertainties facing
Indian gaming in California and the desire to utilize the Company's talent and
expertise developed in gaming operations into business ventures which can
further enhance shareholder value and reduce the risks of dependency on a single
industry.
 
THE GAMING INDUSTRY AND REGULATORY OVERVIEW
 
     General.  Gaming is an international industry that is expanding at a rapid
pace in the United States. Gaming activities include traditional full service
casinos, state or national Indian sponsored lotteries, bingo games, riverboat
gaming, small-stakes casino gaming, international gaming, gaming on cruise ships
in international waters, Internet gaming, and Indian gaming. Other forms of
gaming conducted in certain areas of the United States include parimutuel
betting on horse racing, dog racing and jai-alai; sports bookmaking; and card
rooms.
 
     Indian Gaming.  Prior to 1981, casino-style gaming in the United States,
such as slot machines, blackjack, poker, roulette and craps, was the province of
the traditional gaming markets of Nevada and Atlantic City, New Jersey. In 1981,
however, the Seminole Tribe of Florida established its right to conduct
 
                                        2
<PAGE>   5
 
high-stakes bingo games on its reservation. Bingo is currently conducted by
Indian tribes throughout the United States. As bingo games on tribal land
expanded, tribes began to offer additional gaming activities such as draw poker
and other card games. Such expanded activities led to litigation regarding the
permitted scope of Indian gaming. In 1987, the U.S. Supreme Court ruled that if
a state regulates rather than prohibits any form of gaming, Indian tribes have
the right to conduct such gaming on Indian land, free of state restrictions.
 
     Indian Gaming Regulatory Act.  In response to that U.S. Supreme Court
decision, the United States Congress enacted the Indian Gaming Regulatory Act,
25 U.S.C. Sec. 2701 et seq. (the "IGRA") in 1988, which created the National
Indian Gaming Commission (the "NIGC") to establish basic regulations and provide
some oversight responsibilities for Indian gaming. The IGRA was adopted to
promote tribal economic development and self-sufficiency, while attempting to
balance these goals with legitimate federal and state regulatory concerns. Due
to their generally remote locations, Indian tribes have had few opportunities
for economic development, and high unemployment has been a significant problem
on Indian reservations. Indian casinos have provided tribal members with jobs
and revenue for economic development and for construction of schools, health
care facilities and water treatment and sewage systems.
 
     Indian Gaming in the State of California.  The Barona Tribe's governmental
system consists of the Tribal Council and the General Council. The Tribal
Council consists of elected representatives who manage the day-to-day operations
of the Tribe and its land. The General Council consists of all of the adult
members of the Barona Tribe. The Tribal Council and the Chairman of the Barona
Tribe supervise the day-to-day operations of the gaming activities on the Barona
Tribe's land. The Company has undertaken responsibilities as consultants
focusing on advising the Barona Tribe in their management of the Barona Casino.
The Company has worked with the Barona Tribe to suggest and implement policies
and procedures for casino operations to safeguard the assets of the Barona
Tribe.
 
     Pursuant to IGRA, certain electronic machine gaming is permissible only if
agreed upon by State governments and tribal representatives. The document
embodying the agreement is referred to as a "compact." Compacted gaming must be
consistent with the permissible scope of gaming allowed by state law.
 
     Under regulations promulgated by the NIGC, certain electronic games may be
deemed Class III gaming and must be the subject of a tribal-state compact to be
legally used on Indian lands. Some of the Barona Casino's electronic games could
be deemed to be Class III games and, hence, require a tribal-state compact,
which the Barona Tribe presently does not have. Historically, because of the
legal uncertainties related to several major court proceedings, a number of
Indian tribes, including the Barona Tribe, continued to operate their casinos
utilizing electronic gaming machines. Since June 1994, the Barona Tribe, as well
as two other Southern California Indian tribes, have operated under a
"standstill agreement" with the U.S. Attorney for the Southern District of
California (the "U.S. Attorney") which has maintained the status quo regarding
Indian gaming in the Southern District of California.
 
     Following the denial of a petition for certiorari by the U.S. Supreme Court
in Rumsey v. Wilson, in June 1997, the Barona Tribe, as well as two other Indian
tribes in the Southern District of California, voluntarily agreed to a planned
phase-out of certain electronic games. See Item 6. "Management's Discussion and
Analysis or Plan of Operation -- Overview; Factors that May Affect Future
Results." In addition, the State of California is currently in negotiations with
the Pala Band of Mission Indians, also located in the Southern District of
California, to determine what type of gaming is permissible and the
circumstances under which it may be conducted. It is anticipated that these
negotiations may lead to a model compact; however, it is uncertain whether
Indian Tribes who have operated electronic gaming machines (i.e., the Barona
Tribe) will be eligible to become a party to such model compact. In addition, if
a model compact is reached, such compact may provide for certain persons engaged
in gaming activities (e.g., consultants, vendors, etc.) to be licensed by the
State of California. There can be no assurance that any person (including those
persons currently engaged in gaming activities pursuant to authorization under
tribal gaming ordinances) will be granted a license to engage in gaming
activities. See "Notes to Financial Statements -- NOTE G -- COMMITMENTS AND
CONTINGENCIES -- Certain Third Party Litigation Which Could Effect Indian Gaming
in California," herein. In summary, the current state of regulation in
California, both at the Federal and State levels, is in a state of change and
uncertainty.
 
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SUMMARY OF INLAND CASINO GAMING AGREEMENTS
 
     Agreements with the Barona Tribe.  Prior to April 1, 1996, the Company
provided operational and other services in accordance with the terms and
conditions of a certain Gaming Management Agreement with the Barona Tribe dated
February 1992, as amended (the "Operations Agreement"), under a grant of
authority from the Barona Tribe's General Council. The Operations Agreement was
scheduled to expire in February 1999 and established the Company's rights,
obligations and duties to the Barona Tribe, including the Company's incurrence
of a contingent liability for certain obligations of the Barona Casino. The
Company's revenue was derived from fees based upon a percentage of profits or
the excess of revenue over certain expenses, as defined in the Operations
Agreement, generated from the gaming operations at the Barona Casino. From
February 1992 through March 1996, the Company operated as manager of the Barona
Casino under the terms of the Operations Agreement with the Barona Tribe.
 
     On March 27, 1996, the Company entered into a Consulting Agreement with the
Barona Tribe with an effective date of April 1, 1996 (the "Initial Consulting
Agreement"), under a grant of authority from the Barona Tribe's General Council.
In May 1996, the parties recognized that an inadvertent mistake in the provision
relating to consulting fees had been made and entered into an Amended and
Restated Consulting Agreement (the "Consulting Agreement"). The Consulting
Agreement, by its terms, relates back to March 27, 1996 and reiterates the April
1, 1996 effective date. Since April 1, 1996, the parties have been operating
under the terms of the Consulting Agreement, the terms of which are more
specifically defined in this Item 1 under the caption "Summary of Inland Casino
Gaming Agreements -- Agreements with the Barona Tribe -- The Consulting
Agreement." Pursuant to the terms of the Consulting Agreement and the related
Mutual Release dated as of March 27, 1996, the Operations Agreement was
cancelled effective March 31, 1996, and was superseded by the Consulting
Agreement with an effective date of April 1, 1996.
 
     The NIGC does not approve consulting agreements; however, it does review
such agreements to determine whether they are management or consulting
agreements. If a contract is determined to be a consulting contract, it is then
forwarded to the Bureau of Indian Affairs (the "BIA") for approval. For a
further discussion of the regulatory process of review relating to management
and consulting agreements, see "Discussion of Regulatory Matters" under this
Item 1.
 
     The Consulting Agreement.  Pursuant to the terms of the Consulting
Agreement, the Company will (i) consult with and advise the Barona Tribe,
members of the Barona Tribal Council and the Barona Tribal Gaming Commission,
(ii) provide technical assistance and training to the employees and staff of the
Barona Casino, and (iii) provide other services as may be directed by the Barona
Tribe in such areas as organization and administration, finance, planning and
development, gaming activities, internal controls, accounting systems and
procedures, engineering and maintenance, housekeeping, human resources,
marketing and advertising, purchasing, surveillance, security and food and
beverage operations.
 
     The Consulting Agreement provides for an initial term of three (3) years
commencing April 1, 1996, with an option to extend the agreement for an
additional five-year period. At any time after April 1, 1997, the Barona Tribe
may terminate the Consulting Agreement by (i) giving nine months' notice to the
Company, during which time the Consulting Agreement will remain in effect, and
(ii) paying the Company $475,000 per month for each month remaining under the
initial three-year term. Either party may terminate the Consulting Agreement for
(i) committing or knowingly allowing to be committed any act of theft or
embezzlement; however, theft or embezzlement by an officer or employee of the
Company without the Company's knowledge shall not be cause for termination of
the Agreement, so long as the Company repays all sums which may have been stolen
or embezzled as soon as the Company becomes aware of the facts or (ii)
committing a material breach of any of the Company's representations that
adversely affects its ability to carry out its responsibilities under the
Agreement. Remedies for breach include the resolution of any serious problems
with the Company's performance within 10 days of receipt of notice by the
Company, and if the problems are not resolved within 10 days of notice, by the
Company's meeting and conferring in good faith with the Barona Tribal Council or
the Barona Tribal Gaming Committee to determine what remedial action, if any, is
necessary. In addition, disputes arising under the Consulting Agreement and not
resolved with the Tribal Council or Tribal Gaming
 
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Committee shall be submitted to binding arbitration before the American
Arbitration Association in San Diego.
 
     For its services, the Company receives a monthly base consulting fee of
$475,000 and may receive additional consulting fees if certain operating levels
are reached by the Barona Casino. Notwithstanding the consulting fees to be paid
under the Consulting Agreement, pursuant to its terms, the Barona Tribe has the
right to draw from the gross revenues of the Barona Casino an annual income
stream at least equal to the distributions received by the Barona Tribe for the
twelve month period ended December 31, 1995. In light of such provision, fees
paid or payable to the Company may be reduced.
 
     The Barona Casino relies extensively on electronic video games, including
video pull-tab games, video poker, video keno, and video bingo (the "video
gaming machines"). Inland Casino does not own any of the video gaming machines.
The Company has entered into three leases (each, a "Video Machine Lease" and
collectively, the "Video Machine Leases") for the video gaming machines. These
agreements have been assigned by the Company to the Barona Tribe. To the extent
that the Video Machine Leases are "collateral agreements" to the Consulting
Agreement within the meaning of IGRA, each Lessor is required to comply with
IGRA and its regulations. To the best knowledge of the Company, none of the
Lessors, the Barona Tribe or Inland Casino have submitted the Video Machine
Leases to the NIGC for its approval as "collateral agreements". If these Leases
are "collateral agreements" and are not approved, the Barona Tribe's present
intention is to enter into other legally permissible agreements which relate to
gaming machines meeting applicable legal requirements.
 
COMPETITION
 
     The Company provides consulting services for the Barona Casino, which
operates in a competitive gaming industry. The Barona Casino competes directly
with two other casinos in the San Diego area located on Indian reservations, the
Sycuan Band of Mission Indians (the "Sycuan Tribe") and the Viejas Band of
Kumeyaay (Mission) Indians (the "Viejas Tribe"). In addition, there are a total
of 17 Indian tribes in San Diego county, and at least two of those tribes,
including the Pala Tribe which is currently in compact negotiations with the
State of California, have announced plans to open casino operations in the near
future. See "Notes to Financial Statements, NOTE G -- COMMITMENTS AND
CONTINGENCIES -- Certain Third Party Litigation Which Could Affect Indian Gaming
in California," herein.
 
     To some extent, the Barona Casino's operations also compete with Indian
gaming operations in other parts of the State of California, especially in
southern California. Currently, there are Indian gaming operations in the
California counties of San Diego, Riverside, Tuolumne, Colusa, Lake, Amador,
Shasta, Yolo, San Bernardino, Santa Barbara, Fresno and Humboldt. In addition,
the Barona Casino's operations compete with facilities in Nevada, Atlantic City,
New Jersey and other parts of the world, and with national or state-sponsored
lotteries, a proposed national Indian sponsored lottery, on- and off-track
wagering, card club casinos, riverboats, other Native American gaming ventures,
and other forms of legalized gambling. Competition is likely to increase as
Indian and other forms of gaming continue to expand.
 
     The Company competes with other consulting and management companies for
casino clients. Certain of the Company's competitors have significantly greater
financial resources than the Company. Currently, gaming management companies
from Nevada have not been active in managing Indian gaming operations in
California. However, certain operators have negotiated agreements with Indian
tribes located in California and it is anticipated that if a tribal-state
compact is reached or if legislation or legal actions clarify the scope of
allowed gaming activities at the Barona Casino, there will be significantly more
competition for the Company from other casino management companies. In addition,
more Indian tribes may choose to develop and manage their casinos without
engaging a management or consulting company. If and when the Company assists in
the development of any Indian gaming casinos in the future, such new casinos
also may compete with other casinos constructed in the future, including casinos
that are parts of national or regional chains. Such chains or other casino
development or management companies may have greater financial resources and
personnel with more experience than the Company. Competition in the future also
may be affected by (i) periodic over-building, which can adversely affect
patronage levels; (ii) changes in regional and local market
 
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conditions; (iii) changes in regional and local population and disposable income
characteristics; and (iv) changes in travel patterns and preferences.
 
     The Indian gaming industry competes with other forms of gaming, including
low-stakes bingo games operated by non-profit organizations and pull-tab games;
sports betting; riverboat gaming; parimutuel betting on horse racing, dog racing
and jai-alai; state sponsored lotteries; and international gaming in Mexico and
gaming on cruise ships in international waters. One consequence of the growth in
Indian gaming has been the increased pressure on state legislatures to allow
competitive gaming activity by non-Indians. Several states, other than
California, have approved or are considering approval of non-Indian, land-based
casinos; riverboat gaming; or dockside casinos. Increased support also is
present in a number of states for approval of video gaming machines for bars,
restaurants and resorts. In addition, non-gaming entertainment competes with the
gaming industry for the public's disposable income. Depending on the extent that
these other forms of entertainment and non-Indian gaming affect the demand for
Indian gaming, the opportunities the Company has to manage Indian gaming casinos
and to participate in Indian casino development projects may be adversely
affected.
 
MARKETING AND SALES STRATEGIES
 
     The Company markets its services as a consultant to the gaming industry and
to prospective Indian gaming clients through continuing personal contact with
industry and tribal leaders, media advertising, sponsorships, attendance at
industry conferences and presentations of the Company's qualifications and
credentials.
 
     In its role as consultant, the Company develops marketing and sales
strategies for its clients, including innovative promotional programs and
focused marketing efforts, which together with significant media advertising
programs emphasize special events, entertainment, casino games offered, food
specials and special drawings for casino customers. To promote repeat business,
the Company also assists its clients in ensuring a high level of customer
satisfaction and loyalty by providing attentive customer service in a friendly,
casual and value-oriented atmosphere. Although perceived value attracts casino
customers initially, actual value generates customer satisfaction and loyalty.
The Company believes that actual value becomes apparent during the customer
visit through an enjoyable and high-quality entertainment experience.
 
RESEARCH AND DEVELOPMENT
 
     The Company expended approximately $172,000 during Fiscal 1996 and $13,000
in Fiscal 1997 with third-party vendors in the development of hardware and
software for proposed new video lottery terminals primarily for sale to existing
and prospective Indian gaming clients.
 
EMPLOYEES
 
     As of June 30, 1997, the Company had 19 full-time employees.
 
DISCUSSION OF REGULATORY MATTERS
 
     General Regulatory Background of Indian Gaming.  The operation of any type
of gaming casino on Indian land is subject to extensive Federal, state and
tribal regulation. The current regulatory environment regarding Indian gaming is
evolving rapidly. Changes in federal, state, or tribal law or regulations may
limit or otherwise affect Indian gaming and could therefore have a material
adverse effect on the operations of Inland Casino.
 
     Gaming on American Indian reservations is governed by IGRA. One of the
Congressional purposes in enacting IGRA was to provide a statutory basis for the
operation of gaming by Indian tribes as a means of promoting tribal economic
development, self sufficiency, and strong tribal governments; to provide a
statutory basis for the regulation of gaming by an Indian tribe adequate to
shield it from organized crime and other corrupting influences; to ensure that
the Indian tribe is the primary beneficiary of the gaming operations; and to
assure that gaming is conducted fairly and honestly by both the operator and
players.
 
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     IGRA also is subject to judicial and legislative clarification or
amendment. IGRA established the NIGC to regulate Indian gaming. The NIGC has the
power to (i) monitor Class II gaming conducted on Indian lands; (ii) inspect and
examine all premises located on Indian lands on which Class II gaming is
conducted; (iii) conduct or cause to be conducted such background investigations
as may be necessary; (iv) inspect, examine, photocopy and audit all papers,
books and records respecting gross revenues of Class II gaming conducted on
Indian lands; (v) hold such hearings, sit and act at such times and places, take
such testimony, and receive such evidence as the NIGC deems appropriate; and
(vi) promulgate such regulations and guidelines as it deems appropriate to
implement the provisions of IGRA. The NIGC collects an annual fee on each Class
II gaming activity regulated by it, ranging from 0.5% to 2.5% of the first
$1,500,000 of gross revenues and up to 5% of the gross revenues from each
activity in excess of the first $1,500,000.
 
     IGRA categorized gaming activities as Class I, Class II and Class III
activities. Class I gaming is defined as social games solely for prizes of
minimal value or traditional forms of Indian gaming engaged in by individuals as
a part of, or in connection with, tribal ceremonies or celebrations. Included
within Class II gaming are (i) bingo (whether or not electronic, computer, or
other technologic aids are used) including (if played in the same location)
pull-tabs, lotto, punch boards, tip jars, instant bingo, and other games similar
to bingo, and (ii) card games that are explicitly authorized by the laws of the
state, or are not explicitly prohibited by the laws of the state and are played
at any location in the state, but only if such card games are played in
conformity with those laws and regulations (if any) of the state regarding hours
or periods of operation of such card games or limitations on wagers or pot sizes
in such card games. Class II gaming does not include (i) any banking card games,
including baccarat, chemin de fer or blackjack, or (ii) electronic or
electromechanical facsimiles of any games of chance or slot machines of any
kind. Class III gaming means all forms of gaming that are not Class I or Class
II gaming.
 
     The Chairman of the NIGC has the authority to levy and collect appropriate
civil fines, not to exceed $25,000 per violation, against the tribal operator of
an Indian game or a management contractor engaged in gaming for any violation of
any provision of IGRA. The NIGC also may impose federal criminal sanctions for
illegal gaming on Indian Land and for theft from Indian gaming facilities. The
Chairman of the NIGC also has the power to order temporary closure of an Indian
gaming operation for substantial violation of the provisions of IGRA, or of
tribal regulations, ordinances or resolutions approved in connection with the
applicable provisions of IGRA. After a temporary closure order, the Indian tribe
or management contractor involved has a right to a hearing before the NIGC to
decide whether the NIGC will order a permanent closure of the gaming operation.
 
     IGRA provides that an Indian tribe may engage in, or license and regulate,
Class II gaming on Indian lands within such tribe's jurisdiction if (i) such
Indian gaming is located within a state that permits such gaming for any purpose
by any person, and (ii) the governing body of the Indian tribe adopts an
ordinance or resolution which is approved by the Chairman of the NIGC. Net
revenues received by the Indian tribe may not be used for purposes other than to
(i) fund tribal government operations or programs; (ii) provide for the general
welfare of the Indian tribe and its members; (iii) promote tribal economic
development; (iv) donate to charitable organizations; or (v) help fund
operations of local government agencies.
 
     Any Indian tribe which operates a Class II gaming activity and which (i)
has continuously conducted such activity for a period of not less than three
years, including at least one year after 1988; and (ii) has otherwise complied
with the applicable provisions of the IGRA may petition the NIGC for a
certificate of self-regulation. The NIGC will issue a certificate of
self-regulation if it determines that the Indian tribe has, among other items,
(i) conducted its gaming activity in a manner which has resulted in an effective
and honest accounting of all revenues, has resulted in a reputation for safe,
fair and honest operation of the activity, and has been generally free of
evidence of criminal or dishonest activity; and (ii) adopted and is implementing
adequate systems for accounting for all revenues from the activity, monitoring
of all employees and prosecution of violation of its gaming ordinance and
regulations. An Indian tribe may enter into a management contract for the
operation and management of a Class II gaming activity, but the Chairman of the
NIGC must approve the contract.
 
                                        7
<PAGE>   10
 
     Unlike Class II gaming, an Indian tribe can only engage in Class III gaming
if it enters into a tribal-state compact with the state in which its gaming will
take place, or agrees to abide by a set of regulatory rules obtained from the
Secretary of the Interior.
 
     Contracts to manage Class III gaming activities must be approved by the
NIGC under rules nearly identical to those applicable to Class II management
contacts. Of particular significance are the statutes and regulations regarding
approval of Class II and Class III management contracts which place limitations
on the amount of any management fee which is based on a percentage of the
operation's net revenues from gaming.
 
     Under IGRA, Indian tribal governments have primary regulatory authority
over gaming on Indian land within the Indian tribe's jurisdiction unless a
tribal-state compact has delegated this authority. Therefore, persons engaged in
gaming activities, including Inland Casino, are subject to the provisions of
tribal ordinances and regulations on gaming. Such ordinances and regulations
must be consistent with IGRA and the Indian Civil Rights Act of 1968, and cannot
impose criminal penalties upon non-Indians. However, the civil remedies imposed
by such tribal government regulations, if otherwise valid, will apply to Inland
Casino and its employees. IGRA also requires that the NIGC review tribal gaming
ordinances and approve such ordinances only if they meet certain requirements
relating to the ownership, security, personnel background, recordkeeping and
auditing of the tribe's gaming expenses; the use of the revenues from such
gaming; and the protection of the environment and the public health and safety.
 
     In October 1993, the General Council of the Barona Tribe enacted and
adopted a Gaming Ordinance (the "Ordinance"), authorizing, among other things,
Class II and Class III gaming operations at the Barona Reservation, in
accordance with NIGC regulations. The Ordinance was approved by the NIGC in
February 1994. The Barona Tribe is required by the Ordinance to conduct a
background investigation of each of its key employees and management officials
employed by the Barona Casino, and a report concerning the background
investigation and the Barona Tribe's determination of eligibility of each such
individual must be sent to the NIGC. The Company, its officers, key employees,
directors and shareholders holding 10% or more of the Company's common stock
(collectively, "Principals") are subject to these background investigations.
Unless the NIGC has an objection, an individual may be licensed as a key
employee or management official of the Barona Casino by the Barona Tribe. Any
license so granted may be suspended if the Barona Tribe receives information
from the NIGC that an individual is not eligible for employment. The Barona
Tribe has licensed all key employees and management officials of the Company and
has completed its investigation of the Principals of the Company. No licenses
have been suspended or revoked.
 
     In furtherance of its responsibilities, the NIGC has issued a series of
formal regulations as well as several informal "bulletins" which address
implementation of IGRA. The NIGC's rules and directives, together with IGRA and
cases decided under it, the tribal gaming ordinance, and the provisions of any
applicable tribal-state compact, provide the regulatory framework for gaming on
the Barona reservation.
 
     Required Approval of Management and Consulting Agreements.  IGRA provides
that an Indian tribe may enter into a contract for the management or operation
of Class II or Class III gaming activity if such contract has been submitted to,
and approved by, the NIGC. IGRA also prohibits a management company from
operating a casino on Indian land without first having its management contract
approved by the NIGC.
 
     The Chairman of the NIGC (or his designee), after notice and hearing, has
the authority to require contract modifications or may void any contract if he
makes certain findings of violations. In addition, pursuant to the regulations
under IGRA (the "Regulations"), management agreements that have not been
approved by the Secretary of the Interior or the Chairman of the NIGC in
accordance with the Regulations may be deemed void.
 
     The NIGC does not approve consulting contracts; however the NIGC reviews
such contracts to determine whether they are management or consulting contracts.
If a contract is determined to be a management contract, it is subject to
approval by the NIGC; if determined to be a consulting contract, it is then
forwarded by the NIGC to the BIA for approval.
 
     Regulations under IGRA incorporate and elaborate upon the contract review
requirements imposed by IGRA. Under IGRA, a management contract can be approved
only after the appropriate federal authority
 
                                        8
<PAGE>   11
 
determines that the contract provides for (i) adequate accounting procedures and
verifiable financial reports, which must be furnished to the tribe; (ii) tribal
access to the daily operations of the gaming enterprise, including the right to
verify daily gross revenues and income; (iii) minimum guaranteed payments to the
tribe, which must have priority over the retirement of development and
construction costs; (iv) a ceiling on the repayment of such development and
construction costs; and (v) a contract term not exceeding five years and a
management fee not exceeding 30% of profits; provided, that the NIGC may approve
up to a seven year term and a management fee not to exceed 40% of net revenues
if the NIGC is satisfied that the capital investment required or the income
projections for the particular gaming activity justify the larger profit
allocation and longer term. No contract term shall exceed five years, and no fee
in excess of 30% of Net Revenues may be approved unless the NIGC is satisfied
that a "very substantial capital investment" will be made by the management
contractor, in relation to the size, cost, location and income projections for
the project.
 
     Under IGRA, the management company must provide the NIGC with background
information on each interested party, including a complete financial statement
and a description of such person's gaming experience. Such a person also must
agree to respond to questions from the NIGC.
 
     The Regulations also impose detailed requirements for background
investigations of each officer, director, key employee and interested party of
Indian gaming management companies, gaming equipment suppliers and certain
lenders to Indian gaming operations. Key employees are defined by the
Regulations, and all such persons must provide extensive personal background
information to the NIGC, including a credit bureau report and financial
statements for each of the past 10 years, and the fingerprints of each such
person must be submitted to the Federal Bureau of Investigation before a
management contract involving such persons may be approved by the NIGC. The NIGC
will not approve a management company and may void an existing management
contract if an officer, director, key employee or an interested party of the
management company is (i) an elected member of the Indian tribal government that
owns the facility being managed; (ii) has been or is convicted of a felony
gaming offense; (iii) has knowingly and willfully provided materially important
false information to the NIGC or the tribe; (iv) has refused to respond to
questions from the NIGC; or (v) is a person whose prior history, reputation and
associations pose a threat to the public interest or to effective gaming
regulation and control, or create or enhance the chance of unsuitable activities
in gaming or the business and financial arrangements incidental thereto. In
addition, the NIGC will not approve a management contract if the management
company or any of its agents has attempted to unduly influence any decision or
process of tribal government relating to gaming, or if the management company
has materially breached the terms of the management contract, or the tribe's
gaming ordinance, or if a trustee, exercising due diligence, would not approve
such management contract. The Regulations incorporate and elaborate upon these
requirements and provide that a management contract shall be terminated if
certain persons, who are not clearly identified, are convicted of any felony or
misdemeanor offense after the contract becomes effective, or if Inland Casino
has attempted to unduly influence any decision or process of tribal government.
 
     Even after a management contract has been approved, the NIGC has the
authority to void the contract if an interested party engages in certain
activities, including refusing to respond to inquiries of the NIGC, or, in the
opinion of the NIGC, has a reputation that enhances the possibility of
unsuitable activities in gaming. Inland Casino's Amended and Restated Articles
of Incorporation provide that in the event that an interested party fails to
provide information requested by the NIGC or otherwise gives it cause to either
deny approval of or seek to void a management contract to which Inland Casino is
a party, such interested party shall be required to divest all of Inland
Casino's stock owned by him or her within a 90 day period. If the interested
party is unable to sell such stock within this period, Inland Casino must
repurchase it at a designated purchase price below the fair market value of such
stock. As a public company, Inland Casino will be limited in its ability to
regulate who its shareholders may be. In the event that Inland Casino cannot
purchase such shares, whether for financial reasons or because such interested
shareholder refuses to sell his shares to any party, and the NIGC, as a result
of such interested shareholder's actions, denies approval of, or seeks to void
the Consulting Agreement or other agreements, such action by the NIGC would have
a material adverse effect on Inland Casino. See the discussion of the January
Settlement Agreement with the NIGC herein under the caption "Summary of Inland
Casino Gaming Agreements -- Agreements with the Barona Tribe."
 
                                        9
<PAGE>   12
 
     In March 1996, the Barona Tribe submitted the Initial Consulting Agreement
to the NIGC. In May 1996, the NIGC (i) determined that the Initial Consulting
Agreement was not a management agreement and, therefore, not subject to NIGC
approval and (ii) forwarded the Initial Consulting Agreement to the BIA who in
July 1997 reviewed the Initial Consulting Agreement and determined that no
further action by the BIA with respect to such Agreement was required. In
January 1997, the Company entered into a settlement agreement (the "January
Settlement Agreement") with the NIGC regarding the Company's historical
relationship with the Barona Tribe. Under the terms of the January Settlement
Agreement, the NIGC held, among other things, that the relationship between the
Barona Tribe and the Company had benefitted the Barona Tribe, and that the
Company had not violated any law. The Company agreed to reimburse the NIGC for
administrative, investigative and legal expenses in the aggregate amount of
$250,000. In addition, the Company agreed to contribute $2,000,000 to the Barona
Tribe for general improvements on the reservation, payable in five equal annual
installments, commencing in January 1997. The Company will account for the
$2,000,000 in payments as deferred contract costs, which will be amortized over
the remaining initial term of the Consulting Agreement with the Barona Tribe.
 
     In January 1997, the Company submitted the Consulting Agreement to the
NIGC. In April 1997, the Company received a letter from the NIGC questioning
whether the Consulting Agreement was in fact a management contract. The Company
believes that the NIGC will ultimately determine that the Consulting Agreement
is not a management contract, based upon (i) the May 1996 and July 1997
determinations of the NIGC and the BIA, respectively, with respect to the
Initial Consulting Agreement, (ii) the NIGC's findings in the January Settlement
Agreement, and (iii) the actual elements of the relationship between the Barona
Casino and the Company. However, there can be no assurance that the NIGC will
determine that the Consulting Agreement is not a management contract. If such a
determination is not made by the NIGC, the failure of the NIGC to approve the
Consulting Agreement could have a material adverse effect on the business and
financial condition of the Company. If the NIGC concludes that the Consulting
Agreement is not a management agreement, the NIGC will forward the Consulting
Agreement to the BIA for its review. To the extent that the BIA determines that
its approval is required, there can be no assurance that such Agreement will be
approved by the BIA, and such failure to approve the Consulting Agreement could
have a material adverse effect on the business and financial condition of the
Company. See Notes to Financial Statements, NOTE A -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, -- Barona Consulting Agreement, herein.
 
     Federal and State Laws Other than IGRA.  In addition to the regulations
imposed by IGRA, tribally owned gaming facilities on Indian land are subject to
a number of other federal statutes, including the Assimilative Crimes Act, which
imposes federal criminal penalties for the violation of state laws on Indian
reservations, and the Johnson Act, which imposes federal criminal penalties for
the operation of mechanical gambling devices on Indian reservations. If gaming
activities on Indian land are in compliance with IGRA, neither the Assimilative
Crimes Act nor the Johnson Act, nor any state criminal or civil law, will
operate to impose penalties on such activities. However, if gaming activities on
Indian land do not comply with the provisions of IGRA, the provisions of the
Assimilative Crimes Act, the Johnson Act and other federal and state law may
impose criminal and civil penalties on such activities. In addition, the
Treasury Department has adopted regulations under the Bank Secrecy Act which
apply specifically to Indian gaming operations. These regulations impose federal
criminal penalties for the violation of federal regulations requiring the
reporting of information on unusual or large cash transactions. The Barona
Casino has implemented procedures and programs to comply with these regulations.
 
     Indian Nation Sovereignty.  Indian tribes are sovereign nations with their
own governmental systems. As such, they enjoy sovereign immunity with respect to
most disputes, claims and demands. However, there is a limited waiver of
sovereign immunity in each of the Company's consulting agreements, including the
one relating to the Barona Casino, with respect only to suits by Inland Casino
to enforce such agreements.
 
  Case Law Which Could Materially Affect Gaming On The Barona Reservation
 
     Cabazon Band of Mission Indians v. National Indian Gaming Commission, 14
F.3d 633 (D.C. Cir., 1994). As noted above, the NIGC has determined that at
least one form of gaming, the Video Pull-Tab
 
                                       10
<PAGE>   13
 
Game, which is not currently in use at the Barona Casino but is substantially
similar to some of the electronic games being utilized there, falls within Class
III and must be regulated under a tribal-state compact. The Court of Appeals for
the District of Columbia upheld the NIGC's determination and the U.S. Supreme
Court refused to grant a writ of certiorari, the effect of which was to affirm
the lower court ruling that the Video Pull-Tab Game is a Class III gaming
device.
 
     Sycuan Band of Mission Indians v. Roache, 54 F.3d 535 (9th Cir., 1994). In
1991, sheriff's deputies with search warrants from the San Diego Municipal Court
raided the Barona, Sycuan, and Viejas Tribes' gaming centers in San Diego
County. None of ICC I, ICC II or ICP managed the video gaming operations of
Barona Casino at the time of the raid. The deputies seized gaming machines, cash
and records, and the district attorney commenced prosecutions of four persons
employed in the gaming operation at the Sycuan Reservation. No criminal charges
were ever brought against employees of the Barona Tribe. The Indian tribes
brought actions in the U.S. District Court for the Southern District of
California for declaratory relief and injunctions against the state
prosecutions. The district court granted declaratory and injunctive relief in
favor of the Indian tribes declaring that the county officials were precluded by
IGRA from executing warrants and prosecuting the tribal gaming officials. That
District Court also held that the federal government has exclusive power to
enforce any violation of IGRA on Indian land. Further, the court found that
certain of the confiscated video "pull-tab" machines from the Sycuan Reservation
were "electronic facsimiles" of games of chance and hence were Class III gaming
devices that could be lawfully operated only if authorized by a tribal-state
compact and that no such compact was in place between the State of California
and any of the tribes. On appeal, the Court of Appeals for the Ninth Circuit
affirmed the district court's decision, and the U.S. Supreme Court refused to
grant certiorari, thereby affirming the holdings of both lower courts. While the
Barona Casino's electronic video gaming devices are not the same as those which
were the subject of Sycuan, based on the court's reasoning, the video gaming
devices are likely to be classified as Class III operations under IGRA.
 
     Rumsey Indian Rancheria of Wintun Indians v. Wilson, 64 F.3d 1250 (Aug. 11,
1995), amending 41 F.3d 421 (Nov. 15, 1994). In Rumsey, the Barona Tribe and
other Indian tribes filed a declaratory judgment action in the United States
District Court for the Eastern District of California seeking a determination
that certain electronic and casino style card games, all acknowledged by the
tribes and the State of California to be Class III games, were permitted under
California law and hence the state was required to negotiate a compact with the
tribes for such gaming activities. The Court of Appeals for the Ninth Circuit
held that, with the possible exception of slot machines in the form of video
lottery terminals, such games were prohibited. In June 1997, the United States
Supreme Court denied the petition for a writ of certiorari to consider the
ruling of the Ninth Circuit Court of Appeals which had been issued in August
1995. The Supreme Court's denial of certiorari was issued under the name of
Sycuan Band of Mission Indians v. Wilson, No. 96-1059, 117 S. Ct. 2508 (1997),
on June 27, 1997.
 
     That decision by the U.S. Supreme Court to deny the writ of certiorari
effectively refuted the contention of the Indian tribes in Rumsey that if
California permitted any style of Class III games then the tribes should be
permitted to play all forms of Class III games. The Ninth Circuit's prior
decision remanded portions of the case back to the District Court for the
Eastern District of California to determine whether California permits slot
machine play in the form of its video lottery terminals and scratcher game
dispensers in conjunction with the California State Lottery. A scheduling order
has been issued in which the State of California and the effected tribes,
including the Barona Tribe, must submit written briefs, depositions and evidence
before February 1998. It is uncertain when a decision will be made after the
presiding judge takes the matter under submission, most probably in February
1998.
 
     Western Telcon, Inc. v. California State Lottery, 13 Cal. 4th 475 (1996).
In Western Telcon, the California Supreme Court held that a form of keno
conducted by the California State Lottery was a house-banked game and not a
lottery and hence was not authorized by the California State Lottery Act. In its
decision, the court did not address the positions presented by the plaintiffs
and the intervener, California-Nevada Indian Gaming Association, that the keno
game involved slot machines and that the Lottery Act granted the California
State Lottery a complete exemption from the anti-gaming provisions of the
California Penal Code. A ruling that the game involved slot machines or a form
of electronic gaming authorized by the Lottery Act would have been favorable to
Indian tribes seeking, via Rumsey, a declaration that the state is
 
                                       11
<PAGE>   14
 
required by IGRA to enter into a tribal-state compact governing electronic
gaming on tribal lands. On the other hand, the court noted that the California
State Lottery (and hence by implication, Indian tribes operating with
tribal-states compacts) could legally conduct keno or other numbers games, using
video terminals and on-line computers, provided the games are structured as
lotteries rather than house-banked games.
 
     Seminole Tribe v. Florida, 116 S. Ct. 1114 (1996), aff'g 11 F.3d 1016 (11th
Cir., 1994). Section 11(d)(7)(A)-(B) of IGRA authorized a tribe to bring civil
suit in federal district court if a state refused to negotiate in good faith a
tribal-state compact governing Class III gaming on the tribe's land. If the
tribe prevailed, the court could order the state to conclude a compact within 60
days, and if a compact was not concluded within that time, a court-appointed
mediator would select either the tribe's or the state's last best offer. If the
state did not consent to the selected offer within 60 days, the Secretary of the
Interior could prescribe procedures, consistent with the selected offer, IGRA,
and state law, under which the tribe could conduct such gaming. The U.S. Supreme
Court, citing the states' immunity from suit by private parties in federal
courts under the Eleventh Amendment, held that Congress lacked the power under
the Indian Commerce Clause of the U.S. Constitution to authorize such suit. This
leaves open the question whether, when a state refuses to negotiate in good
faith and to consent to federal jurisdiction, a tribe may proceed directly to
the Secretary of Interior. The Eleventh Circuit so held in Seminole, 11 F.3d at
1029, cert. denied, 116 S. Ct. 1416 (1996), a holding which the Supreme Court
declined to review. Given the uncertainties as to the Barona Tribe's remedies if
the State of California fails to negotiate a compact in good faith, it is
unclear if or when the Barona Tribe will be able to secure a compact or to
obtain procedures for Class III gaming from the Secretary of the Interior.
 
  Pending Legislation
 
     Legislation is pending before Congress and the California state legislature
which could either limit or redefine the scope of gaming activities permitted on
Indian reservations. It is unclear whether any of the bills described below or
any amendment or substitution for such bills will be passed by Congress or the
California legislature. Further, it is unclear what effect, if any, these bills
will have on the gaming operations of the Barona Tribe. Some of the proposed
legislation might, if passed in the proposed form, have an adverse effect on the
operations at the Barona Casino and upon the financial condition and operations
of Inland Casino.
 
     Federal.  Legislation is pending before Congress which could limit the
scope of gaming activities permitted on Indian reservations to that which is
expressly authorized under state law. Although the retroactive effect on Indian
tribes cannot be determined, Indian tribes which do not now have a compact for
electronic or casino type gaming, such as the Barona Tribe, could be seriously
limited in the scope of activities which might be permitted under new
legislation.
 
     Other bills have been introduced to Congress, some of which would create a
federal commission to review national policies toward gambling in light of the
expansion of the gaming industry in general and the Indian gaming industry in
particular. Also, Senators McCain and Inouye have introduced a bill to
comprehensively amend and broaden IGRA. This bill would, among other things,
clarify that electronic video gaming devices are Class III gaming activities and
would provide certain procedural and timing requirements for the negotiation of
tribal-state compacts, including a procedure by which the Secretary of the
Interior could approve a compact that meets the requirements of IGRA after both
the Indian tribe and the state present their respective positions concerning the
proposed compact.
 
     It is unclear whether any of the bills currently pending or any amendment
or substitution for such bills will be passed by Congress. Such legislation
could, if passed, however, have an adverse effect on the operations at the
Barona Casino and upon the financial condition and operations of Inland Casino.
 
     California.  In the most recent legislative session of the California
legislature, which concluded on or about September 19, 1997, there were numerous
bills which could have had an effect on gaming activities in general and Indian
gaming activities in particular within the State of California. Several of these
bills contained the objective of establishing a new centralized government
entity, the California Gaming (or Gambling Control) Commission, to regulate
gambling in the State of California. A bill was proposed which
 
                                       12
<PAGE>   15
 
would have designated the Governor as the person responsible for negotiating and
executing compacts. Other legislation was proposed which would have defined the
scope of gaming permitted by compacts and defining certain types of games to be
played. Other bills would provide the opportunity for Indian tribe exclusivity
with respect to video display terminals. In addition, other bills addressed
non-Indian gaming such as horse racing, the California lottery, gaming clubs and
non-Indian bingo games, but each of these bills could have had an effect on
Indian gaming activities either directly or indirectly.
 
     The Company expects that legislation involving gaming activities in general
and Indian gaming activities in particular will continue to be introduced (or
reintroduced, as the case may be) in the California legislature, including some
or all of the above-referenced legislation. It is unclear whether any of these
bills or any amendment or substitution for such bills will be passed by the
California legislature at any time in the future. Further, it is unclear what,
if any, effect these bills, if passed, will have on the gaming operations of the
Barona Tribe. However, it is possible that legislation might, if passed, have an
adverse effect on the operations at the Barona Casino by limiting the amount
and/or type of gaming activities which could be offered or by increasing the
amount of competition from non-Indian gaming activities. Any of these could have
an adverse effect upon the financial condition and operations of Inland Casino.
 
  Effect of Regulation on Existing Gaming Activities
 
     As noted above, Inland Casino provides consulting services to the Barona
Tribe for the operation of the Barona Casino which includes, among its gaming
activities, various forms of electronic gaming devices. Under NIGC regulations,
certain electronic games may be deemed to be "electronic facsimiles" of games of
chance or slot machines; as such they are defined as Class III gaming and must
be the subject of a tribal-state compact to be legally used on Indian lands. In
Cabazon Band of Mission Indians v. National Indian Gaming Commission, 14 F.3d
633 (D.C. Cir., 1994), the Court agreed with the NIGC that an electronic
pull-tab game played using computers and video screens (the "Video Pull-Tab
Game"), a game similar to electronic games in use at the Barona Casino, to be a
Class III game.
 
     Some of the Barona Casino's electronic games could be deemed to be Class
III electronic facsimiles or slot machines. If so, those games, to be lawful
under IGRA, must be of the kind permitted by California law and be subject to a
tribal-state compact. The Barona Tribe has no such compact with the state. If it
is finally determined that any of the electronic video gaming devices operated
at the Barona Casino are Class III machines, the Barona Tribe has expressed its
intention to convert them into, or replace them with, video display paper
pull-tab dispensing machines which will qualify as Class II machines and which
can be operated without a tribal-state compact.
 
     If the electronic video gaming devices are deemed to be Class III gaming
activities, such activities could be found to be unlawful because there is no
tribal-state compact between the Barona Tribe and the State of California. Also,
it might be determined that certain or all of these electronic games are
activities beyond the scope of what the State of California can be compelled to
include in a tribal-state compact. If this were to occur, there would be little
likelihood that the State of California would agree to such gaming activities in
a compact. This could have a material adverse effect on the business and
financial condition of Inland Casino.
 
     The Barona Casino's continuing operation of video pull-tab or other
electronic games (except for traditional bingo played with certain electronic
and technologic aids), if deemed illegal, could lead to monetary sanctions and
closure of the Barona Casino by the NIGC and criminal sanctions and confiscation
of equipment by the U.S. Attorney. No assurances can be given that the attempts
by various federal agencies, such as the NIGC or the Department of Justice, to
invoke one or more of the various sanctions described above will not be made.
 
     In at least one criminal case brought against a management company, United
States v. E.C. Investments, 77 F.3d 327 (9th Cir., 1996), the Ninth Circuit
Court of Appeals reversed the Central District Court's dismissal of the
indictments against the management company and certain of its principals,
holding that violation of the state law (in this case, California's prohibition
against the use of slot machines) may serve as the predicate offense for federal
prosecution of gambling activities in Indian Country that are in violation of
state law. The case, which was remanded to the District Court for further
proceeding, is significant because
 
                                       13
<PAGE>   16
 
the electronic games in question are similar to those used by the Barona Tribe
at the Barona Casino. The defendants were also charged with other offenses,
including money laundering, conspiracy and use of interstate mails to carry on
an illegal gambling business. These activities may distinguish the good faith
dispute regarding the scope of activities permitted under IGRA when comparing
activities permitted in the State of California.
 
     The significance of the denial of certiorari by the U.S. Supreme Court in
Rumsey, discussed above, is that ruling resulted in the significant modification
of what has been termed "standstill agreements" with the U.S. Attorney for the
Southern District of California (the "U.S. Attorney"). According to a statement
made by the U.S. Attorney's Office for the Southern District of California (the
"USAO"), since June 1994, the Barona Tribe, the Sycuan Band of Mission Indians
and the Viejas Band of Kumeyaay (Mission) Indians (collectively referred to
herein as the "Southern District Tribes") have operated in compliance with a
verbal "standstill" understanding that has maintained the status quo of Indian
gaming in the Southern District of California and have honored those
"standstill" agreements not to expand existing electronic gaming operations
pending the outcome of relevant pending court decisions. As a result of the
denial of certiorari in Rumsey, the Southern District Tribes have acknowledged
that certain currently operated video gaming devices are not within the
acceptable/permissible scope of compactible gaming under present federal and
state law and agreed to the commencement of a voluntary phase-out plan of
electronic games with the USAO.
 
     The phase-out plan commenced in August 1997, with the removal of 6% of each
affected Tribe's existing video gaming machines, and continue with the planned
removal of another 10% of each affected Tribe's video gaming machines. The USAO
stated that the phase-out plan (i) demonstrates a good faith effort by the
Southern District Tribes to continue to cooperate with the USAO and comply with
state and federal laws, (ii) is necessary in order to minimize the impacts to
affected tribal employees and local negative economic impacts resulting from the
reduction of gaming operations, and (iii) is expected to facilitate negotiations
between the State of California and the Southern District Tribes designed to
determine the type of machine gaming that is permissible (otherwise referenced
to as "compactible") under federal and state laws.
 
     The State of California is currently engaged in negotiations with the Pala
Band of Mission Indians (the "Pala Tribe") which is also located in San Diego
County, to determine what type of gaming is permissible and the circumstances
under which it may be conducted. It is anticipated that these negotiations may
lead to a model compact between the State and the Pala Tribe sometime before the
end of calendar year 1997.
 
     The Southern District Tribes have renewed their request that the State of
California begin negotiations with them (similar to those being held with the
Pala Tribe) with a view towards reaching compacts allowing permissible machine
gaming in their facilities; however, the Governor of the State of California has
stated that he will not negotiate compacts with the tribes currently operating
casino games which he believes are not permissible under California law.
 
     To the extent that the Governor alters his position and decides to
negotiate with the Southern District Tribes and other tribes currently operating
electronic gaming machines, an issue in such compact negotiations is the
conversion of electronic video machines to a lottery or pari-mutual format
designed to comply with both federal and state law. The USAO believes that the
question of machine conversion would be consistent with the criteria being
established in the current Pala compact negotiations.
 
     The phase-out of 16% of the video machines at the Barona Casino will result
in an estimated reduction of the Company's consulting fees of approximately
$193,000 per month beginning in October 1997. If the Barona Casino removes
additional machines at the request of the U.S. Attorney, the Company's
consulting fees could be reduced further. If the Barona Casino is forced to
remove all of its current video machines, and is unable to obtain a compact with
the State of California, the Company could lose all of its consulting fee
revenue from the Barona Casino, which could have a material adverse effect on
the financial condition of the Company. See Item 6. "Management's Discussion and
Analysis of Plan of Operation -- Overview; Factors that May Affect Future
Results," herein.
 
     Under the present time-table set forth by the USAO, by mid-October 1997,
the USAO and the Southern District Tribal Councils will review the status of the
phase-out plans and the progress which has been made
 
                                       14
<PAGE>   17
 
toward State of California compact negotiations with the Southern District
Tribes. The Southern District Tribes have requested that the remainder of the
phase-out agreement be completed following a review of the compact negotiations
between the Pala Tribe and the State of California and a review of the status of
the State of California's willingness to enter into negotiations with the
Southern District Tribes. The Southern District Tribes are also continuing to
examine the feasibility of converting existing video gaming machines to lottery-
style games that would not constitute "slot machines" within the meaning of the
California Penal Code. The conversion would also be consistent with the criteria
being established in the current Pala Tribe compact negotiations.
 
     The USAO has stated that it intends to closely monitor this initial
phase-out program during the months of August and September 1997. According to
the U.S. Attorney, the efficacy of the planned phased withdrawal will be
evaluated on a month-to-month basis in consideration of such factors as: (i) the
status of ongoing State of California/Pala negotiations; (ii) the progress of
negotiations between the State and the other Southern District Tribes and other
California Native American Tribes; (iii) the status of gaming elsewhere in
California; (iv) the status of proceedings on remand to Judge Burrell in the
Eastern District of California in the Rumsey case; and (v) the well being of
Native American communities in San Diego County and the persons employed in
those communities. The Southern District Tribes and the U.S. Attorney plan to
meet again in early October 1997 to review the status of State of California
compact negotiations and to finalize the remainder of the phase-out program. The
USAO may elect at any time to accelerate the phase-out of the electronic
machines and to take administrative and judicial action to significantly and
abruptly curtail electronic gaming as currently operated in casinos operated by
the Southern District Tribes. Such action would have a material adverse effect
on the financial condition of the Barona Casino and, accordingly, the Company.
 
  Conclusion Concerning Indian Gaming Regulation
 
     There are significant civil and criminal penalties associated with
operating gaming activity on the Barona Tribe's Indian Reservation otherwise
than in strict compliance with relevant law and judicial interpretation thereof.
These penalties may be imposed on both the Barona Tribe and Inland Casino, and
are generally described above. The imposition of some or all of these sanctions
could have a material adverse effect on the operations and financial prospects
of Inland Casino. Any government action, inquiry and/or investigation could have
a material adverse effect on the competitive position in San Diego County of
Inland Casino in relation to other Indian gaming operations. In light of the
uncertainties regarding interpretation and enforcement of such federal and state
laws and regulations, reported financial information is not necessarily
indicative of Inland Casino's future operating results or financial condition.
 
     It is unclear whether some of the gaming activities conducted at the Barona
Casino are Class II or Class III gaming activities. If they are deemed to be
Class III games, they are unlawful absent a tribal-state compact. However, many
Federal and state laws, rules and regulations affecting such operations have not
as yet been finally interpreted by authorities. The ambiguity is magnified
because the State of California has refused to enter into a compact with the
Barona Tribe as permitted under IGRA. A compact would help clarify and resolve
much of the uncertainty enveloping tribal gaming; however, with the exception of
the recent compact negotiations noted above, the State of California has refused
to negotiate such a compact with any of the Indian tribes located in the State
of California. The U.S. Supreme Court's decision in the Rumsey case narrowed
certain of the ambiguities and resulted in the Southern District Tribes
voluntarily commencing a phase-out of electronic gaming machines.
 
     Although the management of Inland Casino believes that gaming activities
will continue to be conducted at the Barona Casino which will eventually be
expressly permitted under IGRA and the laws of the State of California, given
the uncertainty of the present regulatory environment and because the State of
California has not entered into a compact with the Barona Tribe, it is
impossible to determine the precise nature of Indian gaming in California in the
future. As noted, a compact would help clarify and resolve much of the
uncertainty surrounding tribal gaming. Thus far, with the exception of the
limited statement by Governor Wilson noted above, the State of California has
refused to negotiate with any of the Southern District Tribes concerning such a
compact. Whether or not a compact is ever signed between the Barona Tribe and
the State of
 
                                       15
<PAGE>   18
 
California, there can be no assurance that either the NIGC or the State of
California will agree with the Barona Tribe and management of the Company that
certain gaming activities currently conducted at the Barona Casino are
permissible. A finding that certain gaming activities are impermissible could
have a material adverse effect on the business, operations and financial
condition of Inland Casino. The extent of such findings, the timing of
enforcement actions if certain games are deemed impermissible and the associated
loss of revenue, in the aggregate and over what period of time, are all issues
incapable of accurate resolution at this time. Furthermore, other changes in
such laws, rules and regulations could also have a material adverse effect on
the gaming operations at the Barona Casino.
 
ITEM 2.  DESCRIPTION OF PROPERTY
 
     Executive Offices.  The Company's executive offices are located in La
Jolla, California, and consist of approximately 5,000 square feet under a lease
which will expire in January 1998. The Company is currently in the process of
negotiating a lease agreement for new office space totalling approximately
20,000 square feet located in San Diego, California. Management believes that
the new office space will accommodate the Company's currently anticipated
requirements for the foreseeable future. If the Company and the landlord are not
able to agree to the terms of a lease agreement for the new office space or if
the Company needs further additional space, management believes that the Company
will be able to secure such space at reasonable rates.
 
     Lease of "Big Top" Structure.  On December 14, 1993, ICP, doing business on
behalf of the Barona Casino, entered into a Lease Agreement (the "Big Top
Lease") with Sprung Instant Structures, Inc. ("Sprung") pursuant to which ICP
agreed to lease the "Big Top" structure which houses the Barona Casino. The Big
Top Lease was assigned to Inland Casino. The original lease term was for 12
months and expired on January 15, 1995 but will continue on a month to month
basis for a monthly lease payment of $20,360 unless the Big Top Lease is
canceled by Inland Casino. The lease payments are a liability of Inland Casino
but are considered to be an operating expense of the Barona Casino. Inland
Casino has an option to purchase the "Big Top" structure for $535,342.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     To the best of management's knowledge, there are no material pending legal
proceedings to which the Company is a party. The Company is, however, subject to
legal proceedings and claims which have arisen in the ordinary course of
business and have not been finally adjudicated.
 
     Although the Company cannot predict the likely outcome of any pending
lawsuit or claims involving the Company, management intends to vigorously
defend, and, where applicable, prosecute, each matter or case, and believes that
their final outcome will not have a material adverse effect on the Company's
financial condition or results of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     No matters were submitted during the fourth quarter of the fiscal year
covered by this Form 10-KSB to a vote of security holders of the Company.
 
                                    PART II
 
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
MARKET FOR COMMON STOCK
 
     The common stock of Inland Casino was accepted for trading on the Nasdaq
National Market, effective August 24, 1995, where it trades under the symbol
INLD. The Company's Common Stock traded in the over-the-counter market on the
National Association of Securities Dealers, Inc. Electronic Bulletin Board under
the symbol INLD from May 22, 1995 (the effective date of the Merger) to August
23, 1995, and under the symbol TWCE prior to the effective date of the Merger.
There was no active trading market for the Company's Common Stock for more than
two years prior to the Merger.
 
                                       16
<PAGE>   19
 
     The table below reflects the high and low sale prices of the Company's
common stock as reported by The Nasdaq Stock Market since August 24, 1995. The
number of shareholders of record as of September 25, 1997, was 3,274.
 
<TABLE>
<CAPTION>
                                                                           HIGH       LOW
                                                                           -----     -----
    <S>                                                                    <C>       <C>
    FISCAL YEAR 1996
    First Quarter........................................................  $9.75     $4.00
    Second Quarter.......................................................   7.00      3.63
    Third Quarter........................................................   4.13      3.50
    Fourth Quarter.......................................................   4.25      3.63
 
    FISCAL YEAR 1997
    First Quarter........................................................  $4.13     $2.50
    Second Quarter.......................................................   4.50      3.25
    Third Quarter........................................................   4.25      3.00
    Fourth Quarter.......................................................   3.88      2.13
</TABLE>
 
DIVIDEND POLICY
 
     To date, the Company has not paid any dividends and does not intend to pay
any dividends in the foreseeable future. The Company is not currently restricted
from paying cash dividends; however, the Company presently plans to reinvest
earnings in order to finance the expansion and development of its business.
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
OVERVIEW; FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     Since April 1, 1996, the Company has provided consulting services to the
Barona Tribe at the Barona Casino under the terms of the Consulting Agreement.
From February 1992 through March 1996, the Company provided services to the
Barona Tribe under the terms of the Operations Agreement, including providing
assistance in the development and expansion of the casino facility at the Barona
Casino. The Company and the Barona Tribe also entered into a Mutual Release,
effective April 1, 1996, releasing each other from their respective duties and
obligations under the Operations Agreement. See Item 1. "Description of
Business -- Summary of Inland Casino Gaming Agreements," herein.
 
     Prior to April 1, 1996, the Company earned fees based upon a percentage of
the "net profits" generated by the Barona Casino. As used in the Consulting
Agreement, the term "net profits" is not intended to mean net profits as defined
by generally accepted accounting principles or by IGRA. Generally, the
Operations Agreement defined "net profits" as the total amount of moneys
remaining from monthly gross receipts after payment of the operating expenses
for such month calculated on a cash basis. The Company provided certain
personnel, at its expense, to operate the activities at the Barona Casino, and
it entered into agreements such as leases and other contracts for the Barona
Casino in which the company was the obligor (e.g., leases of gaming equipment
and other facilities, vendor contracts, etc.).
 
     As part of its obligation to the Barona Tribe under the Operations
Agreement, the Company provided significant financing for the construction and
expansion of the Barona Casino. The financing costs have been recognized as an
asset in the financial statements of the Company, designated as deferred
contract costs, and are being amortized to expense over the combined lives of
the Operations and Consulting Agreements through March 1999. The recovery of
these deferred costs is achieved through the fees earned by the Company under
the agreements with the Barona Tribe. However, given the nature of the asset, if
the recoverability is determined not to be probable, the Company will charge to
expense the unamortized portion.
 
     In addition to its obligations under the Consulting Agreement and
collateral contracts for the benefit of the Barona Tribe, the Company's
consulting activities include assisting clients in arranging financing to
support casino construction projects and monitoring of Indian Gaming legislative
and litigation matters.
 
                                       17
<PAGE>   20
 
     In June 1996, the Company began providing consulting services for the
Siletz Tribes at the Chinook Winds Gaming and Convention Center in Lincoln City,
Oregon, and with the Associated Tribes of Northwest Indians in Oregon. In
October 1996, the consulting agreement with the Siletz Tribes was terminated.
 
     Also in June 1996, the Company entered into a consulting agreement with the
Klamath Tribes to assist with the development, construction and eventual
operation of the Kla-Mo-Ya Casino, a new casino to be constructed near
Chiloquin, in south-central Oregon. In connection with the financing of the
Kla-Mo-Ya Casino project, the Company expended $879,933 to purchase revenue
bonds with a principal amount of $900,000, as part of a $4,735,000 principal
amount of bond financing. In January 1997, the Company sold $200,000 principal
amount of the bonds for $195,582, and in June 1997, sold $200,000 principal
amount of the bonds for $185,500. In addition to the bond financing, the Company
pledged a certificate of deposit for $1,518,000 as collateral for third-party
bank loans to the Klamath Tribes. In May 1997, the Company and the Klamath
Tribes terminated the consulting agreement and all of their related construction
agreements. The Kla-Mo-Ya Casino was opened to the public in mid-Summer of 1997.
If the Kla-Mo-Ya Casino sustains operating losses and does not have adequate
cash flow to pay its obligations, the Company could lose a portion or all of its
approximately $463,000 investment in revenue bonds and its pledged $1,518,000
certificate of deposit, which could have a material adverse effect on the
Company's liquidity and financial condition.
 
     During Fiscal 1996 and Fiscal 1997, substantially all of the Company's
revenue was earned under the terms of the Operations Agreement through March
1996, and, beginning in April 1997, under the terms of the Consulting Agreement
with the Barona Tribe. The Company earned consulting fees from other tribes
totalling $46,250 in Fiscal 1996 and $117,850 in Fiscal 1997.
 
     In August 1997, the U.S. Attorney for the Southern District of California
announced that the three tribes in San Diego County with casino operations,
including the Barona Tribe, would be asked to voluntarily phase out 6% of their
electronic video terminals in August 1997, and to phase out an additional 10% by
September 30, 1997. See Notes to Financial Statements, NOTE G -- COMMITMENTS AND
CONTINGENCIES -- Certain Third Party Litigation Which Could Affect Indian Gaming
in California.
 
     The phase-out of 16% of the electronic video terminals at the Barona Casino
will result in an estimated reduction of the Company's consulting fees of
approximately $193,000 per month. If additional video machines are phased out,
the Company's consulting fees could be further reduced, and if the Barona Casino
is forced to remove all of its current video machines, the Company, over time,
could lose all of its consulting fee revenue from the Barona Casino, which would
have material adverse effect on the financial condition of the Company.
 
     Gaming on Indian land is extensively regulated by Federal, State and Tribal
governments. The present regulatory environment is uncertain because of certain
pending litigation and legislation. Adverse findings for any of the Indian
tribes in any of the pending actions could have a material adverse effect on the
operations of the Company, as would criminal and civil enforcement actions taken
by Federal agencies which could be commenced before the outcome of such
litigation is known. See Item 1. "Description of Business -- Discussion of
Regulatory Matters", herein.
 
     In addition, the Company's Consulting Agreement with the Barona Tribe has
not yet been approved by all regulatory authorities. If the Consulting Agreement
is not approved or is significantly modified from the standpoint of consulting
revenue, such action would have a material adverse effect on the business and
financial condition of the Company. See Item 1. "Description of
Business -- Summary of Inland Casino Gaming Agreements" and Notes to Financial
Statements, NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Barona
Consulting Agreement.
 
     As noted above, any material reduction in fees payable to the Company,
whether as a result of (i) a modification to the Consulting Agreement between
the Company and the Barona Tribe as a result of regulatory compliance
requirements, (ii) significant reductions in electronic gaming machines at the
Barona Casino, or (iii) weakness in the operations of the Barona Casino, could
have a material adverse effect on the business and financial condition of the
Company, if the Company could not either reduce expenses or increase revenues
from other sources.
 
                                       18
<PAGE>   21
 
RESULTS OF OPERATIONS
 
TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE TWELVE MONTHS ENDED JUNE 30,
1997
 
     Revenue.  Revenue increased 45.1% from $11,482,010 in Fiscal 1996 to
$16,665,350 in Fiscal 1997, as a result of higher profit margins at the Barona
Casino. With the exception of $117,850 in fees earned from consulting services
provided to other Native American tribes, the Company's revenue was solely from
fees earned under agreements with the Barona Tribe.
 
     Operating Expenses.  General and administrative expenses increased 16.0%
from $6,597,449 for Fiscal 1996 to $7,655,214 for Fiscal 1997, resulting
primarily from an increase in compensation expense reflecting a net increase in
the number of full-time employees from July 1996 through April 1997, partially
offset by a decrease in the number of employees in May and June of 1997. The
increase in compensation expense also resulted from increases in salaries and
other benefits for existing employees. In addition, the increase in operating
expenses resulted from increases in consulting and legal fees, an increase in
the provision for doubtful accounts to cover anticipated losses resulting from
certain consulting engagements, increases in promotion and advertising costs, an
increase in travel and entertainment expense, and an increase in allowable
political contributions. The increases were partially offset by decreases in
sponsorship costs, business development expenses, research and development costs
and charitable contributions.
 
     Amortization of deferred contract costs increased 14.4% from $2,410,333 for
Fiscal 1996 to $2,756,842 for Fiscal 1997, resulting primarily from calculating
amortization on a higher asset value for Fiscal 1997.
 
     Other Income and Expense.  For Fiscal 1997, interest income was $354,116,
compared to $36,914 for Fiscal 1996. Prior to April 1, 1996, while the Company
performed services at the Barona Casino under the terms of the Operations
Agreement with the Barona Tribe, it was determined by management that as long as
the Company had outstanding advances of future fees due to the Barona Casino,
interest earned on excess cash balances would be paid to the Barona Casino.
Commencing April 1, 1996, the effective date of the Consulting Agreement, the
Company began to realize interest income on its cash balances available for
investment.
 
     Interest expense increased from $24,000 for Fiscal 1996 to $320,250 for
Fiscal 1997, primarily as a result of interest expense incurred on notes payable
issued in March 1996 and in September 1996 in connection with the repurchase of
the Company's common stock. See Notes to Financial Statements, NOTE D -- STOCK
REPURCHASE/LONG-TERM DEBT.
 
     Income Tax Provision.  The Company recorded an income tax provision of
$2,528,000 for Fiscal 1997, based on income before income taxes of $6,287,160
for the year, compared to an income tax provision of $1,020,000, based on income
before income taxes of $2,475,693 for Fiscal 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's principal source of liquidity at June 30, 1997, consisted of
cash of $8,004,078, future revenues to be generated from operations and advances
of future fees under the Consulting Agreement with the Barona Tribe. As of June
30, 1997, the Company had no credit facility. The Company finances its
operations through cash provided by its operations and advances of future fees,
substantially all of which is derived from agreements with the Barona Tribe. To
the extent that the Barona Tribe is allowed to operate the Barona Casino in a
manner substantially consistent with past practices, the Company believes that
these sources of liquidity will be sufficient to meet the company's operating
and capital requirements for the foreseeable future.
 
     During Fiscal 1997, the company's cash position increased $3,656,093 from
the June 30, 1996 balance of $4,347,985, to $8,004,078 at June 30, 1997. The
increase was provided by net cash generated by operating activities of
$7,163,664 during the period and reduced by the use of cash for financing
activities of $719,946 and investing activities of $2,787,625.
 
     Deferred income taxes decreased $191,943 as the amortization of deferred
contract costs for tax purposes exceeded amortization of the costs for financial
statement purposes during Fiscal 1997.
 
                                       19
<PAGE>   22
 
     Accounts receivable decreased by $21,054 during Fiscal 1997 primarily as a
result of collections in excess of new billings and by providing an allowance
for doubtful accounts in an amount adequate to cover estimated losses on certain
receivables from Indian gaming clients.
 
     Accounts payable and accrued expense increased $526,135 primarily as a
result of increases in accrued interest on notes payable issued in connection
with repurchases of common stock and an increase in accrued compensation.
 
     From the inception of the Company, deferred contract costs have been
financed principally by cash generated from operations, advance of future fees
from the Barona Casino, working capital and advances and capital contributions
from shareholders. Also from the inception of the Company through June 30, 1997,
in addition to its general and administrative expenses, the Company's most
significant expenditure has been the funding of the deferred contract costs
related to an expansion of the facilities at the Barona Casino. Net cash
provided by operations from fees earned during this same period was insufficient
by itself to fund the deferred contract costs. In addition to fees earned under
the Operations and Consulting Agreements, the Company also has received advances
against future fees from the Barona Tribe and received capital contributions
from its shareholders. The increase of $2,094,538 in deferred contract costs
from $13,160,953 at June 30, 1996 to $15,255,491 at June 30, 1997, was financed
by cash generated from operations and by an increase of $1,369,591 in long-term
debt during the same period. At June 30, 1997, outstanding advances of future
fees from the Barona Casino totalled $2,173,135. Advances do not bear interest
and are due on demand.
 
     Cash flows used in investing activities for Fiscal 1997 include the
purchase of a bank certificate of deposit for $1,518,000, which was pledged as
collateral by the Company to secure loans made pursuant to a bank credit
agreement with the Klamath Tribes, to finance preopening costs and expenses of
approximately $1.5 million in connection with the development of the Kla-Mo-Ya
Casino by the Klamath Tribes, and an $879,993 investment in $900,000 principal
amount of revenue bonds issued by the Klamath Tribes. In January 1997, the
Company sold $200,000 principal amount of the revenue bonds for $195,582, and in
June 1997, sold $200,000 principal amount of the bonds for $185,550, reducing
its net investment in the bonds to $463,750. Restricted cash and other
investments of $1,981,750 is comprised of the pledged bank certificate of
deposit of $1,518,000, the Company's net investment of $463,750 in the Klamath
Tribes' revenue bonds.
 
     Cash flows used in financing activities include a $279,946 debt payment to
a former officer and director, $200,000 in payments related to the repurchase of
shares of common stock and an aggregate of $240,000 in loans, $50,000 of which
was a loan to an officer of the Company.
 
     Long-term debt increased $6,469,591 as a result of the issuance of notes
payable in connection with the repurchase of shares of the Company's common
stock and the January Settlement Agreement with the NIGC. See Notes to Financial
Statements, NOTE D -- STOCK REPURCHASE/LONG-TERM DEBT.
 
     It is the Company's intention to assist the Barona Tribe in funding, or
finding acceptable sources of funding, for future improvements in the Barona
Casino. Depending on the nature and extent of the improvement project, to the
extent practicable it is the Company's intent to first explore funding such
improvement projects from the Company's working capital and through advances of
future fees before seeking outside debt or equity financing. However, outside
sources of financing may be required or sought at any time.
 
     The Barona Casino and all of the related facilities are capital
improvements upon land which belongs to the Barona Tribe. As such, the Company
has no ownership whatsoever in any of the improvements to such land. All of
these improvements belong to the Barona Tribe.
 
SEASONALITY
 
     The Barona Casino is located approximately 30 miles east of downtown San
Diego, California where the population is relatively stable throughout the year,
although it peaks to some extent due to tourism during the summer months and to
a lesser extent during the winter months. On the basis of its experience to
date, the Company believes that the Barona Casino's business is not materially
effected by changes in seasons; however, the number of casino customers and
related revenues increase during week-end days and holidays.
 
                                       20
<PAGE>   23
 
INFLATION
 
     To date, inflation has not had a material impact on the Company's financial
condition or its results of operations.
 
FORWARD-LOOKING STATEMENTS
 
     Included in Item 1. "Description of Business," this Item 2. "Management's
Discussion and Analysis or Plan of Operation," the Notes to the Financial
Statements and elsewhere in this Report are certain forward-looking statements
reflecting the Company's current expectations. Although the Company believes
that its expectations are based on reasonable assumptions, there can be no
assurance that the Company's financial goals or expectations will be realized.
Numerous factors may affect the Company's actual results and may cause results
to differ materially from those expressed in forward-looking statements made by
or on behalf of the Company. Some of these factors include the uncertainties
regarding the current and ongoing discussions between the Southern District
Tribes (including the Barona Tribe) and the U.S. Attorney for the Southern
District of California regarding the staged phase-out of electronic gaming
machines at Indian-operated casinos, the uncertainties regarding the compact
negotiations between the State of California and the Indian tribes, particularly
the Barona Tribe, the uncertainties involved in the regulatory approval process
relating to the Consulting Agreement, the outcome of a variety of pending
litigation and legislation at the federal and state levels regarding Indian
gaming, the possible loss of the Company's various investment and guaranties
related to the Kla-Mo-Ya Casino, the availability of funding alternatives to
fulfill development projects at the Barona Casino, and general economic factors
affecting the gaming industry in general and Indian gaming in particular in the
respective geographic markets within which the Company competes, particularly
Southern California.
 
                                       21
<PAGE>   24
 
ITEM 7.  FINANCIAL STATEMENTS
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Certified Public Accountants....................................    23
 
Financial Statements:
  Balance Sheet -- June 30, 1997......................................................    24
  Statements of Operations -- Two Years Ended June 30, 1996 and 1997..................    25
  Statement of Shareholders' Equity -- Two Years Ended June 30, 1996 and 1997.........    26
  Statements of Cash Flows -- Two Years Ended June 30, 1996 and 1997..................    27
  Notes to Financial Statements.......................................................    28
</TABLE>
 
                                       22
<PAGE>   25
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Shareholders of
  Inland Casino Corporation
La Jolla, California
 
     We have audited the accompanying balance sheet of Inland Casino Corporation
as of June 30, 1997, and the related statements of operations, shareholders'
equity and cash flows for each of the years in the two year period ended June
30, 1997. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inland Casino Corporation,
as of June 30, 1997, and the results of its operations and its cash flows for
each of the years in the two year period ended June 30, 1997, in conformity with
generally accepted accounting principles.
 
/s/  GRANT THORNTON LLP
 
Los Angeles, California
August 12, 1997
 
                                       23
<PAGE>   26
 
                           INLAND CASINO CORPORATION
 
                                 BALANCE SHEET
                                 JUNE 30, 1997
 
<TABLE>
<S>                                                                               <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.....................................................  $ 8,004,078
  Accounts receivable:
     Trade......................................................................       26,265
     Employees..................................................................       43,835
  Prepaid expenses and other current assets.....................................       58,069
                                                                                  -----------
          Total current assets..................................................    8,132,247
RESTRICTED CASH AND OTHER INVESTMENTS...........................................    1,981,750
 
OTHER NON-CURRENT ASSETS:
  Receivables due after one year................................................      240,000
  Furniture and equipment, net..................................................      159,633
  Deferred contract costs, net..................................................    5,843,023
  Deferred taxes................................................................      270,183
  Deposits and other assets.....................................................       87,291
                                                                                  -----------
                                                                                  $16,714,127
                                                                                  ===========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Advances of future consulting fees -- Barona Casino...........................  $ 2,173,135
  Current portion of long-term debt.............................................    1,020,054
  Accounts payable and accrued expenses.........................................      975,424
  Income taxes payable..........................................................      190,737
                                                                                  -----------
          Total current liabilities.............................................    4,359,350
LONG-TERM DEBT, LESS CURRENT PORTION............................................    6,469,591
COMMITMENTS AND CONTINGENCIES
 
SHAREHOLDERS' EQUITY:
  Common stock, $.001 par value, 100,000,000 shares authorized and 3,854,548
     shares outstanding.........................................................        3,855
  Retained earnings.............................................................    5,881,331
                                                                                  -----------
          Total shareholders' equity............................................    5,885,186
                                                                                  -----------
                                                                                  $16,714,127
                                                                                  ===========
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                       24
<PAGE>   27
 
                           INLAND CASINO CORPORATION
 
                            STATEMENTS OF OPERATIONS
                       YEARS ENDED JUNE 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                       1996            1997
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
CONTRACT REVENUE:
  Barona Casino...................................................  $11,435,790     $16,547,500
  Other...........................................................       46,250         117,850
                                                                    -----------     -----------
                                                                     11,482,040      16,665,350
                                                                    -----------     -----------
OPERATING EXPENSES:
  General and administrative expenses.............................    6,597,449       7,655,214
  Amortization of deferred contract costs.........................    2,410,333       2,756,842
                                                                    -----------     -----------
                                                                      9,007,782      10,412,056
                                                                    -----------     -----------
Operating profit..................................................    2,474,258       6,253,294
OTHER INCOME AND (EXPENSE):
  Interest income.................................................       36,914         354,116
  Interest expense................................................      (24,000)       (320,250)
  Merger costs....................................................      (11,479)
                                                                    -----------     -----------
                                                                          1,435          33,866
                                                                    -----------     -----------
Income before income taxes........................................    2,475,693       6,287,160
Income tax provision..............................................    1,020,000       2,528,000
                                                                    -----------     -----------
NET INCOME........................................................  $ 1,455,693     $ 3,759,160
                                                                    ===========     ===========
Income per common and common equivalent share.....................  $      0.12     $      0.55
                                                                    ===========     ===========
Shares used in the computation of income per common and common
  equivalent share................................................   12,159,428       6,882,512
                                                                    ===========     ===========
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                       25
<PAGE>   28
 
                           INLAND CASINO CORPORATION
 
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                       YEARS ENDED JUNE 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                COMMON STOCK                                TOTAL
                                         --------------------------      RETAINED       SHAREHOLDERS'
                                           SHARES         AMOUNT         EARNINGS          EQUITY
                                         ----------     -----------     -----------     -------------
<S>                                      <C>            <C>             <C>             <C>
Balance at June 30, 1995...............  12,541,793     $ 3,753,875     $ 4,017,779      $  7,771,654
  Redemption of common stock...........  (1,909,001)     (1,401,321)             --        (1,401,321)
  Net income...........................          --              --       1,455,693         1,455,693
                                         -----------    -----------     ------------     ------------
Balance at June 30, 1996...............  10,632,792       2,352,554       5,473,472         7,826,026
  Redemption of common stock...........  (6,778,244)     (2,348,699)     (3,351,301)       (5,700,000)
  Net income...........................          --              --       3,759,160         3,759,160
                                         -----------    -----------     ------------     ------------
Balance at June 30, 1997...............   3,854,548     $     3,855     $ 5,881,331      $  5,885,186
                                         ===========    ===========     ============     ============
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                       26
<PAGE>   29
 
                           INLAND CASINO CORPORATION
 
                            STATEMENTS OF CASH FLOWS
                       YEARS ENDED JUNE 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                       1996            1997
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Increase (decrease) in cash:
Net cash provided by operating activities:
  Net income......................................................  $ 1,455,693     $ 3,759,160
  Adjustments to reconcile net income to net cash provided by
     operating activities:
  Depreciation and amortization...................................    2,446,277       2,808,629
  Deferred taxes..................................................      437,135         191,943
  Decline in fair market value of bonds...........................                       26,221
  Loss from sale of bonds.........................................                       10,500
  Changes in assets and liabilities:
  Accounts receivable.............................................      (62,600)         21,054
  Prepaid expenses and other current assets.......................       30,747          (4,939)
  Deposits and other assets.......................................       64,730          57,783
  Accounts payable and accrued expenses...........................      129,062         526,135
  Income taxes payable............................................      210,030         (20,143)
  Advances of future consulting fees..............................      545,630        (212,679)
                                                                    -----------     -----------
     Net cash provided by operating activities....................    5,256,704       7,163,664
Cash flows provided by (used) in investing activities:
  Increase in restricted cash and other investments, net..........                   (2,397,993)
  Sale of bonds...................................................                      381,082
  Purchase of furniture and equipment.............................     (102,338)        (45,767)
  Deferred contract costs.........................................   (1,699,699)       (724,947)
                                                                    -----------     -----------
     Net cash used in investing activities........................   (1,802,037)     (2,787,625)
                                                                    -----------     -----------
Cash flows provided by (used in) financing activities:
  Payment of debt.................................................     (501,321)       (279,946)
  Payments made under stock repurchase agreement..................                     (200,000)
  Loans to employee and others....................................                     (240,000)
  Repayment of loans from shareholders............................      (29,187)
                                                                    -----------     -----------
     Net cash provided by (used in) financing activities..........       15,122        (719,946)
                                                                    -----------     -----------
     Net increase in cash.........................................    2,924,159       3,656,093
Cash at beginning of period.......................................    1,423,826       4,347,985
                                                                    -----------     -----------
Cash at end of period.............................................  $ 4,347,985     $ 8,004,078
                                                                    ===========     ===========
Supplemental disclosures of cash flow information:
  Interest expense paid...........................................  $     3,001     $    63,000
                                                                    ===========     ===========
  Interest income received........................................  $    33,611     $   331,153
                                                                    ===========     ===========
  Income taxes paid...............................................  $   565,152     $ 2,357,000
                                                                    ===========     ===========
  Income tax refund received......................................  $   192,316     $       800
                                                                    ===========     ===========
  Settlement obligation...........................................  $               $ 1,369,591
                                                                    ===========     ===========
  Redemption of common stock by issuance of notes payable.........  $               $ 5,500,000
                                                                    ===========     ===========
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                       27
<PAGE>   30
 
                           INLAND CASINO CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
                             JUNE 30, 1996 AND 1997
 
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
1.  Description of Business
 
     Inland Casino Corporation provides consulting and other professional
services for gaming operations with Native American tribes. Substantially all of
its revenue is earned from a consulting agreement with the Barona Group of
Capitan Grande Band of Mission Indians (the "Barona Tribe").
 
     Operation of any type of gaming on Indian land is subject to Federal, state
and tribal regulation. Changes in regulations may limit or otherwise affect
Indian gaming and therefore could have a material effect on the operations of
the Company. As discussed in Note G, changes in the interpretation or the
enforcement of existing statutes or regulations relating to Indian gaming, new
statutes or regulations adverse to Indian gaming, and adverse decisions in
pending litigation regarding Indian gaming, in general, and in California,
specifically, could have a material adverse effect upon the financial condition
and operation of the Company.
 
2.  Basis of Accounting
 
     The Company reports revenues and expenses from consulting services provided
to Indian tribes using the accrual method of accounting. For all periods
reported in these Financial Statements, substantially all of the Company's
consulting revenue is generated from services related to the Barona Tribe, which
operates the Barona Casino, a single Indian gaming operation located in
California.
 
3.  Barona Consulting Agreement
 
     The Company provides consulting and other professional services to the
Barona Tribe in connection with the Barona Tribe's operations at the Barona
Casino in accordance with the terms and conditions of a certain Amended and
Restated Consulting Agreement (which became effective on April 1, 1996), under a
grant of authority from the Barona Tribe's General Council. In March 1996, the
Company entered into an initial consulting agreement with the Barona Tribe
covering the Barona Casino, also with an effective date of April 1, 1996. In May
1996, after the parties recognized an inadvertent mistake in the provision
relating to consulting fees had been made, the Company and the Barona Tribe
agreed to the above-referenced Amended and Restated Consulting Agreement (the
"Barona Consulting Agreement" or the "Consulting Agreement").
 
     Prior to April 1, 1996, the Company provided operational and other services
on behalf of the Barona Tribe, in accordance with the terms and conditions of a
certain Gaming Management Agreement (the "Operations Agreement") with the Barona
Tribe, also under a grant of authority from the Barona General Council. When the
Operations Agreement was replaced by the Consulting Agreement, the Company and
the Barona Tribe entered into a Mutual Release releasing each other from certain
rights, duties and obligations set forth in the Operations Agreement.
 
     The Barona Consulting Agreement provides for an initial term of three
years, with an option to extend the agreement for an additional five year
period. Under the terms of the Barona Consulting Agreement, the Barona Tribe has
the right to draw from the gross revenues of the Barona Casino an annual income
stream at least equal to the distributions received by the Barona Tribe for the
twelve month period ended December 31, 1995, and fees paid or payable to the
Company may accordingly be reduced.
 
     In March 1996, the Barona Tribe submitted the Initial Consulting Agreement
to the National Indian Gaming Commission (the "NIGC"), and in May 1996 the NIGC
determined that the Initial Consulting Agreement was not a management agreement
and, therefore, not subject to NIGC approval, and forwarded the agreement to the
Bureau of Indian Affairs (the "BIA"). In July 1997, the BIA reviewed the Initial
Consulting Agreement and determined that no further action by it with respect to
such agreement was required.
 
                                       28
<PAGE>   31
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     In January 1997, the Company entered into a settlement agreement with the
NIGC regarding the Company's relationship with the Barona Tribe (the "January
Settlement Agreement"). Under the terms of the January Settlement Agreement, the
NIGC held, among other things, that the relationship between the Barona Tribe
and the Company had benefitted the Barona Tribe, and that the Company had not
violated any law. The Company agreed to reimburse the NIGC for administrative,
investigative and legal expenses in the aggregate amount of $250,000. In
addition, the Company agreed to contribute $2,000,000 to the Barona Tribe for
general improvements on the reservation, payable in five equal annual
installments, commencing in January 1997. The Company will account for the
$2,000,000 in payments as deferred contract costs, which will be amortized over
the remaining initial term of the Consulting Agreement with the Barona Tribe.
 
     In January 1997, the Company submitted the Consulting Agreement to the NIGC
and in April 1997, the Company received a letter from the NIGC questioning
whether the Consulting Agreement was in fact a management contract. The Company
believes that the NIGC will ultimately determine that the Consulting Agreement
is not a management contract, based on (i) the May 1996 and July 1997
determinations of the NIGC and the BIA, respectively, with respect to the
Initial Consulting Agreement, (ii) the NIGC's findings in the January Settlement
Agreement and (iii) the actual elements of the relationship among the Barona
Tribe, the Barona Casino and the Company. However, there is no assurance that
the NIGC will determine that the Consulting Agreement is not a management
contract. If such a determination is not made by the NIGC, the failure of the
NIGC to approve the Consulting Agreement could have a material adverse effect on
the business and financial condition of the Company. If the NIGC concludes that
the Consulting Agreement is not a management agreement, the NIGC will forward
the Agreement to the BIA for its review. To the extent that the BIA determines
that its approval is required, there can be no assurance that such agreement
will be approved by the BIA, and such failure to approve the Consulting
Agreement could have a material adverse effect on the business and financial
condition of the Company.
 
4.  Deferred Contract Costs
 
     Pursuant to oral agreements with the Barona Tribe, the Company has agreed
to fund, or to arrange acceptable financing for, the construction of facility
improvements, furniture and equipment, the establishment of initial working
capital and the losses, if any, of the Barona Casino's operations. Because the
Barona Tribe will not allow its land to be encumbered, and has not assumed any
financial liability for costs associated with developing the Barona Casino, the
Company assumed all liability for these obligations.
 
     The Company capitalized those costs incurred as deferred contract costs
because (i) the Company had the ultimate responsibility for the costs incurred,
and (ii) the Company believes that these costs are fully recoverable over the
life of the Operations Agreement and the Consulting Agreement, through receipt
of fee income from the Barona Casino. However, given the nature of the asset, if
the recoverability is determined to be not probable, the Company will expense
the unauthorized portion.
 
     On an ongoing basis, management reviews the valuation and recoverability of
the unamortized deferred contract costs. As part of this review, the Company
estimates the discounted present value of the future projected net income
generated by the Barona Casino and the resulting revenue to the Company to
determine whether impairment has occurred.
 
     For the period April 1, 1996 to June 30, 1997, amortization of deferred
contract costs is calculated using the straight-line method over the remaining
term of the Consulting Agreement. Under the terms of both the Consulting
Agreement and the Operations Agreement, the title to the casino facilities,
furniture and equipment of the Barona Casino rests solely with the Barona Tribe,
unless the Barona Tribe agrees otherwise. Prior to April 1, 1996, amortization
of these deferred costs was calculated as the greater of amortization using (i)
the straight-line method over the remaining term of the Operations Agreement or
(ii) an accelerated method, whichever is greater. The accelerated amortization
was equal to the excess of fees earned over 30% of the Barona Casino's operating
income.
 
                                       29
<PAGE>   32
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Consulting Agreement can be terminated by the Barona Tribe for any
material breach by the Company, as defined in such Agreement. Management is not
aware of any material breach of the Consulting Agreement.
 
5.  Revenue Recognition
 
     Contract revenue is recorded as earned under the terms of the Consulting
Agreement, and prior to April 1, 1996, under the terms of the Operations
Agreement.
 
6.  Credit Concentrations, Cash and Cash Equivalents
 
     For purposes of the statement of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less.
 
     The Company maintains its cash in bank deposit and checking accounts which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
 
7.  Furniture and Equipment
 
     Furniture and equipment are stated at cost. Depreciation is being provided
by the straight-line method over the estimated useful lives (five years) of the
assets.
 
8.  Advances of Future Consulting Fees
 
     Advances of future consulting fees represent payments made to the Company
in excess of consulting fees earned. The advances were used to fund a portion of
the cost of improvements to the Barona Casino. Advances are repaid through
reduction in payment of future consulting fees and are anticipated to be paid
within one year of the advance. These advances are unsecured, non-interest
bearing and are due on demand.
 
9.  Deferred Income Taxes
 
     Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
 
     The deferred income tax asset results principally from California franchise
taxes which are deductible when paid and from the excess of accelerated
amortization of deferred contract costs for financial statement purposes over
that allowed for income tax purposes.
 
10.  Net Income Per Share
 
     Net income per common and common equivalent share for the years ended June
30, 1996 ("Fiscal 1996") and 1997 ("Fiscal 1997") is calculated using the
weighted average number of shares outstanding during the year. Equivalent shares
are those issuable upon the assumed exercise of stock options reflected under
the treasury stock method using the average market price of the Company's shares
during the year.
 
     In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"), which supercedes Accounting Principles Board Opinion No. 15,
of the same name. SFAS No. 128 simplifies the standards for computing earnings
per share ("EPS") and makes them comparable to international standards. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, with earlier application not permitted. Upon adoption, all
prior EPS data will be restated.
 
                                       30
<PAGE>   33
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table presents basic and diluted EPS for the years ended June
30, 1996 and 1997, computed under the provisions of SFAS No. 128:
 
<TABLE>
<CAPTION>
                                                                         1996     1997
                                                                         ----     ----
        <S>                                                              <C>      <C>
        Basic EPS......................................................  $.12     $.68
                                                                         ====     ====
        Diluted EPS....................................................  $.12     $.55
                                                                         ====     ====
</TABLE>
 
11.  Accounting for Employee Stock Options
 
     In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which requires entities to calculate the fair value of stock awards granted to
employees. This statement provides entities with the option of either electing
to expense the fair value of employee stock-based compensation or continue to
recognize compensation expense under existing accounting pronouncements and
provide pro forma disclosures of net income and, if presented, earnings per
share, as if the above-referenced fair value method of accounting was used in
determining compensation expense. The Company continues to account for stock
based compensation arrangements in accordance with the Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
 
     The adoption of SFAS No. 123 had no effect on the financial position or
results of operations of the Company. The Company has included additional
disclosures about stock-based employee compensation plans required by SFAS No.
123 (see Note H).
 
12.  Use of Estimates
 
     In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
13.  Impairment of Long-Lived Assets
 
     During its fiscal year ended June 30, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"), which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of SFAS No. 121 did not have a material impact on the
financial statements of the Company.
 
NOTE B -- DEFERRED CONTRACT COSTS
 
     Deferred contract costs consist of the following at June 30, 1997:
 
<TABLE>
        <S>                                                               <C>
        Deferred contract costs under Consulting and Operations
          Agreements....................................................  $15,255,491
        Less: accumulated amortization..................................   (9,412,468)
                                                                          -----------
                                                                          $ 5,843,023
                                                                          ===========
</TABLE>
 
                                       31
<PAGE>   34
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE C -- FURNITURE AND EQUIPMENT
 
     Furniture and equipment consist of the following at June 30, 1997:
 
<TABLE>
        <S>                                                                 <C>
        Furniture.........................................................  $ 87,705
        Equipment.........................................................    85,978
        Automotive equipment..............................................    54,542
        Leasehold improvements............................................    20,579
                                                                            --------
                                                                             248,804
        Accumulated Depreciation..........................................   (89,171)
                                                                            --------
                                                                            $159,633
                                                                            ========
</TABLE>
 
NOTE D -- STOCK REPURCHASE/LONG-TERM DEBT
 
  1.  Stock Repurchase Obligation
 
     In March 1996, the Company entered into an agreement to repurchase
1,908,865 shares of its own common stock and outstanding options totaling
894,780 from Jack R. Smith, a former executive officer, director and principal
shareholder of the Company, for consideration totaling $1,400,000, and to
provide continued benefits for the three year period ended February 1999. The
purchase price consisted of a $500,000 cash payment and issuance of a $900,000,
7% unsecured promissory note, payable in three equal installments of $342,947.
In addition, if the Company's common stock trading price reaches certain levels
during measurement periods prior to March 1998 and 1999, Mr. Smith will be
entitled to up to $250,000 in additional compensation for each measurement
period.
 
     On September 30, 1996, pursuant to a Stock Purchase and Settlement and
Release Agreement dated September 27, 1996 (the "Stock Purchase Agreement") by
and among Jonathan Ungar, Alan Henry Woods and the Company, the Company
purchased 3,424,913 shares of its common stock from Mr. Ungar, a former director
of the Company, and 3,353,331 shares of its common stock from Mr. Woods. The
terms of the Stock Purchase Agreement include (i) a cash payment of $200,000
upon closing, (ii) the issuance of unsecured promissory notes in the principal
amount of $3,500,000, with interest at the rate of 10% per annum, payments of
interest only for the first three years, followed by three equal annual
installments of principal repayment, with interest on the remaining balance
commencing September 30, 1997, (iii) contingent obligations (the "Initial
Contingent Obligations") to issue a total of $9,856,488 in unsecured promissory
notes ($4,981,276 in principal amount to Mr. Ungar and $4,875,212 in principal
amount to Mr. Woods) including $2,000,000 in principal amount of notes each year
for four years and $1,856,488 in principal amount of notes to be issued in a
fifth year, each note with interest at the rate of 10% per annum, with payments
of interest only for three years, followed by three equal annual installments of
principal plus interest on the remaining principal balance, and (iv) another
contingent obligation (the "Second Contingent Obligation") to issue an
additional $3,000,000 in principal amount ($1,515,000 to Mr. Ungar and
$1,485,000 to Mr. Woods) in unsecured promissory notes (or cash, if the Company
has closed a firm commitment underwritten public offering of securities of not
less than $35 million prior to the contingencies being met) when and if certain
conditions are met, with interest at the then "preferred" or "prime" rate of
interest charged to the Company by the Company's principal bank, with payments
of interest only for three years from the date of issuance, followed by two
equal annual installments of principal plus interest on the remaining principal
balances.
 
     The Initial Contingent Obligations (i.e., $2,000,000 in notes for four
years and $1,856,488 in notes for a fifth year) are contingent upon the
Company's retained earnings balance being at least $4,000,000 for the fiscal
year ending immediately prior to the date the notes are to be issued. Dividends
paid by the Company and certain other payments, if any, are to be added back to
the retained earnings balance for purposes of this contingency calculation. The
period for determining the Company's obligation to issue each of the $2,000,000
and $1,856,488 in principal amount of notes is an eight year period commencing
with the fiscal year ending
 
                                       32
<PAGE>   35
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
June 30, 1997. If the $4,000,000 retained earnings test is not met in one year,
the Company is not obligated to issue the notes in that year. However, the test
is to be made each year for eight successive years commencing with the fiscal
year ending June 30, 1997, but each year can be used only once during the eight
year period, and only five out of the eight years may be used.
 
     The Second Contingent Obligation is subject to the following conditions:
(i) the Barona Tribe enters into a Class III Gaming Compact (the "Compact") with
the State of California which permits the operation of video gaming machines at
the Barona Casino in San Diego County; (ii) at the time that the Barona Tribe
enters into the Compact, the Company has a consulting agreement or similar
contractual arrangement with the Barona Tribe; and (iii) consulting fees paid to
the Company by the Barona Tribe relating to the Barona Casino for any
consecutive 12-month period within five years after the Barona Tribe has entered
into the Compact equals or exceeds one and one-half times such consulting fees
for the year ended June 30, 1996. The Company intends to record as an additional
cost of the repurchase of its common stock each contingent obligation as each
contingency or condition is met. All payments pursuant to the Stock Purchase
Agreement are further subject to compliance with certain state law provisions
and the Company's Articles of Incorporation concerning repurchase transactions.
 
     As of June 30, 1997, the Company's retained earnings exceeded $4,000,000.
Accordingly, as of September 15, 1997, $1,000,000 in 10% promissory notes
payable are to be issued to each of Mr. Ungar and Mr. Woods. The additional
$2,000,000 obligation has been recorded at June 30, 1997, and has been treated
as additional consideration for the common stock repurchased under the Stock
Purchase Agreement.
 
  2.  NIGC Settlement Obligation
 
     In January 1997, the Company entered into a settlement agreement with the
NIGC regarding the Company's relationship with the Barona Tribe. Under the terms
of the January Settlement Agreement, the Company agreed to contribute $2,000,000
to the Barona Tribe for general improvements on the reservation, payable in five
equal annual installments, commencing in January 1997. Long-term debt at June
30, 1997, includes $1,369,591 relating to the January Settlement Agreement, of
which $400,000 is currently payable (See Note A).
 
NOTE E -- LINE OF CREDIT
 
     In October 1995, the Company negotiated a credit facility with a bank that
allowed for total borrowings of $2,000,000, with interest at prime plus 2%. The
credit agreement was to expire on October 10, 1998, and was secured by all of
the Company's personal property. The Company did not use the credit facility,
and on October 22, 1996, the credit facility was cancelled. As additional
consideration for the facility, the bank received immediately exercisable
warrants to purchase 40,000 shares of the Company's common stock, subject to
certain anti-dilution provisions, at an initial exercise price of $5.00. The
warrant expires on October 10, 2000. The bank agreed to cancel the credit
agreement and terminate its security interest in the Company's assets, but
retained the warrant.
 
NOTE F -- INCOME TAXES
 
     Deferred taxes are comprised of the following at June 30, 1997:
 
<TABLE>
        <S>                                                                 <C>
        Excess of financial statement over tax amortization of deferred
          contract costs..................................................  $ 53,622
        California franchise taxes........................................   217,537
        Allowance for doubtful accounts...................................      (976)
                                                                            --------
        Deferred tax asset................................................  $270,183
                                                                            ========
</TABLE>
 
                                       33
<PAGE>   36
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The composition of the Company's income tax provision is as follows:
 
<TABLE>
<CAPTION>
                                                                      JUNE 30,
                                                              -------------------------
                                                                 1996           1997
                                                              ----------     ----------
        <S>                                                   <C>            <C>
        Current tax:
          Federal...........................................  $  404,701     $1,797,112
          State.............................................     178,165        538,945
                                                              ----------     ----------
             Current tax....................................     582,866      2,336,057
        Deferred tax:
          Federal...........................................     391,558        184,288
          State.............................................      45,576          7,655
                                                              ----------     ----------
             Deferred tax...................................     437,134        191,943
                                                              ----------     ----------
        Income tax provision................................  $1,020,000     $2,528,000
                                                              ==========     ==========
</TABLE>
 
     A reconciliation from the U.S. statutory federal income tax rate to the
effective tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE
                                                                            30,
                                                                     -----------------
                                                                     1996         1997
                                                                     ----         ----
        <S>                                                          <C>          <C>
        U.S. Federal statutory rate................................  34.0%        34.0%
        State income taxes.........................................   6.0%         6.0%
        Other......................................................   1.2%         0.2%
                                                                     ----         ----
                                                                     41.2%        40.2%
                                                                     ====         ====
</TABLE>
 
NOTE G -- COMMITMENTS AND CONTINGENCIES
 
  Transactions with the Klamath Tribes
 
     In June 1996, the Company entered into a consulting agreement (the "Klamath
Agreement") with the Klamath and Modoc Tribes and the Yahooskin Band of Snake
Indians (collectively, the "Klamath Tribes"). The Klamath Tribes constructed and
now operate the Kla-Mo-Ya Casino near Chiloquin, in south-central Oregon. In May
1997, the Klamath Agreement was terminated by mutual agreement of the Klamath
Tribes and the Company.
 
     Funding for the land purchase and a portion of the construction costs for
the Kla-Mo-Ya Casino was obtained by the sale and issuance of $4,735.000 in
revenue bonds issued by the Klamath Tribes. In connection with the bond
financing, the Company expended $879,933 to purchase revenue bonds with a
principal amount of $900,000. As a condition of the bond financing, the Company
agreed to purchase and hold at least $500,000 principal amount of the such bonds
for a five year period. In January 1997, the Company sold bonds with a principal
amount of $200,000 for $195,582, and in June 1997, sold bonds with a principal
amount of $200,000 for $185,500. Preopening costs and expenses of approximately
$1,500,000 are being financed by loans made pursuant to a third-party bank
credit agreement with the Klamath Tribes. The Company has pledged to the bank a
certificate of deposit for $1,518,000 as collateral for such loans.
 
     Under the terms of the Tribal State Compact for Regulation of Class III
Gaming between The Klamath Tribes and the State of Oregon (the "Compact"), the
Klamath Tribes opened the Kla-Mo-Ya Casino initially as a temporary facility
which permits the operation of 300 video lottery terminals for a
twenty-four-month period. Under the terms of the Compact, at the end of the
twenty-four-month period, the Klamath Tribes must either increase the square
footage of the casino facility to provide that the video lottery terminal area
comprises no more than fifteen percent (15%) of the total square footage of the
casino facility, or reduce the video lottery terminal area (and therefore the
number of terminals or machines) to equal fifteen percent (15%) of the square
footage of the temporary facility.
 
                                       34
<PAGE>   37
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     If cash flow from Kla-Mo-Ya Casino operations is not adequate to pay the
Kla-Mo-Ya Casino's obligations, the Company may lose all or a portion of its
investment in the revenue bonds it purchased and its certificate of deposit
pledged as collateral for bank loans to the Klamath Tribes. Management believes
that no allowance is necessary in the Company's financial statements, based upon
estimated future cash flows of the Kla-Mo-Ya Casino operations during the next
fiscal year.
 
  Lease Obligations
 
     During Fiscal 1996, the Company entered into operating leases for
facilities, vehicles and equipment which expire at various dates through fiscal
2001. The minimum future payments due under operating lease contracts at June
30, 1997 for the years ending June 30 are as follows:
 
<TABLE>
                <S>                                                  <C>
                1998...............................................  $73,038
                1999...............................................    7,168
                2000...............................................    5,736
                2001...............................................    1,603
                2002...............................................       --
                                                                     -------
                Net minimum lease payments.........................  $87,545
                                                                     =======
</TABLE>
 
     Rental expense for Fiscal 1996 and Fiscal 1997 was $136,235 and $148,955,
respectively.
 
  Contingent Lease Obligations
 
     The Company has guaranteed certain lease obligations of the Barona Casino
in connection with agreements with the Barona Tribe. The minimum future payments
due under these contracts for the five fiscal years ending June 30, 2002, totals
approximately $61,000.
 
     In addition, the Company signed lease agreements covering video machines
used in the operation of the Barona Casino. Such agreements are cancelable upon
30 days notice. These agreements are in the process of being assigned by the
Company to the Barona Tribe; however, in the event that the Barona Tribe does
not make the monthly rental payments under the agreements, the Company could be
required to make the payments.
 
     The Company has guaranteed automobile lease payments on behalf of certain
employees. Such leases expire at dates through 2002. Assuming that all future
payments were to be made by the Company under this commitment, the Company would
be obligated to pay approximately $237,000.
 
  Certain Third-Party Litigation Which Could Affect Indian Gaming In California
 
     Indian Gaming is the subject of numerous lawsuits in various court
jurisdictions at both Federal and State levels. These court cases are attempting
to define the permissible gaming activities on Indian reservations, the states'
right or limitations on control of gaming, the rights of the tribes to compel
the states to negotiate compacts with them, and numerous other issues. The
Barona Tribe is not a party to most of these cases, nor is the Barona
Reservation within the jurisdiction of certain courts in which many of these
cases will be decided.
 
     According to a statement made by the U.S. Attorney's Office for the
Southern District of California (the "USAO"), since June 1994, the Barona Tribe,
the Sycuan Band of Mission Indians and the Viejas Band of Kumeyaay (Mission)
Indians (collectively referred to herein as the "Southern District Tribes") have
operated in compliance with a verbal understanding (a "standstill agreement")
that has maintained the status quo of Indian gaming in the Southern District of
California and have honored those agreements not to expand
 
                                       35
<PAGE>   38
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
existing electronic gaming operations pending the outcome of relevant pending
court decisions, discussed below.
 
     In Rumsey Indian Rancheria of Wintun Indians v. Wilson, 64 F.3d 1250 (Aug.
11, 1995), amending 41 F.3d 421 (Nov. 15, 1994), the Barona Tribe and certain
other Indian tribes in California filed a declaratory judgment action in the
United States District Court for the Eastern District of California seeking a
determination that certain electronic and casino style card games, all
acknowledged by the tribes and the State of California to be Class III games,
were permitted under California law and hence the State was required to
negotiate a compact with the tribes for such gaming activities. The Court of
appeals for the Ninth Circuit held that, with the possible exception of slot
machines in the form of video lottery terminals, such games were prohibited. The
Ninth Circuit's decision remanded portions of the case back to the District
Court to determine whether California permits slot machine play in the form of
its video lottery terminals and scratcher game dispensers in conjunction with
the California State Lottery. A scheduling order has been issued in which the
State of California and the affected tribes, including the Barona Tribe, must
submit written briefs, depositions and evidence before February 1998. It is
uncertain when a decision will be made after the presiding judge takes the mater
under submission, most probably in February 1998.
 
     In Western Telcon, Inc. v. California State Lottery, 13 Cal. 4th 475
(1996), the California Supreme Court held that a form of keno conducted by the
California State Lottery was a house-banked game and not a lottery and hence was
not authorized by the California State Lottery Act. In its decision, the court
did not address the positions presented by the plaintiffs and the intervener,
California-Nevada Indian Gaming Association, that the keno game involved slot
machines and that the Lottery Act granted the California State Lottery a
complete exemption from the anti-gaming provisions of the California Penal Code.
A ruling that the game involved slot machines or a form of electronic gaming
authorized by the Lottery Act would have been favorable to Indian tribes
seeking, via Rumsey, a declaration that the State is required by IGRA to enter
into a tribal-state compact governing electronic gaming on tribal lands. On the
other hand, the court noted that the California State Lottery (and hence by
implication, Indian tribes operating with tribal-states compacts) could legally
conduct keno or other numbers games, using video terminals and on-line
computers, provided the games are structured as lotteries rather than
house-banked games.
 
     In June 1997, the U.S. Supreme Court denied the petition for a writ of
certiorari which had been filed by some of the plaintiff tribes in the Rumsey
case. The Supreme Court's denial of certiorari was issued under the name of
Sycuan Band of Mission Indians v. Wilson, No. 96-1059, 117 S. Ct. 2508 (1997),
on June 27, 1997. This action upheld the above-referenced Ninth Circuit Opinion
and effectively refuted the contention of the Indian tribes in Rumsey that if
California permitted any style of Class III games then the tribes should be
permitted to play all forms of Class III games. As a result of the Supreme
Court's denial of certiorari, the Southern District Tribes have acknowledged
that certain currently operated video gaming devices are not within the
acceptable/permissible scope of compactible gaming under present federal and
state law and agreed to the commencement of a voluntary phase-out plan with the
USAO.
 
     The phase-out plan commenced in August 1997, with the removal of 6% of each
affected Tribe's existing video gaming machines and continues with the planned
removal of another 10% of each affected Tribe's video gaming machines. The USAO
stated that the phase-out plan (i) demonstrates a good faith effort by the
Southern District Tribes to continue to cooperate with the USAO and comply with
state and federal laws, (ii) is necessary in order to minimize the impacts to
affected Tribal employees and local negative economic impacts resulting from the
reduction in gaming operations, and (iii) is expected to facilitate negotiations
between the State of California and the Southern District Tribes designed to
determine the type of machine gaming permissible (otherwise referred to as
"compactible") under federal and state laws.
 
     The State of California is currently engaged in negotiations with the Pala
Band of Mission Indians (the "Pala Tribe"), which is also located in San Diego
County, to determine what type of gaming is permissible
 
                                       36
<PAGE>   39
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
and the circumstances under which it may be conducted. Management believes that
these negotiations may lead to a model compact between the State and the Pala
Tribe sometime before the end of calendar year 1997.
 
     The Southern District Tribes have renewed their request that the State of
California begin negotiations with them (similar to those being held with the
Pala Tribe) with a view towards reaching compacts allowing permissible machine
gaming in their facilities. However, the Governor of the State of California has
stated that he will not negotiate compacts with tribes currently operating
casino games which he believes are not permissible under California law.
 
     To the extent that the Governor alters his position and decides to
negotiate with the Southern District Tribes and other tribes currently operating
electronic gaming machines, an issue in such compact negotiations is the
conversion of electronic video machines to a lottery or pari-mutual format
designed to comply with both federal and state law. The USAO has stated that it
believes that the question of machine conversion would be consistent with the
criteria being established in the current Pala compact negotiations.
 
     The phase-out of 16% of the video machines at the Barona Casino will result
in an estimated reduction of the Company's consulting fees of approximately
$193,000 per month beginning in October 1997. If the Barona Casino removes
additional machines at the request of the U.S. Attorney for the Southern
District of California (the "U.S. Attorney"), the Company's consulting fees
could be reduced further. If the Barona Casino is forced to remove all of its
current video machines, and is unable to obtain a compact with the State of
California, the Company could lose all of its consulting fee revenue from the
Barona Casino, which could have a material adverse effect on the financial
condition of the Company.
 
     Under the present time-table set forth by the USAO, by mid-October 1977 the
USAO and the Southern District Tribal Councils will review the status of the
phase-out plans and the progress which has been made toward State of California
compact negotiations with the Southern District Tribes. The Southern District
Tribes have requested that the remainder of the phase-out agreement be completed
following a review of the compact negotiations between the Pala Band and the
State of California and a review of the status of the State of California's
willingness to enter into negotiations with the Southern District Tribes. The
Southern District Tribes are also continuing to examine the feasibility of
converting existing video gaming machines to lottery-style games that would not
constitute "slot machines" within the meaning of the California Penal Code. The
conversion would also be consistent with the criteria being established in the
current Pala Tribe compact negotiations.
 
     The USAO has stated that it intends to closely monitor this initial
phase-out program during the months of August and September 1997, and the
Southern District Tribes and the U.S. Attorney plan to meet again in early
October 1997 to review the status of State of California compact negotiations
and to finalize the remainder of the phase-out program.
 
     According to the U.S. Attorney, the efficacy of the planned phased
withdrawal will be evaluated on a month-to-month basis in consideration of such
factors as: (i) the status of the ongoing State of California/Pala negotiations;
(ii) the progress of negotiations between the State and the other Southern
District Tribes and other California Native American Tribes; (iii) the status of
gaming elsewhere in California; (iv) the status of proceedings on remand to
Judge Burrell in the Eastern District of California in the Rumsey case; and (v)
the well being of Native American communities in San Diego and the persons
employed in those communities.
 
  Company Litigation
 
     The Company is subject to claims and lawsuits which arise in the ordinary
course of business. In the opinion of the Company, the resolution of such
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
 
                                       37
<PAGE>   40
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE H -- STOCK OPTIONS
 
     In 1994, the Board of Directors and shareholders of Inland Casino
Corporation, a Delaware corporation ("ICC") approved a Stock Option Plan (the
"1994 Plan") under which 27,838 incentive stock options and 41,756 nonstatutory
stock options were granted. Upon the merger of ICC with and into the Company
(formerly known as Twin Creek Exploration Co., Inc.) on May 22, 1995, the 1994
Plan was terminated, but all options outstanding under the 1994 plan were
assumed by the Company and are immediately exercisable.
 
     In 1995, the Board of Directors and the shareholders of the Company
approved the Company's 1995 Stock Option Plan (the "1995 Plan"). Under the terms
of the 1995 Plan, options to purchase up to 4,000,000 shares of the Company's
common stock may be granted. Shares covered by options which terminate without
exercise are available for reissuance. Options may be issued to employees,
consultants and directors of the Company either as (i) incentive stock options;
(ii) nonstatutory stock options; or (iii) as combinations of both types of
options.
 
     In 1996, the Board of Directors and shareholders of the Company approved
the Company's 1996 Nonemployee Directors Stock Option Plan (the "1996 Plan").
Under the terms of the 1996 Plan, options to purchase up to 100,000 shares of
the Company's common stock may be granted. The 1996 Plan provides that each
nonemployee director will automatically be granted an option to purchase 10,000
shares on the date such nonemployee director is first elected to the Board of
Directors. In addition, the 1996 Plan provides that each nonemployee director
will be granted an option to purchase 5,000 shares on the date of each of the
Company's Annual Meetings of Shareholders at which such nonemployee director is
elected to the Board of Directors. The stock option grants will be issued as
nonstatutory stock options, and the option price will be equal to the closing
price of the Company's common stock on the date of grant.
 
     Stock option grants are determined by the Compensation Committee of the
Board of Directors or, in the absence of the Compensation Committee, by the full
Board of Directors. Under the 1995 Plan, options granted to any single
individual cannot exceed 900,000 shares over any period of three consecutive
fiscal years. Options granted under the 1995 Plan have a maximum term of ten
years and are generally exercisable ratably over a four and one-half or five
year period following the date of grant. Incentive stock options must have an
exercise price of not less than fair market value on the date of grant.
Incentive stock options may be granted to any officer or key employee who owns
more than 10% of the Company's common stock only if the exercise price is at
least 110% of the fair market value on the date of grant, and such options must
have a maximum term of five years from date of grant. Nonstatutory stock options
must have an exercise price of not less than 80% of the fair market value on the
date of grant.
 
     The following table summarizes stock option activity under the 1994 Plan,
the 1995 Plan and the 1996 Plan (collectively the "Plans") for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                                  OPTIONS       OPTION PRICE
                                                                OUTSTANDING       PER SHARE
                                                                -----------     -------------
    <S>                                                         <C>             <C>
    Outstanding at June 30, 1995..............................      69,594          $1.00
    Year ended June 30, 1996:
      Granted.................................................   1,773,306      $3.50 -- $4.00
      Cancelled...............................................     (92,278)         $3.50
                                                                 ---------
    Outstanding at June 30, 1996..............................   1,750,622      $1.00 -- $3.75
    Year ended June 30, 1997:
      Granted.................................................   1,614,440      $2.75 -- $3.75
      Cancelled...............................................     (40,000)         $3.50
                                                                 ---------
    Outstanding at June 30, 1997..............................   3,325,062      $1.00 -- $3.75
                                                                 ---------
</TABLE>
 
                                       38
<PAGE>   41
 
                           INLAND CASINO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     There were no options exercised under any of the Plans as of June 30, 1997.
 
     The Plans are accounted for under APB No. 25 and related interpretations.
The exercise price of each option equals the market price of the Company's stock
on the date of grant; accordingly, under APB No. 25, no compensation costs are
recognized for the Plans. Had compensation cost for the Plans been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below.
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                                 --------------------------
                                                                    1996            1997
                                                                 -----------     ----------
    <S>                                                          <C>             <C>
    Net income (loss)
      As reported..............................................  $ 1,455,693     $3,759,160
      Pro forma................................................  $(2,374,992)    $  176,853
    Net income (loss) per share
      As reported..............................................  $      0.12     $     0.55
      Pro forma................................................  $     (0.20)    $     0.03
</TABLE>
 
     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in the years ended June 30, 1996
and 1997, respectively: dividend yield, 0.0% for both years; expected volatility
of 1.74 and 1.42; average risk-free interest rates of 6.0% and 6.2%; and
expected lives of 5 years for both years.
 
     The pro forma calculations are not indicative of current or future
operating results of the Company. In addition, the pro forma charges to income
are calculated without income tax benefit since none of the outstanding options
have been exercised. The stock option exercise date determines when the benefits
may be recorded.
 
                                       39
<PAGE>   42
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                    PART III
 
ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     The information set forth under the captions "ELECTION OF DIRECTORS," and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Compliance with Section 16(a) of the
Exchange Act" in Inland Casino's definitive proxy statement (the "Proxy
Statement") for the Annual Meeting scheduled to be held in December 1997 is
hereby incorporated herein by reference. The Proxy Statement will be filed with
the U.S. Securities and Exchange Commission (the "Commission") not later than
120 days after the close of Fiscal 1997.
 
ITEM 10.  EXECUTIVE COMPENSATION
 
     The information set forth under the captions "COMPENSATION OF EXECUTIVE
OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD -- Compensation of Directors" in the Proxy Statement is hereby
incorporated herein by reference.
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is hereby incorporated
herein by reference.
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is hereby incorporated herein by reference.
 
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (A) LIST OF EXHIBITS. The Exhibits listed below are filed with the
Commission as part of this annual report on Form 10-KSB. The Company will
furnish a copy of any exhibit upon request, but a reasonable fee will be charged
to cover the Company's expense in furnishing such exhibit.
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.
-------
<C>       <S>
  3.1     Amended and Restated Articles of Incorporation of the Company (formerly known as Twin
          Creek Exploration Co., Inc.), previously filed as Exhibit 3.1 to the Company's Annual
          Report on Form 10-KSB for the Fiscal Year Ended June 30, 1995, filed with the
          Commission on October 12, 1995 (File No. 0-11532) (the "Fiscal 1995 Annual Report"),
          which is hereby incorporated herein by reference.

  3.2     Amended and Restated By-laws of the Company (formerly known as Twin Creek Exploration
          Co., Inc.), previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form
          10-QSB for the Quarterly Period Ended March 31, 1996, filed with the Commission on
          May 17, 1996 (File No. 0-11532) (the "March 1996 Quarterly Report"), which is hereby
          incorporated herein by reference.
</TABLE>
 
                                       40
<PAGE>   43
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.
-------
<C>       <S>
 MATERIAL CONTRACTS RELATING TO MANAGEMENT COMPENSATION PLANS OR ARRANGEMENTS
 
 10.1     1994 Stock Option Plan of ICC II, previously filed as Exhibit 10.2 to the Fiscal 1995
          Annual Report, which is hereby incorporated herein by reference.

 10.2     The Company's 1995 Stock Option Plan, previously filed as Appendix A to the Company's
          Proxy Statement dated October 30, 1995 filed with the Commission on October 30, 1995
          (File No. 0-11532) (the "1995 Proxy Statement"), which is hereby incorporated herein
          by reference.

 OTHER MATERIAL CONTRACTS

 10.3     Amended and Restated Consulting Agreement by and between the Company and the Barona
          Group of Capitan Grande Band of Mission Indians (the "Barona Tribe"), dated as of
          April 29, 1996, previously filed as Exhibit 10.7 to the Company's Annual Report on
          form 10-KSB for the Fiscal Year Ended June 30, 1996, filed with the Commission on
          October 5, 1996 (File No. 0-11532) (the "Fiscal 1996 Annual Report"), which is hereby
          incorporated herein by reference.

 10.4     Mutual Release by and between the Company and the Barona Tribe dated as of March 27,
          1996, previously filed as Exhibit 10.8 to the Fiscal 1996 Annual Report, which is
          hereby incorporated herein by reference.

 10.5     Assignment and Assumption of Lease between ICC II and Winland Corporation, dated as
          of January 1, 1995, previously filed as Exhibit 10.6 to the Fiscal 1995 Annual Report
          which is hereby incorporated herein by reference.

 10.6     Amended and Restated Gaming Machine Location Agreement by and between SSK Game
          Enterprises and the Company, dated December 1, 1995, previously filed as Exhibit
          10.16 to the Fiscal 1996 Annual Report, which is hereby incorporated herein by
          reference.

 10.7     Amended and Restated Gaming Machine Location Agreement between Zino, Inc. and the
          Company, dated December 1, 1995, previously filed as Exhibit 10.17 to the Fiscal 1996
          Annual Report, which is hereby incorporated herein by reference.

 10.8     Amended and Restated Gaming Machine Location Agreement between American Heritage
          Amusement Corporation and the Company, dated December 1, 1995, previously filed as
          Exhibit 10.18 to the Fiscal 1996 Annual Report, which is hereby incorporated herein
          by reference.

 10.9     Lease Agreement between Sprung Instant Structures, Inc. and Inland Casino Partners
          (d/b/a Barona Casino), dated December 14, 1993, previously filed as Exhibit 10.10 to
          the Fiscal 1995 Annual Report, which is hereby incorporated herein by reference.

 10.10    Stock Purchase and Settlement and Release Agreement by and between the Company and
          Jack R. Smith dated February 23, 1996, previously filed as Exhibit 10.1 to the March
          1996 Quarterly Report, which is hereby incorporated herein by reference.

 10.11    Promissory Note dated March 4, 1996 in favor of Jack R. Smith in the principal amount
          of $900,000, previously filed as Exhibit 10.2 to the March 1996 Quarterly Report,
          which is hereby incorporated herein by reference.

 10.12    Stock Purchase and Settlement and Release Agreement by and among the Company,
          Jonathan Ungar and Alan Henry Woods, dated September 27, 1996, previously filed as
          Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 1, 1996, filed
          with the Commission on October 1, 1996 (File No. 0-11532) (the "October 1, 1996
          Current Report"), which is hereby incorporated herein by reference.

 10.13    Promissory Note dated September 30, 1996 in favor of Jonathan Ungar in the principal
          amount of $1,768,550, previously filed as Exhibit 2.2 to the October 1, 1996 Current
          Report, which is hereby incorporated herein by reference.
</TABLE>
 
                                       41
<PAGE>   44
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.
-------
<C>       <S>
 10.14    Promissory Note dated September 30, 1996 in favor of Alan Henry Woods in the
          principal amount of $1,731,450, previously filed as Exhibit 2.3 to the October 1,
          1996 Current Report, which is hereby incorporated herein by reference.

 10.15    Talent Agreement dated October 30, 1995 by and between Kenny Rogers Productions and
          the Company, previously filed as Exhibit 10.25 to the Fiscal 1996 Annual Report,
          which is hereby incorporated herein by reference.

 10.16    Settlement Agreement dated January 3, 1997 by and between the Company and the
          National Indian Gaming Commission, previously filed as Exhibit 99 to the Company's
          Current Report on Form 8-K dated January 7, 1997, filed with the Commission on
          January 7, 1997 (File No. 0.11532), which is hereby incorporated herein by reference.

 23       Consent of Grant Thornton LLP.

 27       Financial Data Schedule.
</TABLE>
 
     (B) REPORTS ON FORM 8-K
 
     No reports on Form 8-K were filed with the Commission during the Company's
fourth quarter of the fiscal year covered by this Form 10-KSB.
 
                                       42
<PAGE>   45
 
                                   SIGNATURES
 
     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                          INLAND CASINO CORPORATION,
                                          a Utah corporation
 
Dated: September 29, 1997                 By:    /s/ L. DONALD SPEER, II
                                            ------------------------------------
                                            L. Donald Speer, II
                                            Chairman of the Board and Chief
                                            Executive Officer, President 
                                            and Chief Operating Officer
                                            (Principal Executive Officer)
 
     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
 
<TABLE>
<S>                                                                        <C>
/s/ L. DONALD SPEER, II                                                     September 29, 1997
------------------------------------------------------
L. Donald Speer, II,
Chairman of the Board and Chief Executive Officer,
  President and Chief Operating Officer
  and a Director (Principal Executive Officer)
 
/s/ ARTHUR R. PFIZENMAYER                                                   September 29, 1997
------------------------------------------------------
Arthur R. Pfizenmayer
Executive Vice President and a Director
 
/s/ ANDREW B. LAUB                                                          September 29, 1997
------------------------------------------------------
Andrew B. Laub
Executive Vice President, Finance and
  Development, Treasurer and a Director
 
/s/ G. FRITZ OPEL                                                           September 29, 1997
------------------------------------------------------
G. Fritz Opel
Executive Vice President, Marketing and
  Consulting Services and a Director
 
/s/ DUANE M. EBERLEIN                                                       September 29, 1997
------------------------------------------------------
Duane M. Eberlein
Executive Vice President, Chief Financial Officer
  and a Director (Principal Financial
  and Accounting Officer)
 
------------------------------------------------------
Jana McKeag
Vice President, Governmental Relations
  and a Director
 
/s/ CHARLES REIBEL                                                          September 29, 1997
------------------------------------------------------
Charles Reibel
Director
 
/s/ CORNELIUS E. SMYTH                                                      September 29, 1997
------------------------------------------------------
Cornelius E. ("Neil") Smyth
Director
</TABLE>
 
                                       43
<PAGE>   46
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                          DESCRIPTION
-------   -------------------------------------------------------------------------------------
<C>       <S>
  3.1     Amended and Restated Articles of Incorporation of the Company (formerly known as Twin
          Creek Exploration Co., Inc.), previously filed as Exhibit 3.1 to the Company's Annual
          Report on Form 10-KSB for the Fiscal Year Ended June 30, 1995, filed with the
          Commission on October 12, 1995 (File No. 0-11532) (the "Fiscal 1995 Annual Report"),
          which is hereby incorporated herein by reference.

  3.2     Amended and Restated By-laws of the Company (formerly known as Twin Creek Exploration
          Co., Inc.), previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form
          10-QSB for the Quarterly Period Ended March 31, 1996, filed with the Commission on
          May 17, 1996 (File No. 0-11532) (the "March 1996 Quarterly Report"), which is hereby
          incorporated herein by reference.

 MATERIAL CONTRACTS RELATING TO MANAGEMENT COMPENSATION PLANS OR ARRANGEMENTS

 10.1     1994 Stock Option Plan of ICC II, previously filed as Exhibit 10.2 to the Fiscal 1995
          Annual Report, which is hereby incorporated herein by reference.

 10.2     The Company's 1995 Stock Option Plan, previously filed as Appendix A to the Company's
          Proxy Statement dated October 30, 1995 filed with the Commission on October 30, 1995
          (File No. 0-11532) (the "1995 Proxy Statement"), which is hereby incorporated herein
          by reference.

 OTHER MATERIAL CONTRACTS

 10.3     Amended and Restated Consulting Agreement by and between the Company and the Barona
          Group of Capitan Grande Band of Mission Indians (the "Barona Tribe"), dated as of
          April 29, 1996, previously filed as Exhibit 10.7 to the Company's Annual Report on
          Form 10-KSB for the Fiscal Year Ended June 30, 1996, filed with the Commission on
          October 15, 1996 (File No. 0-11532) (the "Fiscal 1996 Annual Report"), which is
          hereby incorporated herein by reference.

 10.4     Mutual Release by and between the Company and the Barona Tribe dated as of March 27,
          1996, previously filed as Exhibit 10.8 to the Fiscal 1996 Annual Report, which is
          hereby incorporated herein by reference.

 10.5     Assignment and Assumption of Lease between ICC II and Winland Corporation, dated as
          of January 1, 1995, previously filed as Exhibit 10.6 to the Fiscal 1995 Annual Report
          which is hereby incorporated herein by reference.

 10.6     Amended and Restated Gaming Machine Location Agreement by and between SSK Game
          Enterprises and the Company, dated December 1, 1995, previously filed as Exhibit
          10.16 to the Fiscal 1996 Annual Report, which is hereby incorporated herein by
          reference.

 10.7     Amended and Restated Gaming Machine Location Agreement between Zino, Inc. and the
          Company, dated December 1, 1995, previously filed as Exhibit 10.17 to the Fiscal 1996
          Annual Report, which is hereby incorporated herein by reference.

 10.8     Amended and Restated Gaming Machine Location Agreement between American Heritage
          Amusement Corporation and the Company, dated December 1, 1995, previously filed as
          Exhibit 10.18 to the Fiscal 1996 Annual Report, which is hereby incorporated herein
          by reference.

 10.9     Lease Agreement between Sprung Instant Structures, Inc. and Inland Casino Partners
          (d/b/a Barona Casino), dated December 14, 1993, previously filed as Exhibit 10.10 to
          the Fiscal 1995 Annual Report, which is hereby incorporated herein by reference.

 10.10    Stock Purchase and Settlement and Release Agreement by and between the Company and
          Jack R. Smith dated February 23, 1996, previously filed as Exhibit 10.1 to the March
          1996 Quarterly Report, which is hereby incorporated herein by reference.
</TABLE>
<PAGE>   47
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                          DESCRIPTION
-------   -------------------------------------------------------------------------------------
<C>       <S>
 10.11    Promissory Note dated March 4, 1996 in favor of Jack R. Smith in the principal amount
          of $900,000, previously filed as Exhibit 10.2 to the March 1996 Quarterly Report,
          which is hereby incorporated herein by reference.

 10.12    Stock Purchase and Settlement and Release Agreement by and among the Company,
          Jonathan Ungar and Alan Henry Woods, dated September 27, 1996, previously filed as
          Exhibit 2.1 to the Company's Current Report on Form 8-K dated October 1, 1996, filed
          with the Commission on October 1, 1996 (File No. 0-11532) (the "October 1, 1996
          Current Report"), which is hereby incorporated herein by reference.

 10.13    Promissory Note dated September 30, 1996 in favor of Jonathan Ungar in the principal
          amount of $1,768,550, previously filed as Exhibit 2.2 to the October 1, 1996 Current
          Report, which is hereby incorporated herein by reference.

 10.14    Promissory Note dated September 30, 1996 in favor of Alan Henry Woods in the
          principal amount of $1,731,450, previously filed as Exhibit 2.3 to the October 1,
          1996 Current Report, which is hereby incorporated herein by reference.

 10.15    Talent Agreement dated October 30, 1995 by and between Kenny Rogers Productions and
          the Company, previously filed as Exhibit 10.25 to the Fiscal 1996 Annual Report,
          which is hereby incorporated herein by reference.

 10.16    Settlement Agreement dated January 3, 1997 by and between the Company and the
          National Indian Gaming Commission, previously filed as Exhibit 99 to the Company's
          Current Report on Form 8-K dated January 7, 1997, filed with the Commission on
          January 7, 1997 (File No. 0.11532), which is hereby incorporated herein by reference.

 23       Consent of Grant Thornton LLP.

 27       Financial Data Schedule.
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