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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                      ------------------------------------
                                   Form 10-K

<TABLE>
<S>     <C>                                                           <C>
 [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES EXCHANGE ACT OF 1934
                For the fiscal year ended December 31, 2000
                                     OR

 [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES EXCHANGE ACT OF 1934
                For the transition period from           to
                        Commission File No. 0-22482
</TABLE>

                    INNOVATIVE GAMING CORPORATION OF AMERICA
             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  MINNESOTA                                      41-1713864
         (State or other jurisdiction                         (I.R.S. Employer
      of incorporation or organization)                     Identification No.)
            333 ORVILLE WRIGHT CT
              LAS VEGAS, NEVADA                                    89119
   (Address of principal executive offices)                      (Zip Code)
</TABLE>

                                 (702) 614-7199
              (Registrant's telephone number, including area code)

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

     Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.01 par value

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

                        Yes [X]                  No [ ]

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

     As of March 30, 2001, 13,621,626 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the Nasdaq Small Cap Market on March 30, 2001,
was $10,224,896. For purposes of this computation, affiliates of the Registrant
are the Registrant's executive officers and directors.
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                      DOCUMENTS INCORPORATED BY REFERENCE

PART III -- Portions of the Registrant's definitive proxy statement in
connection with the annual meeting of the shareholders are incorporated by
reference into Items 10 through 13, inclusive.

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ITEM 1.  BUSINESS

     The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Innovative Gaming Corporation of America (the "Company") could
differ materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
in "Certain Factors."

     Innovative Gaming Corporation of America ("IGCA") and its wholly owned
operating subsidiary, Innovative Gaming, Inc. ("IGI"), together (the "Company"),
develop, manufacture, market and distribute multi-station and other gaming
machines to regulated gaming markets world-wide. The Company has two primary
product lines: multi-player/multi-station video based games and single player
video slot machines incorporating a state of the art operating system providing
superior graphic and sound capabilities.

     During 2000, the Company's management team was reorganized through the
Board's selection of a new Chief Executive Officer, Roland Thomas, who was
charged to develop a team for improving the Company's financial performance,
product development efforts, and expansion of market opportunities.

     Management believes that the Company's financial performance can be
improved through increasing sales revenues, improving manufacturing efficiencies
and processes, and reducing overhead costs.

     The Company intends to expand its existing market for gaming machines,
especially by pursuing international opportunities. Additionally, the Company
will focus on development of exciting new gaming products based on what
Management believes are the technological advantages of its current
single-player products.

     The Company's pursuit of new international market opportunities is
evidenced by recent joint venture arrangements with Delta Automaten, a leading
distributor in Holland and Belgium, and Unidesa Gaming in Spain. Management
believes these two relationships will expand the Company's market presence in
Europe and South America. In addition the Unidesa arrangement will widen IGCA's
product offerings in the US markets. The arrangements with Delta and Unidesa are
subject to final documentation. No assurance can be given that such arrangements
will be successfully finalized.

     In December 1999 the Company entered into a merger agreement under which it
would have been merged into nMortgage, Inc., a subsidiary of Equitex, Inc. In
conjunction with this merger agreement, in February 2000 the Company entered
into a separate agreement to sell substantially all of its gaming assets to
Xertain, Inc. The Company subsequently determined that the merger with nMortgage
was inadvisable and terminated the merger plan.

XERTAIN MERGER AGREEMENT

     On September 19, 2000, the Company's Board of Directors entered into a
letter of intent with Xertain, Inc., whereby the Company would effect a merger
with Xertain. On October 12, 2000, the Company entered into an Agreement and
Plan of Merger by and among Xertain, Inc., Innovative Gaming Corporation of
America and IGCA Acquisition Corp. (the "Xertain Merger Agreement"). Pursuant to
the Xertain Merger Agreement, Xertain will be merged into IGCA Acquisition
Corp., a Minnesota corporation and wholly owned subsidiary of the Company.
Following the Merger, Xertain's shareholders will own 45% of the Company.
Concurrent with the signing of the Xertain Merger Agreement, the Company and
Xertain completed an initial closing by the issuance and mutual purchase of 9.9%
of the respective companies' common stock. Final closing of the Merger is
anticipated to occur in mid-2001, subject to shareholder, regulatory and various
governmental agencies' approval.

     Xertain is a Delaware corporation formed in 1999 to market gaming products
and to manage casino properties, primarily in Indian gaming and other limited
jurisdictions.

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     Management believes the proposed merger of Xertain into IGCA has produced
substantial improvements to the financial results for the last two quarters of
2000 and has enhanced the future viability of the Company as follows:

     1.    Sales revenues have increased dramatically because of new marketing
           strategies and relationships with customers and distributors.

     2.    New manufacturing management and techniques have resulted in lower
           product costs and created operational efficiencies for the
           production, service and distribution of the Company's products.

     3.    Numerous technology advancements and professional product plans have
           favorably influenced customers, suppliers and distributors. This
           influence also has triggered numerous proposals for joint venture
           activities in the international marketplace as well as in the
           established United States gaming markets.

     4.    A comprehensive investor relations program has been launched for the
           current and future benefit of IGCA emphasizing the Company's new
           sales and marketing initiatives and management team.

     The Company's primary target markets have historically been gaming
jurisdictions in North America, including the states of Arizona, Colorado, Iowa,
Louisiana, Mississippi, Minnesota, Nevada, New Mexico, South Dakota, North
Carolina and international markets such as Australia and Holland. The Company
has submitted and has pending applications in Connecticut, New Jersey, Illinois
and Indiana. Previously registered with Alberta, Manitoba, Saskatchewan, Quebec
and the Atlantic Lottery Corporation, the Company has applications pending in
British Columbia, Ontario and Nova Scotia. As of December 2000, the Company's
single player video slot machine has been approved for sale in Colorado, Iowa,
Louisiana, Minnesota, New Mexico, Nevada and California.

     The Company distributes its products directly and through the use of
distributors, primarily on a cash sales basis. In jurisdictions allowing the
company to undertake the activities, the Company places its products under
lease, sales (cash or extended payment terms) or participation agreements. Under
participation agreements the Company retains ownership and shares in the net win
of the games with the casino. In Colorado, the Company currently sells or leases
its products through the use of a distributor.

     The Company believes that its gaming machines will appeal to casinos,
clubs, lotteries and slot route operators seeking to enhance the entertainment
experience by providing new and unique forms of gaming.

BUSINESS STRATEGY

     The present business model for the Company contains three components,
structured to add support to the research and development of the Company's
current products and to support and expand its international sales programs
through the development of opportunities for entering new business segments. The
first strategy involves the Company's recently developed multiple screen
hardware and software platform, branded the VSS I-II-III. The new product, based
on standard PC hardware and the Linux operating system, is believed to have
applications not only in the gaming industry but also in non-gaming based kiosk
applications. The management of the Company is currently exploring opportunities
for the new VSS I-II-III platform outside of the casino gaming environment that
previously were not considered.

     The second new business strategy is directly related to the proposed merger
with Xertain. As Xertain identifies opportunities for managing casinos in Indian
gaming and other limited jurisdictions, IGCA will work to establish exclusive
rights for supplying gaming equipment to those properties, thus enhancing the
market for the Company's products. The Company has determined that this business
segment is extremely important to the future development of the Company's base
of operations and has committed to the development of this segment beginning in
2001.

     The third segment of the new business strategy is focused on the
development of reliable product financing alternatives for the end users of the
Company's products. This important area of opportunity is
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currently under development and the Company is exploring alternatives for
funding and provision for the operational requirements of this program.

PRODUCTS

     The Company's product development strategy is to develop and maintain a
competitive advantage by focusing on three key elements: (a) exercising
sufficient control over the development and manufacturing process to enable
quick reaction to the ever-changing technology environment; (b) licensing the
Company's developed operating system to competitive companies, creating a
de-facto industry standard operating system for the gaming industry; and (c)
concentrating efforts on development of gaming machine platforms and games that
are protected by patents or other property rights to maintain an exclusive or
dominant position in the market.

     The Company has two primary product lines: multi-player/multi-station video
gaming machines and single player video slot machines incorporating a state of
the art operating system enabling superior graphics and sound capabilities.

MULTI-PLAYER/MULTI-STATION VIDEO TABLE GAMES

     BJ BLITZ(TM) AND LIVE VIDEO BLACKJACK(R) are electronic audio/video
multi-player blackjack games. Each blackjack machine consists of a central
"dealer" and three or five "player" stations that face the dealer in a
semicircle, in the same configuration as a live action blackjack table. The
dealer and each player station have video display screens. The dealer screen
displays the cards as they are shuffled and dealt, and the dealer's hand. The
electronic dealer directs the action with spoken instructions, and indicators
flash on the video display screen of the player whose turn it is to bet. Each
player station has lighted controls that the players can push to hit, stand,
bet, double down, split or buy insurance. Between games, players can also push
buttons to display the rules and the odds. The machines incorporate
electronically generated voices, sound effects, lights and music into the game.
A "21 Stud" game is offered by the Company on the blackjack game platform. "21
Stud" is an automated blackjack game with a stud poker game player option. At
the end of each hand of blackjack, the player has a chance at additional awards
according to a five-card poker hand completed from the dealer's original hand.
These blackjack games accounted for an aggregate of 26% of sales in 2000, 21% of
sales in 1999, and 40% in 1998.

     HOT SHOT DICE(TM) AND LIVE VIDEO CRAPS(R) are electronic craps machines
management believes are the first entirely electronic multi-player video craps
games in the world, which consist of a rectangular table that is approximately
half the size of a live action craps table, with a lighted canopy. Each table
accommodates six players, two on each side, and one at each end. Except for a
border that contains the player controls, the table consists of two large video
display screens that reproduce a craps tabletop. Each player has a hand-sized
trackball that the player rotates with his palm to roll the dice. The trackball
also controls a video "hand" that the player moves around the playing field to
place his bet of video "chips" in the appropriate spot. The odds are displayed
as the hand passes over each betting spot on the field. Each player has his own
distinctly colored video hand and chips. The video rolling dice are superimposed
on the playing field and the roll of the dice responds to the force and
direction with which the player spins the track ball. The game incorporates
sound effects such as rolling dice, and visual effects such as a croupier rake
that wipes away chips, in addition to electronically generated voices, music and
flashing lights. These electronic craps games accounted for an aggregate of 5%
of sales in 2000, 12% of sales in 1999, and 0% of sales in 1998.

     LIGHTNING STRIKE(TM) ROULETTE AND LIVE VIDEO ROULETTE(R) are roulette
machines that management believes are the first entirely electronic multi-player
video roulette games in the world, which consist of a rectangular table that is
approximately half the size of a live action roulette table. The table
accommodates five players, two on each side and an additional player at one end.
The other end of the table has a stand-up cabinet that incorporates a 29-inch
video monitor that employs what the Company believes is the most advanced
computer graphics available in the industry today. On the top of the cabinet, a
simulated roulette wheel is displayed that incorporates rotating lights
coordinated with the play of the

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game. Except for a border that contains the player controls, the table consists
of two large video display screens that reproduce a roulette table betting
field. Each player has a hand-sized trackball that the player rotates with his
palm to control a video hand that the player moves around the playing field to
place his bet of video "chips" in the appropriate spot. The odds are displayed
as the hand passes over each betting spot on the field. Each player has his own
distinctly colored video hand and chips. The cabinet video monitor displays
sharp, 3 dimensional graphics of rotating dealers, roulette wheel action,
betting, instructional game play features, and game summary data. These roulette
games accounted for an aggregate of 30% of sales in 2000, 20% of sales in 1999,
and 38% in 1998.

SINGLE PLAYER VIDEO SLOT MACHINES

     This new series of single game slot machines incorporates a unique PC based
platform. The Company believes the operating system and game software provides
very powerful performance gains and excellent cost advantages over traditional
gaming operating systems. Its modular software structure enables rapid
development of new game personalities without affecting basic machine functions.
This quick game development capability overcomes a current video slot problem,
in that the games are not easily modified/ customized as required by most
customers. The single game product line currently incorporates the titles of
Monster Money, Area 51 and Tiki Treasure with additional titles under
development. Single player games accounted for an aggregate of 30% of sales in
2000, 21% of sales in 1999, and 9% in 1998.

VSS I-II-II

     The Company's newest product line scheduled for release in the 4th quarter
of 2001, the VSS I-II-II incorporates all of the advantages of the single game
operating system in addition to a newly designed hardware platform incorporating
a multiple monitor array application, that eliminates the use of static screened
graphics for game identification, pay tables, and other traditional uses in
gaming machines. The modularity of the VSS I-II-III hardware platform is
significant as the game has multiple applications in the casino industry. The
platform additionally conforms to design specifications for use in the Company's
multi-game products as well as an Internet kiosk terminal. The Company has
initiated efforts for patent protection on several elements of this new
platform.

MANUFACTURING AND SUPPLY ARRANGEMENTS

     The Company's current multi-game products are assembled at its production
facility in Reno, Nevada, and the recent single game platform games are
assembled in Las Vegas, Nevada at the Company's corporate headquarters. The
products collectively are assembled utilizing various parts and components from
a large base of vendors. The Company has developed new technology to replace the
electronic components previously purchased from its Japanese Multi game vendor
and the Company has identified alternate sources of supply for significant parts
and components in the event any of its current vendors fail to meet order
requirements.

INTELLECTUAL PROPERTY

     The Company has spent considerable effort and expense developing and
implementing its proprietary operating system software for slot machine
operations. This software revolves around the Linux operating system and Java
software and operates on standard PC computer hardware platforms and proprietary
interface circuits. The Company has filed for patent protection for these
technologies.

     On February 2, 1996, the Company acquired the balance of all remaining
intellectual property including patents, trademarks, picture rights and
copyrights for its games from its Japanese suppliers in exchange for an
aggregate 225,000 shares of IGCA common stock. The Company has exclusive
ownership and licenses pertaining to its blackjack, craps, roulette and
Supersuits Progressive Blackjack in gaming markets worldwide.

     IGCA(R), BJ Blitz(TM), Hot Shot Dice(TM), Lightning Strike Roulette(TM),
Live Video Blackjack(R), Live Video Craps(R), Live Video Roulette(R), Bonus
Streak(TM), Cascade of Diamonds(TM), Mythical Reels(TM) and Supersuits (R)
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are all trademarks of Innovative Gaming Corporation of America. The Company has
either Federally registered or applied for Federal registration of these
trademarks. In November 1997, IGCA received notification that it was granted a
Trademark and Design registration for Lightning Strike Roulette in Australia.

     The Company believes that the technical know-how, trade secrets and
creative skills of its employees and contract personnel are substantial assets
of the Company. The Company requires customers, employees, contract personnel
and other significant contacts of the Company who have access to proprietary
information concerning the Company's products to sign non-disclosure agreements.
The Company relies on such agreements, other security measures, and trade secret
law to protect such proprietary information. No assurance can be given that
pending applications for intellectual property will be granted. There also can
be no assurance that patents or other intellectual property rights will not be
infringed, or that others will not develop technology that will not violate
these rights.

DISTRIBUTORSHIP AND SALES AGENCY ARRANGEMENTS

     The Company distributes and/or anticipates distributing its products both
directly to gaming markets and through licensed distributors. In certain
jurisdictions the Company may use an existing licensed distributor to sell its
products pursuant to any necessary Tribal or regulatory transaction approvals.

     In February 1996, the Company entered into an exclusive distribution
agreement with Aristocrat Leisure Industries of New South Wales, Australia for
the marketing and distribution of multi-player games in Australia, New Zealand,
and neighboring South Pacific jurisdictions. Pursuant to this agreement, the
Company sold an aggregate of 99 games in 1997, 86 games in 1998 and no games in
1999. Due to the declining multi-player game sales in their territory, the
Company and Aristocrat terminated the distribution agreement in March 2000.

     The Company has submitted its applications for licensure in New Jersey and
Connecticut, and will apply for approval of its various games. Once the Company
is able to sell product in these jurisdictions, it will be represented by Par 4
("Agent") under terms of a two-year exclusive agency agreement entered into in
January 1999. Under the agreement, the agent will represent certain of the
Company's products for sale in Atlantic City, New Jersey and Connecticut. As of
December 2000, the applications for licensure are still pending and the Company
expects to renew its agency agreement with Par 4.

SIGNIFICANT CUSTOMERS

     During 2000, the Company made sales to Delta Automation and Casino Arizona
accounting for 22.26% and 12.76% of gross sales respectively. During 1999, the
Company made sales to one customer, a distributor, Black Hills Novelty Co.,
which accounted for 18.9% of sales for the year. During 1998, a majority of the
Company's sales were to a distributor, Aristocrat Leisure Industries, which
accounted for 54.1% of sales.

COMPETITION

     Many gaming equipment companies, several of which are large and well
established, supply the casino and video lottery industries with video gaming
machines and other gaming equipment. Management believes that Aristocrat,
Alliance Gaming, International Game Technology, Casino Data Systems and WMS
Gaming are among the largest and most-established gaming machine suppliers.
Management believes that none of these companies currently offer video gaming
machines that are similar to the Company's multi-station products. However,
Sigma Games distributes a multi-player horserace game. Furthermore, the
Company's single game product is currently in competition with products
developed by all of the above-mentioned companies and there can be no assurance
that the single player games developed by the Company will have continued
acceptance in such competitive markets. There can be no assurance that these
competitors, or another competitor, will not develop gaming machines that are
similar to the Company's multi player gaming machines in the future.

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REGULATION

     GENERAL -- The manufacture, sale and distribution of gaming machines are
subject to various federal, state, county, tribal, municipal and international
laws, regulations and ordinances, which are administered by the relevant
regulatory agency or agencies in each jurisdiction (the "Regulatory
Authorities"). These laws, regulations and ordinances vary from jurisdiction to
jurisdiction, but primarily concern the responsibility, financial stability and
character of gaming equipment manufacturers and distributors, as well as persons
financially interested or involved with gaming equipment manufacturers and
distributors. Furthermore, regulations also require various technical standards
and specifications approval and adherence, which are conducted by state and/or
private laboratories. There are substantial similarities in the basic
provisions, which are described below. In the future, Regulatory Authorities may
also significantly curtail or eliminate gaming in jurisdictions that currently
or hereafter allow gaming.

     INDIAN GAMING -- The operation of gaming on Indian land, including the
terms and conditions of contracts to sell or lease gaming equipment to Indian
tribes, is subject to the Indian Gaming Regulatory Act of 1988 ("IGRA"), which
has delegated oversight responsibility to the Bureau of Indian Affairs (the
"BIA") and the National Indian Gaming Commission ("NIGC"), and also is subject
to the provisions of statutes relating to contracts with Indian tribes, which
are administered by the BIA. The regulations and guidelines under which the BIA
and the National Indian Gaming Commission will administer IGRA are incomplete
and evolving. IGRA is subject to interpretation by the Secretary of the Interior
and the NIGC and may be subject to judicial and legislative clarification or
amendment.

     The NIGC is empowered to inspect and audit all Indian gaming facilities, to
conduct background checks on all persons associated with Indian gaming, to hold
hearings, issue subpoenas, take depositions, adopt regulations and to assess
fees. Civil penalties for violations of IGRA, and/or other applicable law, may
be imposed. In addition, IGRA provides for criminal penalties for illegal gaming
on Indian land and for theft from Indian gaming facilities.

     IGRA classifies games that may be played on Indian land into three
categories. Class I gaming includes traditional Indian games and private social
games engaged in as a part of; or in connection with, tribal ceremonies or
celebrations. These games, under IGRA, are regulated exclusively by the
respective tribes.

     Class II gaming includes bingo and, additionally, pull tabs, lotto, punch
boards, tip jars, instant bingo, and other games similar to bingo, if those
games are played at a location where bingo is played. Class II gaming explicitly
excludes electronic or electromechanical facsimiles of any games of chance or
slot machines of any kind. This classification is also reserved for tribal
regulation, but under federal oversight. Class II gaming is permitted on Indian
land if: (i) the state in which the Indian gaming is located permits such gaming
for any purpose by any person, (ii) the gaming is not otherwise specifically
prohibited on Indian land by federal law, (iii) the gaming is conducted in
accordance with a tribal ordinance which has been approved by the Chairman of
the NIGC (provided that gaming may be conducted under unapproved ordinances or
resolutions adopted prior to the enactment of IGRA unless and until such
ordinances or resolutions are disapproved by the Chairman), (iv) an Indian tribe
has sole proprietary interest and responsibility for the conduct of gaming
(subject to certain exceptions), (v) the primary management officials, key
employees and the facility are tribally licensed; and (vi) several other
specified requirements are met, including the existence of any adequate system
which ensures background investigations are conducted on primary management
officials, all contracts for supplies, services or concessions in excess of
$25,000 annually are subject to independent audit and the construction and
maintenance of the gaming facility is conducted in a manner which adequately
protects the environment and the public health and safety.

     Class III gaming includes all other forms of gaming, such as video casino
games (e.g., video slots, video blackjack), slot machines, table games (e.g.,
blackjack, craps, roulette), and other gaming (e.g., sports betting and
pari-mutuel wagering). The machines manufactured and distributed by the Company
are classified as Class III gaming devices. Class III gaming is permitted on
Indian land only if such activity is: (i) authorized by a tribal ordinance
meeting the requirements of IGRA and approved by the
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Chairman of the NIGC (provided that gaming may be conducted under unapproved
ordinances or resolutions adopted prior to the enactment of IGRA unless and
until such ordinances or resolutions are disapproved by the Chairman), (ii)
located in a state that permits gaming defined as Class III by any person for
any purpose, (iii) governed by requirements similar to those described for Class
II gaming, and (iv) conducted in compliance with the terms of a written
tribal-state compact entered into between the Indian tribe and the state in
which the subject gaming is located and which has been approved by the
Secretary.

     TRIBAL ORDINANCES -- Under IGRA, except to the extent otherwise provided in
a tribal-state compact, Indian tribal governments have primary regulatory
authority over gaming on land within the tribe's jurisdiction. Therefore,
persons engaged in gaming activities, including the Company, are subject to the
provisions of tribal ordinances and regulations regarding gaming. Such
ordinances and regulations must be consistent with IGRA and with any applicable
tribal-state gaming compact, and cannot impose criminal penalties upon
non-Indians. However, the civil remedies imposed by such tribal government
regulations, if otherwise valid, will likely apply to the Company and its
employees and customers. Tribal ordinances also require participants involved in
Indian gaming enterprises to obtain tribal licenses. The Company as a
manufacturer/distributor of gaming equipment is usually required to obtain a
tribal license before making any equipment sales. Management companies and their
officers, directors and significant shareholders are also subject to licensing
requirements. Tribes have great discretion to deny such licenses, fail to renew
current licenses or revoke such licenses. An Indian tribe has the right to
revoke any tribal gaming ordinance and, pursuant to such revocation, render
Class III gaming illegal on the lands of the tribe.

     The Company must also comply with regulations promulgated pursuant to the
tribal state compacts entered into between the State and the particular Indian
tribe. These compacts vary significantly from state to state.

     Indian tribes are sovereign nations with their own courts and governmental
systems. The Company intends to seek waivers of Sovereign immunity, where
appropriate, from tribes with whom the Company does business although there can
be no assurance that such waivers will be obtained.

     UNITED STATES CODE SECTION 81 -- Title 25, Section 81 of the United States
Code states that "no agreement shall be made by any person with any tribe of
Indians, or individual Indians not citizens of the United States, for the
payment or delivery of any money or other thing of value in consideration of
services for said Indians relative to their lands unless such contract or
agreement be executed and approved' by the Secretary or his or her designee. An
agreement or contract for services relative to Indian lands which fails to
conform to the requirements of Section 81 will be void and unenforceable. All
money or other thing of value paid to any person by any Indian or tribe for or
on his or their behalf, on account of such services, in excess of any amount
approved by the Secretary or his or her authorized representative will be
subject to forfeiture.

     The Company has sold and intends to sell gaming machines directly to Indian
tribes. The Company has not submitted its past gaming machine sales contracts
with Indian tribes to the Secretary for approval for a number of reasons. In the
Company's opinion, its sales contracts are not for services. The Company
believes it is engaged in the sale of goods, namely gaming machines, and
therefore Section 81 does not apply to its activities. The Company also believes
that its sales of gaming machines are not "relative to Indian lands." Although
the gaming machines ultimately may be used on Indian lands, the Company believes
the machines themselves are not related to Indian land. The Company intends to
continue its practice of not submitting its sales contracts to the Secretary for
approval. The position of regulatory authorities relative to approval of
contracts of this kind has not been clear.

NEVADA

     The manufacture and distribution of gaming devices in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulations. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
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Gaming Control Board (the "Nevada Board"), and appropriate county and municipal
licensing agencies. The Nevada Commission, the Nevada Board, and the various
county and municipal licensing agencies are collectively referred to as the
"Nevada Gaming Authorities."

     The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company.

     Manufacturer and distributor licenses require the periodic payment of fees
and taxes and are not transferable. No person may become a stockholder of, or
receive any percentage of profits from, IGI, the wholly-owned subsidiary of
IGCA, without first obtaining licenses and approvals from the Nevada Gaming
Authorities. IGCA is registered by the Nevada Commission as a publicly traded
corporation ("Registered Corporation") and IGI was granted all requisite
licenses in May 1996 to manufacture gaming devices used in Nevada and to
distribute such devices, subsequent to technical product approvals. As such, the
Company is required periodically to submit detailed financial and operating
reports to the Nevada Commission and furnish any other information that the
Nevada Commission may require.

     All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval process
for gaming devices includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming device meets strict technical
standards that are set forth in the regulations of the Nevada Commission.

     The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company in order to
determine whether such individual is suitable or should be licensed as a
business associate of a gaming licensee. Officers, directors and certain key
employees of IGI must file applications with the Nevada Gaming Authorities and
are required to be licensed by the Nevada Gaming Authorities. Officers,
directors and key employees of IGCA who are actively and directly involved in
the gaming activities of IGI may be required to be licensed or found suitable by
the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an
application for licensing or a finding of suitability for any cause they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and in addition to their authority
to deny an application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position. If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or to continue having a relationship with
the Company, the companies involved would have to sever all relationships with
such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.

     The Company is required to submit detailed financial and operating reports
to Nevada Gaming Authorities. Substantially all material loans, leases, sales of
securities and similar financing transactions by the Company, must be reported
to or approved by the Nevada Commission.

     If it was determined that the Nevada Act was violated by IGI, the gaming
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory
                                        10
<PAGE>   11

procedures. In addition, IGI, IGCA and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Limitation, conditioning or suspension of
any gaming license could (and revocation of any gaming license would) materially
adversely affect the Company.

     Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.

     The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails a written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Act, which acquires more than 10% but not more than 15%
of the Company's voting securities, may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Company, any change in the Company's corporate charter, bylaws,
management, policies or operations of the Company or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Company's voting securities for investment
purposes only. Activities that are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.

     Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company, the Company
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays remuneration
in any form to that person for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally, the Clark County
Liquor and Gaming Licensing Board has taken the position that they have the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.

     The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by
                                        11
<PAGE>   12

such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.

     The Company is required to maintain a current stock ledger in Nevada that
may be examined by the Nevada Gaming Authorities at any time. If any Securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that such securities are subject to the Nevada Act. However,
to date, the Nevada Commission has not imposed such a requirement on the
Company.

     The Company may not make a public offering of any securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.

     Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and the Nevada Commission concerning a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process of the transaction.

     The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.

     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are also required to comply with certain
reporting requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of

                                        12
<PAGE>   13

Nevada or its ability to collect gaming taxes and fees, or employ a person in
the foreign operation who has been denied a license or a finding of suitability
in Nevada on the ground of personal unsuitability.

NEW JERSEY

     The manufacture and distribution of slot machines and casino gaming
activities in New Jersey are subject to extensive state regulation under the New
Jersey Casino Control Act, N.J.S.A. 5:12-1 et seq. (the "New Jersey Act"). The
New Jersey Act created the New Jersey Casino Control Commission ("New Jersey
Commission"), which is authorized to decide all license applications and other
matters and to promulgate regulations. The New Jersey Act also created the New
Jersey Division of Gaming Enforcement (the "New Jersey Division"), which is
authorized to investigate all license applications, make recommendations to the
New Jersey Commission, and prosecute violations of the New Jersey Act. The New
Jersey Act requires any manufacturer or distributor of slot machines to be
licensed as a gaming related casino service industry ("CSI") by the New Jersey
Commission prior to transacting any business with a casino. The Company's wholly
owned subsidiary, Innovative Gaming, Inc. ("IGI"), has filed an application for
a CSI license, but it has not yet been deemed complete by the New Jersey
Commission.

     In order for the requisite CSI license to be issued to IGI and maintained,
the Company's and IGI's officers, directors and key employees and all beneficial
owners of five percent (5%) or more of the Company's Common Stock must be found
qualified by the New Jersey Commission after an investigation by the New Jersey
Division. In order to be found qualified, the Company and IGI, its officers,
directors, key employees and five percent (5%) or greater shareholders must
demonstrate by clear and convincing evidence their good character, honesty and
integrity, and their financial stability, integrity and responsibility. However
"institutional investors" (as defined in the New Jersey Act) holding five
percent (5%) or more of the shares of the Company may be granted a waiver of the
requirement to be found qualified by the New Jersey Commission. Any other
shareholder or other person associated with the Company or IGI whom the New
Jersey Commission deems appropriate, in its discretion, is also required to be
qualified. If a person is required to and fails to submit for qualification or
submits for qualification and is found disqualified by the New Jersey
Commission, the New Jersey Commission may prohibit casinos in New Jersey from
doing business with the Company and IGI.

     The New Jersey Commission may permit a company to transact business with a
casino prior to licensure if the company has filed a complete application for
CSI licensure and the New Jersey Division does not object to the transaction. A
request for permission to conduct a business transaction with a casino prior to
CSI licensure may be made 30 days after the filing of a complete CSI license
application with New Jersey Commission.

     A CSI license is issued for an initial period of two years and is
thereafter renewable for four-year periods. There is no guarantee that IGI will
be granted an initial license or that, following the issuance of an initial CSI
license or any renewal thereof, IGI will continue to be granted renewals of the
license. Additionally, upon application of the New Jersey Division, the New
Jersey Commission may at any time review any license issued by it and determine
to suspend, revoke or place conditions on such license.

     In addition to the required CSI license, the gaming equipment manufactured,
distributed or sold by IGI to New Jersey casinos is subject to a technical
examination by the New Jersey Division and approval by the New Jersey Commission
for, at a minimum, quality, design, integrity, fairness, honesty and
suitability. The review process includes the submission of a model of the
machine to the New Jersey Division for testing, examination and analysis. Prior
to a decision by the New Jersey Commission to approve a particular model of
machine, it may require up to a 60-day trial period to test the machine in a
casino. During the trial period, the manufacturer or distributor of the machine
shall not be entitled to receive revenue of any kind whatsoever. Once a model is
approved by the New Jersey Commission, all machines of that model placed in
operation in casinos shall operate in conformity with the model approved by the
New Jersey Commission. Any changes in the design, function or operation of the
machine are subject to prior approval by the New Jersey Commission, after
testing by the New Jersey Division.

                                        13
<PAGE>   14

OTHER JURISDICTIONS

     Each of the other jurisdictions in which the Company does business requires
various licenses, permits and approvals in connection with the manufacture
and/or distribution of gaming devices typically involving restrictions similar
in many respects to those of Nevada.

     UNITED STATES -- FEDERAL -- The Federal Gambling Devices Act of 1962 (the
"Federal Act") makes it unlawful for a person to manufacture, deliver or receive
gaming machines and components thereof across interstate lines unless that
person has first registered with the Attorney General of the United States. The
Company is so registered and must renew its registration annually. In addition,
various record keeping and equipment identification requirements are imposed by
the Federal Act. Violation of the Federal Act may result in seizure or
forfeiture of equipment, as well as other penalties.

CERTAIN FACTORS

     In addition to the factors discussed elsewhere in this Report, such as
regulation, competition and dependence on significant customers, the following
are important factors that could cause actual results or events to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company.

     SHORT-TERM LIQUIDITY AND NEED FOR ADDITIONAL FINANCING -- As of April 5,
2001, the Company had cash of approximately $305,000. The Company has
experienced negative cash flow from operations of $1.7 million, $5.1 million and
$2.1 million for the years ended December 31, 2000, 1999, and 1998,
respectively. The Company estimates that if current sales forecasts are met its
cash and anticipated funds from operations will be adequate to fund cash
requirements through May 2001. Management believes that the costly process of
product development and introduction will require the Company to seek additional
financing to successfully complete any such future development and introduction.
As of March 30, 2001 the Company had obtained commitments for $1 million of
unsecured short-term debt financing. The Company also is currently working with
two outside lenders to secure a revolving line of credit secured by the
Company's receivables and inventory. There can be no assurance that the Company
will be successful in obtaining any additional financing on terms acceptable to
the Company. Failure to obtain additional financing could have a material
adverse effect on the Company, and the Company would have to consider
liquidating all or part of the Company's assets and potentially discontinuing
operations.

     RISK OF FAILURE TO COMPLETE MERGER WITH XERTAIN, INC. -- In October 2000,
the Company and Xertain executed a definitive merger agreement governing the
Merger. The Merger is subject to shareholder and gaming regulatory approval. No
assurance can be given that the Merger will be consummated.

     LACK OF PROFITABILITY -- The Company has had losses of $2.3 million in
2000, $13.5 million in 1999 and $4.7 million in 1998. The Company had its first
profitable quarter since 1997 during the quarter ended September 30, 2000.
Although Management is implementing plans to restore the Company to
profitability, there can be no assurance these plans will be successful.

     FAILURE TO REGISTER CERTAIN SHARES -- The Registration Rights Agreements
relating to the Company's recent issuances of the Company's Series E, F, and G
Convertible Preferred Stock (the "Convertible Preferred Stock") require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or pay certain liquidated damages. The first of
these provisions will take effect on April 30, 2001. These provisions include 2%
of the gross proceeds of the Convertible Preferred Stock sold if such Common
Stock is not registered by the initial due date, and 3.5% per month for each
month thereafter that such Common Stock is not registered. Beginning May 1,
2001, the liquidated damages would be $103,000 and would increase substantially
each succeeding month, as further disclosed in the Notes to the Company's
financial statements. As of March 30, 2001, the Company has not registered such
shares of Common Stock with the Securities and Exchange Commission. Unless the
Company can register such shares by April 30, 2001 or obtain a waiver of such
provisions from the holders

                                        14
<PAGE>   15

of the Company's Convertible Preferred Stock, the Company will be contractually
required to make such payments, which could have a material adverse impact on
the Company's liquidity.

     DEVELOPMENT RISKS -- Although the Company was formed in 1991, the Company
continues to face the risks, expenses and difficulties frequently encountered by
new and expanding businesses, including, but not limited to, negative cash flow,
initial high development costs of new products without corresponding sales
pending receipt of corporate and product regulatory approvals and market
introduction and acceptance of new products. There is no assurance that the
Company's products will be accepted in the marketplace and that regulatory
approvals will be obtained.

     PRODUCT ACCEPTANCE -- The Company's success as a gaming machine
manufacturer and supplier is dependent upon numerous factors, including its
ability to design, manufacture, market and service gaming machines that achieve
player and casino acceptance while maintaining product quality and acceptable
margins and to compete against gaming machine suppliers with greater financial
resources, name recognition and established service networks and customer
relationships. To date, the sales of the Company's multi-player games have been
significantly lower than anticipated by the Company. In order to diversify and
expand sales, the Company has begun licensing, marketing and selling single
player games such as Bonus Streak. Additionally, the Company has developed other
single player games such as its single player video slot machines incorporating
state of the art graphics and sound. There can be no assurance that such single
player games will be accepted by the market. The Company believes that it will
need to develop gaming machines that offer technological advantages or unique
entertainment features in order for the Company to be able to compete
effectively in the gaming machine market.

GOVERNMENT REGULATION

     The manufacture and distribution of gaming machines are subject to
extensive federal, state, provincial, tribal, international and local
regulation. These regulations are constantly changing and evolving, and may
permit additional gaming or curtail gaming in various jurisdictions in the
future, which may have a material adverse impact on the Company. The Company and
its key personnel undergo extensive investigation before each jurisdictional
license is issued. The Company's gaming machines are subjected to independent
testing and evaluation prior to approval from each jurisdiction in which the
Company does business. Generally, regulatory authorities have broad discretion
when granting, renewing or revoking such game approvals and licenses. The
failure of the Company, any of its key personnel, or its gaming machines to
obtain or retain a license in any jurisdiction could have a material adverse
effect on the Company or on the ability of the Company, its key personnel, and
its gaming machines to obtain or retain required licenses in other
jurisdictions. If the Company enters into lease participation agreements under
which the Company shares in the revenues generated by gaming machines, the
Company may be subject to additional regulation as a gaming operator. Regulatory
authorities may require significant shareholders to submit to background
investigations and respond to questions from regulatory authorities, and may
deny a license or revoke the Company's licenses based upon their findings. See
"Regulation", for additional discussion regarding governmental regulation.

     RAPIDLY CHANGING TECHNOLOGY -- The Company's business is characterized by
rapidly changing technology and frequent new product introductions and
enhancements. The Company's success as a gaming equipment manufacturer is
dependent on its ability to enhance its existing products and to introduce in a
timely manner new products that meet existing and future regulatory requirements
and evolving customer requirements and to achieve market acceptance. There can
be no assurance that the Company will be successful in identifying, developing
and marketing new products or enhancing its existing products. The Company's
business will be adversely affected if the Company experiences delays in
developing new products or enhancements or if such products or enhancements do
not meet and receive all regulatory approvals and/or gain customer acceptance.

     FACTORS AFFECTING PROFITABILITY AND GROWTH -- All of the Company's revenues
have been derived from the gaming industry. The growth of the Company's business
is substantially dependent upon factors that are beyond the control of the
Company, including, among others, the pace of development, changes in

                                        15
<PAGE>   16

gaming regulation, expansion and renovation of casinos and other forms of casino
gaming in new jurisdictions, and the continued popularity of casino gaming as a
leisure activity. The expansion of the gaming industry has slowed in recent
years and the continued expansion of gaming markets is dependent upon political,
legal and other factors, which are beyond the control of the Company. As a
result of these and other factors, there is no assurance of the Company's growth
or profitability.

     DEPENDENCE UPON RELATIONSHIP WITH VENDORS, SUPPLIERS AND DISTRIBUTORS -- A
significant interruption or delay in the delivery of components from suppliers
or the loss of a significant distributor could have a material adverse effect on
the Company's results of operations.

     PRODUCT PROTECTION -- The Company's products are technology-based and as
such, the Company faces several intellectual property risks. The Company's
business is dependent upon its ability to protect its proprietary software,
hardware and other intellectual property. The Company relies primarily on a
combination of non-disclosure agreements for its key employees, license
agreements with its customers and suppliers and trade secret protection to
protect such intellectual property. Despite the Company's precautions, it may be
possible for unauthorized parties to copy or to "reverse engineer" certain
portions of the Company's products or to obtain and use information that the
Company believes is proprietary, Therefore, there is no assurance that
precautionary steps taken by the Company in this regard will be adequate to
deter misappropriation of its intellectual property or independent third party
development of functionally equivalent products or that the Company can
meaningfully protect its rights to such proprietary intellectual property.

     The Company relies on a combination of patent, trade secret, copyright and
trademark law, nondisclosure agreements and technical security measures to
protect its rights pertaining to its products. The Company holds patents for its
blackjack, craps and roulette machines. There can be no assurance that such
patents are valid. The Company may file for patents on certain features of
products that the Company may develop in the future. No assurance can be given
that, if applied for, any patents will be issued, or, if issued, that such
patents will be valid or will provide any significant competitive protection for
such products. Only certain features of the Company's blackjack, craps, and any
other products the Company may develop in the future may be eligible for patent
protection. Such protection may not preclude competitors from developing
products with features similar to the Company's products.

     Second, although the Company is not aware of any infringement, the Company
may be subject to claims from third parties alleging that the Company has
infringed the proprietary intellectual property of such third parties. Such
claims could have a material adverse effect on the Company given the costs
associated with intellectual property litigation, the potential diversion of
Management's resources to litigation and the risk of some injunction or other
delay in the offering of the Company's products. See "Business -- Intellectual
Property" for additional discussion regarding product protection.

     REVENUE VOLATILITY -- The Company's operating results have varied
substantially from quarter to quarter. Revenues in any quarter are substantially
dependent on regulatory approval, receipt of orders and delivery and
installation in that quarter. Because the Company's staffing and operating
expenses are based on anticipated revenue levels, and a high percentage of the
Company's costs are fixed, in the short-term, the loss of any one order, or the
failure to obtain new orders as existing orders are completed, could have a
material adverse effect or cause significant fluctuations in the Company's
revenues and cash flow from quarter to quarter.

     STOCK PRICE VOLATILITY AND NASDAQ LISTING -- The market price of the
Company's Common Stock has been highly volatile. In order to maintain its
listing on the NASDAQ Small Cap Market, the Company must maintain a closing
sales price of at least $1.00 per share for a certain period of time. Since
January 2, 2001 the Company's Common Stock has traded between $1.03 and $0.53
per share. No assurance can be given that the Company's Common Stock will
continue to trade above the NASDAQ Small Cap Market minimum requirements or that
the Company can maintain its NASDAQ Small Cap Market listing. If the Company
fails to maintain the NASDAQ standards for quotation, the Company's Common Stock
could be traded in the over-the-counter market, which would make it more
difficult to dispose of, or obtain accurate quotations as to the price of the
Company's Common Stock. In addition, the
                                        16
<PAGE>   17

Company could then be subject to certain rules of the Securities and Exchange
Commission relating to "penny stocks". Such rules require broker-dealers to make
a suitability determination for purchasers and to receive the purchaser's prior
written consent for a purchase transaction, thus restricting the ability of
purchasers and broker-dealers to sell the stock in the open market.

     DEPENDENCE ON KEY PERSONNEL -- The Company is highly dependent upon the
personal efforts and abilities of certain key personnel. The loss of the
services of any of these key personnel could have a substantial adverse effect
on the Company.

     UNDESIGNATED STOCK -- The Board of Directors, without action by the
Company's shareholders, is authorized to designate and issue shares in such
classes or series (including classes or series of preferred stock) as it deems
appropriate and to establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights. The rights of
holders of preferred stock and other classes of commons stock that may be issued
may be superior to the rights granted to the holders of the Company's Common
Stock. Further, the ability of the Board of Directors to designate and issue
such undesignated shares could impede or deter an unsolicited tender offer or
takeover proposal regarding the Company, and the issuance of additional shares
having preferential rights could adversely affect the voting power and other
rights of holders of Common Stock.

ITEM 2.  PROPERTIES

     The Company leases approximately 53,100 square feet of warehouse and office
space in Reno, Nevada for its main facility, which includes administrative,
sales, manufacturing and warehousing operations. The rent under the lease, which
expires in October 2001, was approximately $288,000 in 2000, with provisions for
annual rent increases. Pending completion of the Xertain merger, the Company is
subleasing office and warehouse space in Las Vegas, Nevada on a month-to-month
basis for $17,000 per month.

ITEM 3.  LEGAL PROCEEDINGS

     During October 2000 the Company was named as defendant in two lawsuits in
federal district court in California, alleging breach of obligations under a
distribution agreement. The suit named Xertain, Inc. as a co-defendant.
Management is vigorously defending this lawsuit and has filed counterclaims
against the plaintiffs. It is not possible to determine the likely result of
this lawsuit, nor the extent of its adverse effects on the Company if it is
unsuccessful. The Company is plaintiff in a lawsuit filed in Colorado district
court which alleges improper use of its proprietary technology. Although the
Company believes it will be successful in this lawsuit, the possible financial
effects to the Company cannot be predicted.

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

     No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended December 31, 2000.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND
         RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK

     Our Common Stock is traded on the NASDAQ SmallCap Market under the symbol
"IGCA". Our Common Stock was also traded on the NASDAQ SmallCap Market from May
28, 1993, the date of the Company's initial public offering, through September
20, 1994. During the period from September 21, 1994 until December 22, 2000, our
common stock was traded on the NASDAQ National Market.

                                        17
<PAGE>   18

     The following table summarizes the high and low closing sales prices per
share of the Common Stock for the periods indicated as reported on the NASDAQ
SmallCap Market or the NASDAQ National Market:

<TABLE>
<CAPTION>
                                                                HIGH      LOW
                                                                -----    -----
<S>                                                             <C>      <C>
FYE 12/31/99
  First Quarter.............................................    $1.38    $1.00
  Second Quarter............................................     2.31     1.00
  Third Quarter.............................................     2.72     1.50
  Fourth Quarter............................................     2.61     1.19
</TABLE>

<TABLE>
<CAPTION>
                                                                HIGH      LOW
                                                                -----    -----
<S>                                                             <C>      <C>
FYE 12/31/00
  First Quarter.............................................    $2.56    $1.44
  Second Quarter............................................     1.81     0.56
  Third Quarter.............................................     1.06     0.56
  Fourth Quarter............................................     1.03     0.44
</TABLE>

     On March 30, 2001, the last reported sale price for the Common Stock was
$0.84 per share. As of March 30, 2001, the Company had 209 record holders of
Common Stock plus an estimated 1,000 additional beneficial holders of Common
Stock.

     IGCA's Board of Directors has not declared any dividend on our Common Stock
since the Company's inception, and does not intend to pay out any cash dividends
on its Common Stock in the foreseeable future. The Board of Directors presently
intends to retain all earnings, if any, for use in the Company's business for
the foreseeable future. Any future determination as to declaration and payment
of dividends will be made at the discretion of the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

     On November 1, 2000, the Company completed a private placement of Series E
6% Convertible Preferred Stock with an aggregate value of $4,162,500. Upon
issuance, each share of Series E Preferred Stock may be converted into Common
Stock at a conversion price equal to the lesser of $1.25 or 75% of the average
of the closing bid prices of the Company's Common Stock as reported on NASDAQ
during the five trading days immediately preceding the date of conversion. The
applicable conversion price has since been reduced to equal the lesser of
$0.8125 or 70% of the average of the closing bid prices of the Company's Common
Stock as reported on NASDAQ during the five trading days immediately preceding
the date of conversion. In connection with this offering, the Company also
issued to the purchasers of Series E Preferred Stock warrants to purchase an
aggregate of 416,250 shares of Common Stock. With respect to these issuances,
the Company relied on the exemption from registration under Rule 506 of
Regulation D, promulgated under the Securities Act of 1933, as amended.

     On December 1, 2000, the Company completed a private placement of Series F
6% Convertible Preferred Stock with an aggregate value of $3,062,500, of which
$2,062,500 represented an exchange of previously issued Series E Preferred
Stock. Each share of Series E Preferred Stock may be converted into Common Stock
at a conversion price equal to the lesser of $0.8125 or 70% of the average of
the closing bid prices of the Company's Common Stock as reported on NASDAQ
during the five trading days immediately preceding the date of conversion. In
connection with this offering, the Company also issued to the purchaser of
Series F Preferred Stock warrants to purchase an aggregate of 100,000 shares of
Common Stock. With respect to these issuances, the Company relied on the
exemption from registration under Rule 506 of Regulation D, promulgated under
the Securities Act of 1933, as amended.

     On January 5, 2001, the Company completed a private placement of Series G
6% Preferred Stock with an aggregate value of $632,000, all of which represented
an exchange of previously issued Series D Convertible Preferred Stock. Each
share of Series G Preferred Stock may be converted into Common

                                        18
<PAGE>   19

Stock at a conversion price equal to the lesser of $3.00 or 75% of the average
of the closing bid prices of the Company's Common Stock as reported on NASDAQ
during the five trading days immediately preceding the date of conversion. With
respect to this offering, the Company relied on the exemption from registration
under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as
amended.

     The Company has used and intends to continue to use the proceeds received
from the above offerings for general working capital.

     The Company has undertaken to register for resale, on behalf of the holders
of the Series E Preferred Stock, the Series F Preferred Stock, the Series G
Preferred Stock and the warrants issued to the holders thereof, the shares of
Common Stock issuable upon conversion of such preferred stock. In that regard,
the Company filed a registration statement on Form S-3 covering the resale of
such shares of Common Stock with the Securities and Exchange Commission on
January 13, 2000. The Company has since filed amendments to this registration
statement on May 24, 2000, January 19, 2001, and February 14, 2001. This
registration statement has not been declared effective by the Commission.

ITEM 6.  SELECTED FINANCIAL DATA

     The following is a summary of certain consolidated statement of operations,
cash flow and balance sheet information for the Company as of and for the years
ended December 31, 2000, 1999, 1998, 1997, and 1996. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial Statements of Innovative Gaming Corporation of America and Subsidiary
(in thousands except per share data).

<TABLE>
<CAPTION>
                                    FOR THE        FOR THE        FOR THE        FOR THE        FOR THE
                                   YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                                  DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                      2000           1999           1998           1997           1996
                                  ------------   ------------   ------------   ------------   ------------
<S>                               <C>            <C>            <C>            <C>            <C>
Statement of operations data:
  Net sales.....................    $  8,936       $  4,026       $ 8,509        $10,292        $ 2,664
  Gross profit..................       4,045         (4,605)        1,375          3,103            529
  Operating loss................        (458)       (12,729)       (4,444)        (2,182)        (6,592)
  Net loss......................        (742)       (12,876)       (4,338)        (1,935)        (6,899)
  Net loss per common share:....       (0.23)         (1.80)        (0.63)         (0.43)         (1.09)
Cash flow data:
  Cash provided by (used for):
     Operating activities.......      (1,707)        (5,123)       (2,106)        (7,516)        (2,726)
     Investing activities.......         (98)           (38)          (92)           555          3,784
     Financing activities.......       1,986          3,684         3,297          4,486          1,038
  Increase (decrease) in cash
     and cash equivalents.......         181         (1,477)        1,099         (2,475)         2,096
Balance sheet data (end of
  period):
  Cash, cash equivalents and
     available-for-sale
     securities.................         321            140         1,617            518          5,959
  Working capital...............       6,927          4,580        12,100         12,603         11,996
  Total assets..................      11,094          8,058        17,093         18,461         15,256
  Long-term debt (net of current
     maturities)................         578          3,131           856            509             --
  Total stockholders' equity....       8,505          3,189        16,872         16,482         14,730
</TABLE>

                                        19
<PAGE>   20

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

     The following discussion and this Form 10-K contain forward-looking
statements that involve risks and uncertainties relating to future events.
Actual events or the Company's results may differ materially from those
discussed in such forward-looking statements. Factors that might cause actual
results to differ from those indicated by such forward-looking statements
include, but are not limited to: successful completion of the proposed merger
with Xertain, Inc., customer acceptance of the Company's products, need for
additional financing, Preferred Stock conversions, decline in demand for gaming
products or reduction in the growth rate of new markets, failure or delay in
obtaining gaming licenses and regulatory approvals, delays in developing or
manufacturing new products, delays in orders and shipment of products, changing
economic conditions, approval of pending patent applications or infringement
upon existing patents, the effects of regulatory and governmental actions and
increased competition.

     OVERVIEW -- The Company was formed in 1991 to develop, manufacture, market
and distribute multi-player and other specialty video gaming machines. The
Company manufactures, markets and distributes its products to certain gaming
markets worldwide. Since inception, the Company has focused most of its
resources on the development of games, the regulatory approval process and the
sale and installation of its games. The Company has begun to expand and
diversify its product line by developing and marketing single player games
incorporating state of the art graphics and sound.

     As noted in Item 1-Business and the Notes to the Company's Consolidated
Financial Statements, in December 1999 the Company entered into a merger
agreement under which it would have been merged into nMortgage, Inc., a
subsidiary of Equitex, Inc. In conjunction with this merger agreement, in
February 2000 the Company entered into a separate agreement to sell
substantially all of its gaming assets to Xertain, Inc. The Company subsequently
determined that the merger with nMortgage was inadvisable and terminated the
merger plan.

     On September 19, 2000, the Company's Board of Directors entered into a
letter of intent with Xertain, Inc., whereby the Company would effect a merger
with Xertain. On October 12, 2000, the Company entered into an Agreement and
Plan of Merger whereby Xertain will become a wholly owned subsidiary of the
Company.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1999

     For the year ended December 31, 2000, the Company reported a net loss
attributable to common shareholders of $2,278,000, or $ 0.23 per share compared
to a net loss attributable to common shareholders of $13,547,000, or $1.80 per
share, for the year ended December 31, 1999. Results from operations for both
years have been adjusted for preferred stock accretion and preferred stock
dividends paid. The reduction in net loss in 2000 was primarily due to the
Company's efforts at increasing sales revenues and reducing operating costs.

SALES, COST OF SALES AND GROSS PROFIT

     Net sales were $8,936,735 during the year ended December 31, 2000 compared
to $4,026,000 for the year ended December 31, 1999. This increase in sales is
due to substantial increases in sales of substantially all of the Company's
product lines.

                                        20
<PAGE>   21

     The following table presents the comparative sales revenue and percentage
of revenue derived from each of the Company's product lines recorded for the
years ending December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                 YEAR ENDED              YEAR ENDED
                                              DECEMBER 31, 2000       DECEMBER 31, 1999
                                            ---------------------   ---------------------
<S>                                         <C>                     <C>
Sales revenue.............................  $           8,936,735   $           4,026,000
                                            ---------------------   ---------------------
Product line:.............................  Percentage of revenue   Percentage of revenue
                                            ---------------------   ---------------------
  Multi-player games......................                    61%                     53%
  Single player games.....................                    30%                     21%
  Parts sales and other...................                     6%                     17%
  Lease participation.....................                     3%                      9%
                                            ---------------------   ---------------------
       Total..............................                   100%                    100%
                                            =====================   =====================
</TABLE>

     The Company recorded a gross margin of 45.3% in 2000 compared to a negative
gross margin in 1999. The improvement in 2000 was attributable to better
absorption of overhead expenses at the increased level of production.
Additionally, there was a write-down of inventory of $1.8 million in 1999 due to
the anticipated divestiture of the Company's gaming assets to Xertain, Inc. The
Company's sales in 2000 included substantial amounts of product which had
previously been included in this market write-down, which also contributed to
the improved gross margins.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses for the year ended December
31, 2000 were $4,503,000 compared to $6,787,000 during 1999. The decrease in
expenses for 2000 was primarily attributable to substantial reductions in
corporate management and engineering expenses during 2000.

INTEREST INCOME AND EXPENSE

     Net interest expense for the year ended December 31, 2000 was $284,000
compared to net interest expense of $147,000 for fiscal year 1999. Interest
expense increased due to increased debt service.

PREFERRED STOCK ACCRETION ADJUSTMENT

     During 2000, the Company recorded accretion adjustments on preferred stock
of $1,373,000, compared to $547,000 for 1999. These adjustments are explained
more fully in the Notes to the financial statements. The increase in 2000 was
attributable to the Company's increased reliance on convertible preferred stock
as a means for raising additional working capital.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998

     For the year ended December 31, 1999, the Company reported a net loss
attributable to common shareholders of $13,547,000, or $1.80 per share. The
Company recorded a net loss attributable to common shareholders of $4,710,000,
or $.63 per share, for the year ended December 31, 1998. Results from operations
for both years have been adjusted for preferred stock accretion and preferred
stock dividends paid. The increased loss in 1999 was primarily due to a write
down of inventory, property and equipment and intangible assets to market value
due to the Company's anticipated merger and divestiture of its gaming
manufacturing assets (See Note 11 -- Agreement for Merger and Note
12 -- Subsequent Events -- Gaming Asset Divestiture Agreement), a decline in
revenues and gross profit and increased expenses incurred related to the
Company's efforts to develop/enhance and license its products and introduce
those products into new markets.

                                        21
<PAGE>   22

SALES, COST OF SALES AND GROSS PROFIT

     Net sales were $4,026,000 during the year ended December 31, 1999 compared
to $8,509,000 in the year ended December 31, 1998. This decline in sales was
primarily due to a 66% decrease in sales of multi-player game sales from 1998 to
1999.

     The following table presents the comparative sales revenue and percentage
of revenue derived from each of the Company's product lines recorded for the
years ending December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                 YEAR ENDED              YEAR ENDED
                                              DECEMBER 31, 1999       DECEMBER 31, 1998
                                            ---------------------   ---------------------
<S>                                         <C>                     <C>
Sales revenue.............................  $           4,026,000   $           8,509,000
                                            ---------------------   ---------------------
Product line:.............................  Percentage of revenue   Percentage of revenue
                                            ---------------------   ---------------------
  Multi-player games......................                    53%                     78%
  Single player games.....................                    21%                      9%
  Parts sales and other...................                    17%                      8%
  Lease participation.....................                     9%                      5%
                                            ---------------------   ---------------------
       Total..............................                   100%                    100%
                                            =====================   =====================
</TABLE>

     The Company recorded a negative gross margin in 1999 compared to a gross
margin of 16.2% in 1998. The negative gross margin in 1999 was primarily due to
a $3,318,000 write-down of inventory to market value due to the anticipated
merger and divestiture of gaming manufacturing assets, and unabsorbed labor and
overhead costs attributable to lower production volume.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expense for the year ended December 31,
1999 was $6,787,000 compared to $5,819,000 during fiscal year 1998. The increase
in expenses for 1999 was primarily attributable to higher expenditures for
engineering and development of new products and enhancements to existing
products. Expenses also increased related to licensing the Company's products
and costs to introduce those products into new markets.

WRITE DOWN ASSETS TO MARKET VALUE

     The $1,337,000 expense recorded in 1999 represents a reduction in carrying
value of the Company's property and equipment and intangible assets to the
amount expected to be realized upon the closing of the anticipated divestiture
of the Company's gaming assets (See Note 12 -- Subsequent Events -- Gaming Asset
Divestiture Agreement).

INTEREST INCOME AND EXPENSE

     Net interest expense for the year ended December 31, 1999 was $147,000
compared to net interest income of $106,000 for fiscal year 1998. Interest
expense increased due to increased debt and interest income declined due to
reduced amounts invested in interest bearing accounts, and interest bearing
notes receivable from the sale of products.

PREFERRED STOCK ACCRETION ADJUSTMENT

     During 1999, the Company recorded accretion adjustments on preferred stock
of $547,000, compared to $297,000 for 1998. These adjustments are explained more
fully in the Notes to the financial statements. The increase in 1999 was
attributable to the Company's increased reliance on convertible preferred stock
as a means for raising additional working capital.

                                        22
<PAGE>   23

LIQUIDITY AND CAPITAL RESOURCES

PREFERRED STOCK ISSUES

     The Company raised proceeds from the issuance of convertible preferred
stock of $2.6 million in 2000, $3.7 million in 1999 and $2.8 million in 1998.
These stock issuances are discussed more fully in the Notes to the Financial
Statements. Preferred stock issuances have represented the Company's primary
source of non-operating cash over the three-year period. It is anticipated that
the Company will continue using preferred stock as a source for obtaining
additional capital.

CONVERTIBLE DEBT FINANCING

     During 1999, three-year convertible secured notes totaling $1.5 million
were issued to a group of investors including a current shareholder of the
Company. Interest was payable quarterly at a rate of 12% per annum, and the
notes had an original maturity date of June 1, 2002. During 2000, the holders of
$1.3 million of these notes exchanged the notes for preferred stock.
Additionally, the holders of $1.0 million of notes previously issued to redeem
common stock exchanged their notes for preferred stock. These arrangements are
more fully discussed in the Notes to the Financial Statements.

LIQUIDITY

     The Company had $321,000 and $140,000 in cash and cash equivalents as of
December 31, 2000 and December 31, 1999, respectively. The Company has
experienced negative cash flow from operations of $1.7 million, $5.7 million and
$2.1 million for the years ended December 31, 2000, 1999, and 1998,
respectively. As of April 5, 2001, the Company had cash of approximately
$305,000. The Company presently estimates that if current sales forecasts are
met its cash and anticipated funds from operations will be adequate to fund cash
requirements through May 2001. Management believes that the costly process of
product development and introduction will require the Company to seek additional
financing to successfully compete in the market place. As of March 30, 2001 the
Company had obtained commitments for $1 million of unsecured short-term debt
financing. The Company also is currently working with two outside lenders to
secure a revolving line of credit secured by the Company's receivables and
inventory. There can be no assurance that the Company will be successful in
obtaining any additional financing on terms acceptable to the Company. Failure
to obtain additional financing would have a material adverse effect on the
Company, and the Company would have to consider liquidating all or part of the
Company's assets and potentially discontinuing operations.

     The Registration Rights Agreements relating to the Company's recent
issuances of the Company's Series E, F, and G Convertible Preferred Stock (the
"Convertible Preferred Stock") require the Company to register the shares of
Common Stock issuable upon conversion of such preferred shares within 180 days
or pay certain liquidated damages. The first of these provisions will take
effect on April 30, 2001. These provisions include 2% of the gross proceeds of
the Convertible Preferred Stock sold if such Common Stock is not registered by
the initial due date, and 3.5% per month for each month thereafter that such
Common Stock is not registered. Beginning May 1, 2001, the liquidated damages
would be $103,000 and would increase substantially each succeeding month, as
further disclosed in the Notes to the Company's financial statements. A
registration statement relating to such Common Stock was filed February 14, 2001
but had not been declared effective as of March 30, 2001. Unless the Company can
register such shares by April 30, 2001 or obtain a waiver of such provisions
from the holders of the Company's Convertible Preferred Stock, the Company will
be contractually required to make such payments, which could have a material
adverse impact on the Company's liquidity.

COMMON STOCK REDEMPTION

     As disclosed in the Notes to the Financial Statements, during 1999 the
Company repurchased a total of 1.1 million shares of its outstanding Common
Stock in exchange for notes totaling $1.3 million. As noted above in
"Convertible Debt Financing" the holders of these notes exchanged them for
convertible preferred stock in 2000.

                                        23
<PAGE>   24

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

     The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events, including statements regarding the demand for the
Company's products in certain key jurisdictions. In addition, statements
containing expressions such as "believes," "anticipates," "hopeful" or "expects"
used in the Company's periodic reports on Forms 10-K and 10-Q filed with the SEC
are intended to identify forward looking statements. The Company cautions that
these and similar statements included in this report and in previously filed
periodic reports including reports filed on Forms 10-K and 10-Q are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statement, including, without
limitation, the following: the successful completion of the merger with Xertain,
Inc.; ability to obtain additional financing through leasing, equity or other
arrangements; the inability to successfully develop, license, manufacture and
market new products in a timely manner; decline in demand for gaming products or
reduction in the growth rate of new markets; increased competition; the effect
of economic conditions; a decline in the market acceptability of gaming;
political and economic instability in developing international markets; a
decrease in the desire of established casinos to upgrade machines in response to
added competition from newly constructed casinos; the loss of a distributor;
loss or retirement of key executives; approval of pending patent applications or
infringement upon existing patents; the effect of regulatory and governmental
actions; unfavorable determination of suitability by regulatory authorities with
respect to officers, directors or key employees; the limitation, conditioning or
suspension of any gaming license; adverse results of significant litigation
matters; fluctuation in exchange rates, tariffs and other barriers. Investors
are referred to the full discussion of risks and uncertainties associated with
forward-looking statements contained in this Form 10-K in ITEM 1. -- BUSINESS,
under the caption "Certain Factors". Many of the foregoing factors have been
discussed in the Company's prior SEC filings and, had the amendments to the
Securities Act of 1933 and Securities Exchange Act of 1934 become effective at a
different time, would have been discussed in an earlier filing.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's financial instruments include cash and cash equivalents and
long-term debt. The Company considers all financial instruments which are highly
liquid, have original maturities of three months or less to be cash and cash
equivalents which are readily convertible into cash. The Company's cash and cash
equivalents are not subject to significant interest rate risk due to the short
maturities of these instruments. The total outstanding long-term debt of the
Company as of December 31, 2000 was $714,000. The Company's long-term debt is
not subject to interest rate risk because all of the Company's long-term debt
has fixed rates of interest. The Company does not enter into contracts for
speculative or investment purposes.

     Gains and losses on foreign currency transactions are reconciled currently
in earnings. The Company's revenues from foreign markets are typically
negotiated for payment in United States currency, and the Company does not
consider foreign transactions to be a significant risk at this time.

                                        24
<PAGE>   25

ITEM 8.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Innovative Gaming Corporation of
America:

     We have audited the accompanying consolidated balance sheets of Innovative
Gaming Corporation of America and Subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Innovative Gaming Corporation
of America and Subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with generally accepted accounting
principles.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
negative cash flow from operations that raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to addressing the future liquidity and cash flow requirements of the Company are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

     Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule is
presented for purposes of complying with the Securities and Exchange Commission
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

                                            KAFOURY, ARMSTRONG & CO.

Reno, Nevada
April 2, 2001

                                        25
<PAGE>   26

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                AS OF DECEMBER 31,
                                                                -------------------
                                                                 2000        1999
                                                                -------    --------
<S>                                                             <C>        <C>
          ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................    $   321    $    140
  Accounts receivable, net of allowances of $113 and $280...      3,168         759
  Current portion of notes receivable.......................         93         188
  Inventories, net..........................................      4,123       4,576
  Prepaid expenses and other................................      1,233         655
                                                                -------    --------
       Total current assets.................................      8,938       6,318
NOTES RECEIVABLE, LESS CURRENT PORTION......................        190         268
INVESTMENT IN XERTAIN, INC..................................        989          --
PROPERTY AND EQUIPMENT, net.................................        350         707
INTANGIBLES ASSETS, net.....................................        627         765
                                                                -------    --------
       TOTAL ASSETS.........................................    $11,094    $  8,058
                                                                =======    ========
          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................    $ 1,106    $    585
  Accrued liabilities.......................................        769         561
  Notes payable -- current portion..........................        136         592
                                                                -------    --------
       Total current liabilities............................      2,011       1,738
  Notes payable -- net of current portion...................        578       3,131
                                                                -------    --------
       Total liabilities....................................      2,589       4,869
                                                                -------    --------
COMMITMENTS AND CONTINGENCIES (NOTE 9)......................         --          --
STOCKHOLDERS' EQUITY:
  Series B Convertible Preferred Stock, $.01 par value,
     nonvoting, 4,000 shares authorized, 30 and 280 shares
     outstanding, respectively..............................         --          --
  Series C Convertible Preferred Stock, $.01 par value,
     nonvoting, 2,000 shares authorized, 630 and 900 shares
     outstanding, respectively..............................         --          --
  Series D Convertible Preferred Stock, $.01 par value,
     nonvoting, 3,000 shares authorized, 1,132 and 1,612.5
     shares outstanding, respectively.......................         --          --
  Series E Convertible Preferred Stock, $.01 par value,
     nonvoting, 400,000 shares authorized, 210,000 and 0
     shares outstanding, respectively.......................          2          --
  Series F Convertible Preferred Stock, $.01 par value,
     nonvoting, 400,000 shares authorized, 306,250 and 0
     shares outstanding, respectively.......................          3          --
  Common stock, $.01 par value, 100,000,000 shares
     authorized, 11,930,837 and 8,952,366 shares issued and
     outstanding, respectively..............................        119          90
  Additional paid-in capital................................     42,085      34,525
  Accumulated deficit.......................................    (33,704)    (31,426)
                                                                -------    --------
       Total stockholders' equity...........................      8,505       3,189
                                                                -------    --------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...........    $11,094    $  8,058
                                                                =======    ========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
                                        26
<PAGE>   27

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         FOR THE YEAR    FOR THE YEAR    FOR THE YEAR
                                                            ENDED           ENDED           ENDED
                                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                             2000            1999            1998
                                                         ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>
NET SALES............................................      $ 8,936         $  4,026        $ 8,509
COST OF SALES........................................        4,891            5,313          7,134
WRITE DOWN INVENTORY TO MARKET VALUE.................           --            3,318             --
                                                           -------         --------        -------
       Gross profit..................................        4,045           (4,605)         1,375
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.........        4,503            6,787          5,819
WRITE DOWN ASSETS TO MARKET VALUE....................           --            1,337             --
                                                           -------         --------        -------
       Operating loss................................         (458)         (12,729)        (4,444)
INTEREST INCOME (EXPENSE), net.......................         (284)            (147)           106
                                                           -------         --------        -------
       Loss before income taxes......................         (742)         (12,876)        (4,338)
PROVISION FOR INCOME TAXES...........................           --               --             --
                                                           -------         --------        -------
       Net loss......................................         (742)         (12,876)        (4,338)
PREFERRED STOCK DIVIDENDS............................          163              124             75
PREFERRED STOCK ACCRETION............................        1,373              547            297
                                                           -------         --------        -------
       Net loss attributable to common
          shareholders...............................      $(2,278)        $(13,547)       $(4,710)
                                                           =======         ========        =======
LOSS PER SHARE OF COMMON STOCK.......................      $ (0.23)        $  (1.80)       $ (0.63)
                                                           =======         ========        =======
       Weighted average common shares outstanding....        9,774            7,525          7,535
                                                           =======         ========        =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        27
<PAGE>   28

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      CONVERTIBLE                                  UNREALIZED
                                   COMMON STOCK     PREFERRED STOCK   ADDITIONAL                 GAIN/(LOSS) ON
                                  ---------------   ---------------    PAID-IN     ACCUMULATED   AVAILABLE-FOR-
                                  SHARES   AMOUNT   SHARES   AMOUNT    CAPITAL       DEFICIT     SALE SECURITIES    TOTAL
                                  ------   ------   ------   ------   ----------   -----------   ---------------   --------
<S>                               <C>      <C>      <C>      <C>      <C>          <C>           <C>               <C>
BALANCE, DECEMBER 31, 1997......  7,535       75       --       --      29,575       (12,448)           --           17,202
  Series B preferred stock
    issued......................     --       --        3       --       2,804            --            --            2,804
  Preferred stock accretion
    adjustment..................     --       --       --       --         297          (297)           --               --
  Preferred stock dividend
    paid........................     --       --       --       --          --           (76)           --              (76)
  Net loss......................     --       --       --       --          --        (5,058)           --           (5,058)
                                  ------    ----     ----     ----     -------      --------          ----         --------
BALANCE, DECEMBER 31, 1998......  7,535       75        3       --      32,676       (17,879)           --           14,872
  Series C preferred stock
    issued......................     --       --        1       --       1,291            --            --            1,291
  Series D preferred stock
    issued......................     --       --        3       --       2,389            --            --            2,389
  Preferred stock conversions to
    common stock:
    Series B preferred stock....  1,410       14       (2)      --         (14)           --            --                0
    Series C preferred stock....    388        4       --       --          (4)           --            --                0
    Series D preferred stock....    674        7       (1)      --          (7)           --            --                0
  Series B preferred stock
    redemption..................     --       --       (1)      --      (1,100)           --            --           (1,100)
  Preferred stock accretion
    adjustments.................     --       --       --       --         547          (547)           --                0
  Preferred stock dividends.....      7       --       --       --           9          (124)           --             (115)
  Repurchase of common stock....  (1,100)    (11)      --       --      (1,302)           --            --           (1,313)
  Stock options exercised.......     38        1       --       --          40            --            --               41
  Net loss......................     --       --       --       --          --       (12,876)           --          (12,876)
                                  ------    ----     ----     ----     -------      --------          ----         --------
BALANCE, December 31, 1999......  8,952     $ 90        3     $ --     $34,525      $(31,426)           --         $  3,189
  Series E preferred stock
    issued......................     --       --      416        4       4,118            --            --            4,122
  Series F preferred stock
    issued......................     --       --      100        1         800            --            --              801
  Preferred stock conversions to
    common stock:
    Series B preferred stock....     89        1       --       --          (1)           --            --                0
    Series C preferred stock....    617        6       --       --          (6)           --            --                0
    Series D preferred stock....    826        8       --       --          (8)           --            --                0
  Preferred stock conversions to
    preferred stock:
    Series E preferred stock....     --       --     (206)      (2)     (2,058)           --            --           (2,060)
    Series F preferred stock....     --       --      206        2       2,060            --            --            2,062
  Preferred stock accretion
    adjustments.................     --       --       --       --       1,373        (1,373)           --                0
  Preferred stock dividends.....     --       --       --       --          --          (163)           --             (163)
  Stock issued for Xertain,
    Inc.........................  1,092       11       --       --         978            --            --              989
  Stock options exercised.......     30       --       --       --          33            --            --               33
  Stock issued for expenses.....    325        3       --       --         271            --            --              274
  Net loss......................     --       --       --       --          --          (742)           --             (742)
                                  ------    ----     ----     ----     -------      --------          ----         --------
BALANCE, DECEMBER 31, 1999......  11,931    $119      519     $  5     $42,085      $(33,704)           --         $  8,505
                                  ======    ====     ====     ====     =======      ========          ====         ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        28
<PAGE>   29

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               FOR THE YEAR    FOR THE YEAR    FOR THE YEAR
                                                                  ENDED           ENDED           ENDED
                                                               DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                   2000            1999            1998
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net loss.................................................      $  (742)        $(12,876)       $(4,338)
    Adjustments to reconcile net loss to cash flows used
      for operating activities --
    Depreciation and amortization..........................          593            1,194            936
    Provision for inventory obsolescence...................       (1,678)           1,170            571
    Write down inventory to market value...................         (767)           3,318             --
    Write down assets to market value......................           --            1,337             --
    Book value of fixed assets charged to cost of sales....           --               --             26
    Provision for bad debts................................           --              198             --
    Changes in operating assets and liabilities:
      Accounts and notes receivable........................       (2,236)             470            875
      Inventories..........................................        2,899               29            376
      Prepaid expenses and other...........................         (303)            (272)          (224)
      Accounts payable and accrued expenses................          527              309           (171)
      Customer deposits....................................           --               --           (157)
                                                                 -------         --------        -------
      Net cash used for operating activities...............       (1,707)          (5,123)        (2,106)
                                                                 -------         --------        -------
INVESTING ACTIVITIES:
  Release of restricted investments........................           --              700            300
  Inventory (capitalized for use in) returned from gaming
    operations.............................................           66             (511)           363
  Purchases of property and equipment......................          (84)             (77)          (255)
  Purchases of intangible assets...........................          (80)            (150)          (500)
                                                                 -------         --------        -------
      Net cash provided by (used for) investing
         activities........................................          (98)             (38)           (92)
                                                                 -------         --------        -------
FINANCING ACTIVITIES:
  Proceeds from financing agreements.......................           --            2,028            955
  Payments on long-term obligations........................         (559)            (840)          (402)
  Preferred stock dividends paid...........................          (99)            (125)           (60)
  Net proceeds from sale of common stock...................           33               40             --
  Net proceeds from sale of preferred stock................        2,611            3,681          2,804
  Payment to redeem preferred stock........................           --           (1,100)            --
                                                                 -------         --------        -------
      Net cash provided by financing activities............        1,986            3,684          3,297
                                                                 -------         --------        -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...........          181           (1,477)         1,099
CASH AND CASH EQUIVALENTS, beginning of period.............          140            1,617            518
                                                                 -------         --------        -------
CASH AND CASH EQUIVALENTS, end of period...................      $   321         $    140        $ 1,617
                                                                 =======         ========        =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
  Cash paid for interest...................................      $   249         $    214        $     1
                                                                 =======         ========        =======
  Cash paid (refund received) for income taxes.............      $     1         $      1        $    (3)
                                                                 =======         ========        =======
  Noncash transactions:
    Preferred Stock converted to common stock..............      $ 1,008         $  2,957        $ 4,000
                                                                 =======         ========        =======
    Preferred Stock dividends paid with common stock.......      $    --         $      9        $    12
                                                                 =======         ========        =======
    Notes payable issued to redeem common stock............      $    --         $  1,313        $    --
                                                                 =======         ========        =======
    Expenses paid with common stock........................      $   274         $     --        $    --
                                                                 =======         ========        =======
    Common stock issued for investment in Xertain, Inc.....      $   989         $     --        $    --
                                                                 =======         ========        =======
    Long-term obligations converted to preferred stock.....      $ 2,310         $     --        $    --
                                                                 =======         ========        =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        29
<PAGE>   30

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS AND RISK FACTORS

     Innovative Gaming Corporation of America ("the Company") was incorporated
in the State of Minnesota on September 19, 1991. The Company, through its wholly
owned subsidiary, Innovative Gaming, Inc.("IGI"), is in the business of
developing, manufacturing, marketing and distributing gaming equipment. The
Company distributes its products to certain gaming markets worldwide.

     On October 8, 1999, the Company entered into a non-binding letter of intent
with Equitex, Inc.("Equitex"), which outlined the terms of a contemplated merger
between the Company and Equitex's subsidiary, nMortgage, Inc. ("nMortgage") in a
tax-free exchange of stock (the "Merger"). On December 21, 1999, IGCA
Acquisition Corporation was created in anticipation of this merger. On December
31, 1999, the Company, Equitex and nMortgage executed a definitive merger
agreement governing the Merger. Pursuant to the merger agreement, the
stockholders of the Company will retain 25% of the surviving corporation to the
Merger on a post-merger basis. As a condition to the Merger, concurrent with the
merger, the Company must divest substantially all of its gaming assets. In
September 2000, the Company and Equitex terminated their merger agreement.

     Subsequent to canceling the nMortgage merger, in October 2000 the Company
entered into a plan to merge Xertain, Inc. into a subsidiary of the Company. The
details of this agreement are more fully described in Note 10.

     The Company has experienced negative cash flow from operations of $1.7
million, $5.1 million and $2.1 million for the years ended December 31, 2000,
1999, and 1998, respectively. As of March 30, 2001, the Company had cash of
approximately $89. The Company estimates that its cash and anticipated funds
from operations will be adequate to fund cash requirements through April 2001.
Management believes that the costly process of product development and
introduction will require the Company to seek additional financing to
successfully compete in the market place. As of March 30, 2001 the Company had
obtained commitments for $400 of invested capital and $1 million of unsecured
short-term debt financing. The Company also is currently working with two
outside lenders to secure a revolving line of credit secured by the Company's
receivables and inventory. There can be no assurance that the Company will be
successful in obtaining any additional financing on terms acceptable to the
Company. Failure to obtain additional financing would have a material adverse
effect on the Company, and the Company would have to consider liquidating all or
part of the Company's assets and potentially discontinuing operations.

USE OF ESTIMATES

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

REGULATION

     The manufacture, distribution and sale of the Company's products are
regulated by various jurisdictions and entities, including requirements to
obtain licenses and product approval. The Company is presently seeking licenses
and product approval in several jurisdictions. Failure to successfully obtain
licenses, approvals, or meet other regulatory requirements could materially
impact the future operation of the Company.

                                        30
<PAGE>   31

CERTAIN RISKS AND UNCERTAINTIES

     A significant portion of the Company's operations are generated from a
limited number of gaming jurisdictions. A change in general economic conditions
or the regulatory environment of these jurisdictions could adversely affect the
Company's operating results.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Innovative
Gaming Corporation of America and its wholly owned subsidiaries, Innovative
Gaming, Inc. and IGCA Acquisition Corp. All significant intercompany
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

     The Company considers all financial instruments which are highly liquid and
have original maturities of three months or less to be cash and cash equivalents
which are readily convertible to cash.

     The Company classifies all investments which are not cash equivalents as
available-for-sale securities with all gross unrealized gains or losses included
as a separate component of equity.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

     The Company has provided for an allowance for doubtful accounts for the
years ended December 31, 2000 and 1999, based on management's estimate of the
collectibility of accounts receivable.

PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost with depreciation provided for
using the straight-line method over the useful lives of the assets or the lease
term, whichever is shorter. Maintenance, repairs and minor renewals are expensed
when incurred. Depreciation expense recorded in the years ended December 31,
2000, 1999 and 1998 was $375, $852, and $584, respectively.

<TABLE>
<CAPTION>
                                            USEFUL LIFE       2000       1999
                                            -----------      -------    -------
<S>                                         <C>              <C>        <C>
Office equipment..........................  5 years          $   913    $   899
Display games.............................  5 years               66        142
Gaming operations equipment...............  2.5 years            265        790
Manufacturing equipment...................  5 years              359        359
Leasehold improvements....................  Life of lease        321        317
                                                             -------    -------
  Total property and equipment............                     1,924      2,507
  Less: Accumulated depreciation..........                    (1,256)    (1,482)
        Write down to market value........                      (318)      (318)
                                                             -------    -------
       Total property and equipment,
          net.............................                   $   350    $   707
                                                             =======    =======
</TABLE>

                                        31
<PAGE>   32

INVENTORIES

     Inventories are recorded at the lower of cost or market value. Cost is
determined according to the first-in, first-out accounting method. Inventories
consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                              2000      1999
                                                             ------    ------
<S>                                                          <C>       <C>
Game components and parts................................    $4,416    $5,320
Work in process..........................................       422       418
Finished goods...........................................     1,926     3,926
Inventory reserves.......................................       (91)   (1,770)
Write down to market value...............................    (2,550)   (3,318)
                                                             ------    ------
       Total inventories, net............................    $4,123    $4,576
                                                             ======    ======
</TABLE>

INTANGIBLES

     The Company amortizes intangibles on a straight-line basis over their
estimated economic lives while the technology are being utilized (See Note 5).

PRODUCT SALES/REVENUE RECOGNITION

     The Company makes product sales for cash, on normal terms of 90 days or
less, and over longer term installments until the purchase price is paid.
Revenues from the sale of products are recognized upon transfer of title and
risk of loss to the customer. Deposits received from customers in advance of
delivery are deferred.

CONCENTRATIONS OF RISK

     During 2000, the Company made sales to Delta Automation and Casino Arizona
accounting for 22.26% and 12.76% of gross sales respectively. During 1999, the
Company made sales to a distributor, Black Hills Novelty Co., which accounted
for 18.9% of sales for the year. During 1998, a majority of the Company's sales
were to one customer, a distributor, Aristocrat Leisure Industries
("Aristocrat"), which accounted for 54.1% of sales. In March 2000, the Company
and Aristocrat terminated the distribution agreement. For the years ended
December 31, 2000, 1999, and 1998, no other distributors or customers accounted
for greater than 10% of sales.

     The Company maintains deposits in excess of federally insured limits.
Statement of Financial Accounting Standards No. 105 identifies these items as a
concentration of risk requiring disclosure, regardless of the degree of risk.
The risk is managed by maintaining all deposits in high quality financial
institutions.

     The financial instruments that subject the Company to concentrations of
credit risk consists principally of accounts and notes receivable. Accounts and
notes receivable are concentrated in specific legalized gaming jurisdictions.
Notes receivable are collateralized by the equipment sold. The Company has no
secured interest in the trade accounts receivable.

     At December 31, 2000, the following concentrations of credit risk existed:

<TABLE>
<S>                                                           <C>
Arizona.....................................................   25%
Minnesota...................................................   21%
Holland.....................................................   21%
Nevada......................................................    7%
Iowa........................................................    6%
New Jersey..................................................    6%
Other (less than 6% each)...................................   14%
                                                              ---
       Total................................................  100%
                                                              ===
</TABLE>

                                        32
<PAGE>   33

RESEARCH AND DEVELOPMENT COSTS

     The Company engages in the development of new and existing products.
Research and development costs are expensed as incurred. The Company expensed
approximately $1,190, $3,309 and $2,353 for the years ended December 31, 2000,
1999 and 1998, respectively. These amounts are included in selling, general and
administrative expenses.

INCOME TAXES

     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 -- "Accounting for Income Taxes" (SFAS
No. 109), whereby deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be removed or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

     To the extent the amount deductible for income tax purposes from stock
option plans exceeds the amount charged to operations for financial statement
purposes, the related tax benefits are credited to capital stock when realized.

EARNINGS PER SHARE

     The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" -- (SFAS No. 128). The earnings per share data for all
periods presented is based on weighted average common shares outstanding and on
the same basis as "basic" earnings per share calculated under SFAS No. 128.
Diluted earnings per share is not presented because the resulting earnings per
share would be antidilutive for each period reported.

FOREIGN CURRENCY TRANSACTIONS

     Transactions that occur in currencies other than U.S. dollars are
translated to U.S. dollars for financial reporting purposes. Gains and losses
from this process are recorded in the results of operations.

LONG-LIVED ASSETS

     SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " established accounting standards for the
recognition and measurement of impairment of long-lived assets and certain
identifiable intangibles and goodwill either to be held or disposed of.

     Management reviews long-lived assets, including intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For assets which produce future cash flows, an
estimate of undiscounted future cash flows is compared to the carrying amount to
determine if impairment exists. For assets which do not produce quantifiable
future cash flows, such as intangibles, impairment is measured at the enterprise
level. At December 31, 1999, the carrying values of long-lived assets were
evaluated, and taking into consideration the planned sale of the gaming assets
to Xertain, Inc. which was a prerequisite to the proposed merger with
nMortgage.com, the carrying values were reduced to reflect the amount expected
to be realized upon the closing of the asset sale and merger. The total
impairment amount of $1,337, which is presented separately on the face of the
statement of operations, was attributable to the write-down to market value of
property and equipment in the amount of $318 and intangible assets in the amount
of $1,019. No impairment existed at December 31, 2000 or 1998.

                                        33
<PAGE>   34

2.  RELATIONSHIP WITH LAKES GAMING, INC.:

     Lakes Gaming, Inc. ("LGI") (formerly Grand Casinos, Inc.) is in the
business of managing and developing casinos. Lyle Berman, who was Chairman of
the Board of the Company until June 24, 1998, is a principal shareholder and
Chairman of the Board of LGI, and was Chief Executive Officer of LGI from
October 1991 through March 1998. Mr. Berman served on the Board of Directors of
the Company until July 16, 1999. Under an existing machine purchase agreement,
LGI may purchase up to an aggregate of 125 of the Company's multi-station
blackjack, craps and roulette games in quantity purchases at distributor level
prices. Previous quantity sales were also made to LGI at distributor level
prices for the purpose of testing, evaluating and marketing the Company's
blackjack, craps and roulette games. Under a 1998 agreement between the Company
and LGI, used multi-player machines that LGI previously purchased from the
Company could be placed on consignment with the Company to be refurbished and
sold into legal markets. The proceeds from sales of up to three of the
consignment games could be applied to the purchase of one new Bonus Streak game
from the Company and with minimum proceeds of $5,000 to be credited to LGI for
each game sold by the Company. During 1998, LGI submitted 15 such used
multi-player games to the Company for sale under the consignment agreement. In
the first quarter of fiscal 1999, the Company delivered 5 Bonus Streak games to
casinos managed by LGI in exchange for the used multi-player games submitted to
the Company for sale under this agreement. The Company made sales of six Bonus
Streak(TM) games and no multi-player machine sales to LGI during 1998 and no
machine sales in 1999 and 2000.

     In April 1999, in order to expedite the timing of gaming regulatory
approval in certain jurisdictions, the Company repurchased 700,000 shares of
Common Stock from LGI in exchange for convertible notes totaling $875. On
November 1, 2000 a portion of these notes were redeemed as discussed in Note 6.

3.  NOTES RECEIVABLE:

     The Company has granted certain customers extended payment terms under
sales contracts. These contracts are generally for terms of one to five years
with interest recognized at prevailing rates and are collateralized by the
equipment sold. The contracts typically have no stated interest to be paid, and
interest is imputed at prime plus 2%. At December 31, 2000, the face amount of
notes receivable was $283. The carrying value of notes receivable approximates
their fair value. The following table represents the estimated future
collections of notes receivable, net of amounts to be recognized as interest
income, at December 31, 2000:

<TABLE>
<CAPTION>
                                                              ESTIMATED
                                                              RECEIPTS
                                                              ---------
<S>                                                           <C>
YEARS ENDING DECEMBER 31,
2001........................................................    $ 93
2002........................................................      62
2003........................................................      62
2004........................................................      62
2005........................................................       4
                                                                ----
       Total................................................    $283
                                                                ====
</TABLE>

                                        34
<PAGE>   35

4.  INTANGIBLE ASSETS:

     Intangible assets consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                            USEFUL LIFE       2000       1999
                                                            -----------      -------    -------
<S>                                                         <C>              <C>        <C>
Product patent and technology rights......................  5 to 10 years    $ 3,162    $ 3,082
Nevada distribution rights................................  10 years             250        250
                                                                             -------    -------
  Total intangible assets.................................                     3,412      3,332
  Less: accumulated amortization..........................                    (1,766)    (1,548)
        write down to market value........................                    (1,019)    (1,019)
                                                                             -------    -------
       Total intangible assets, net.......................                   $   627    $   765
                                                                             =======    =======
</TABLE>

     Amortization recorded for intangibles was $218, $977 and $352 in the years
ended December 31, 2000, 1999, and 1998, respectively.

     During 1998, the Company entered into agreements with various companies to
acquire rights to technology and intellectual property for use in games which
the Company intends to develop, manufacture and market totaling $750. During
1999, $650 of these costs were fully written down based on management's
estimation that no economic benefit would be realized in the future.

     During 2000, the Company entered into agreements with various companies to
acquire rights to domain name, technology and intellectual property for use in
games which the Company intends to develop, manufacture and market totaling $80.

5.  FINANCING ARRANGEMENTS:

NOTES PAYABLE

     Notes payable consists of convertible notes issued for the repurchase of
Common Stock of the Company from Lakes Gaming, Inc. and another shareholder,
convertible notes issued to a group of investors as part of a financial
restructuring to raise operating capital, amounts owed IGT, a wholly-owned
subsidiary of International Game Technology, for the purchase of slant top slot
machines incorporated in the Company's Bonus Streak game, an operating capital
loan from Finova Capital Corporation.

     In March 1998, Innovative Gaming, Inc., a wholly-owned subsidiary of the
Company, entered into a loan commitment securing available funding of $2 million
from Finova Capital Corporation. The initial funding of approximately $910 was
completed on April 13, 1998. The loan is payable in 36 equal installments
including interest paid in arrears at a rate of 12.06 percent. This financing is
secured by certain of the Company's long-term receivables and a corporate
guarantee from the Company. The Company's borrowing capacity under this
arrangement was dependent upon the level of receivables generated through
"bucket sales" agreements. The Company did not borrow any additional amounts
under this arrangement.

     In March 1999, in order to expedite the timing of gaming regulatory
approval in certain jurisdictions, the Company repurchased 400,000 shares of its
outstanding Common Stock, at market price, from a shareholder. The Company
entered into a Stock Redemption Agreement with such shareholder pursuant to
which the Company redeemed 400,000 shares of Company Common Stock beneficially
owned by such shareholder in exchange for a four year convertible note in the
amount of $438 and a warrant to purchase 50,000 shares of the Company's Common
Stock. On November 1, 2000, $437 was converted to series E preferred stock. In
April 1999, the Company redeemed 700,000 shares of Common Stock from Lakes
Gaming, Inc. in exchange for a four year convertible note in the amount of $875
and a warrant to purchase 87,500 shares of the Company's Common Stock. This
redemption was also to expedite the timing of gaming regulatory approval in
certain jurisdictions. These notes are unsecured, pay interest of 5% per annum
and are convertible to Common Stock of the Company at $1.09375 and $1.25 per
share, respectively. Interest is paid quarterly on the first note and is due at
maturity on the second note. The

                                        35
<PAGE>   36

notes may not be converted in the first year following issuance. The exercise
price of the warrants is the same as the conversion price of the notes. On
November 1, 2000, $575 of the convertible debt was converted to series E
preferred stock.

     On June 1, 1999, the Company completed a financial restructuring which
included a private placement of three-year convertible secured notes totaling
$1,550 issued to a group of investors. Interest on such notes is paid quarterly
at a rate of 12% per annum, and the principal balance is due June 1, 2002. At
any time after June 1, 2000, and until the principal balance is paid in full,
the holders of the notes may convert the notes into Common Stock of the Company
at a conversion price of $1.50 per share. The note holders may not convert the
notes into Common Stock if such conversion would result in beneficial ownership
by such note holder of more than 4.9% of the Company's issued and outstanding
Common Stock. These notes are secured by the furniture, fixtures and equipment,
inventory and intangible property of the Company. On November 1, 2000, $1,300 of
the convertible debt was converted to series E preferred stock.

     Under the agreement with IGT, the Company shares equally in the net
revenues received from customers under participation agreement sales until IGT
is paid in full for the sales price of the slant top slot machine acquired by
the Company. Thereafter the Company receives 90% and IGT receives 10% of the net
revenues from the customer. For cash sales, the Company must pay IGT the
purchase price of the slant top slot machines from the proceeds of the sale. IGT
has agreed to accept the return of the slant top slot machines and grant credit
for the balance due on the games returned. Management has estimated the portion
of current notes payable to represent those amounts expected to be paid to IGT
under participation arrangements and from cash sales in 2000.

     The following table represents the estimated future payments of notes
payable at December 31, 2000:

<TABLE>
<CAPTION>
                                                              ESTIMATED
                                                              PAYMENTS
                                                              ---------
<S>                                                           <C>
YEARS ENDING DECEMBER 31,
  2001......................................................     136
  2002......................................................     254
  2003......................................................       4
  2004......................................................     320
                                                                ----
       Total................................................    $714
                                                                ====
</TABLE>

6.  STOCKHOLDERS' EQUITY:

PREFERRED STOCK

     On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000, prior to any offering expenses.
The stated par value per share is $.01, resulting in a total par value of thirty
dollars being recorded as Series B Convertible Preferred Stock, and the balance
of approximately $3.0 million is included in Additional Paid-in Capital. An
annual dividend of 4% shall be paid quarterly in arrears either in Preferred
Stock of the Company or cash at the Company's discretion.

     Each share of Series B Preferred Stock is convertible into shares of the
Company's Common Stock at a conversion price of 91% of the three consecutive day
average of the lowest closing bid price of the Company's Common Stock over the
twenty-day trading period ending the day prior to conversion (the "Conversion
Price"). The Conversion Price may not exceed $5.16, which represents 135% of the
ten-day average of the closing bid price of the Company's Common Stock ending on
May 12, 1998. The maximum number of shares of Common Stock that may be issued
upon conversion is 1,505,000. In the event a holder of Series B Preferred Stock
is unable to convert shares of Preferred Stock into Common Stock at a discount
because 1,505,000 shares have been issued at a discount, then the Company may
either 1) redeem any unconverted Series B Preferred Stock for cash at a price
equal to 115% of the liquidation

                                        36
<PAGE>   37

value of the shares or 2) issue Series C Convertible Preferred Stock in an
amount equal to the economic value that would have been received by such holder
if able to convert at a discount. The Company has the right to redeem the Series
B Preferred Stock at 115% of par in cash. On June 1, 1999, the Company redeemed
$1,100 of the Series B Preferred Stock at 100% of par in cash. As of December
31, 1999, shares representing $1,620 of Series B Preferred Stock had been
converted into Common Stock, and all of the remaining outstanding balance of
$280 of Series B Preferred Stock is convertible into Common Stock, at the
election of the holder thereof. All outstanding shares of Series B Preferred
Stock will automatically be converted into Common Stock on June 1, 2001. A
holder of Series B Preferred Stock may not convert such stock into Common Stock
if, following such conversion, the holder beneficially owns in excess of 4.9% of
the Company's Common Stock.

     The 9% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series B
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $297, which reduces income available for holders of the Company's
Common Stock and therefore reduces earnings per share on a pro rata basis over
the period from issuance of the Series B Preferred Stock to the earliest
conversion date. Income available to holders of Common Stock was reduced by
approximately $141, $144 and $12 during the second, third and fourth quarters of
1998, respectively.

     On June 1, 1999, as part of a financial restructuring, the Company issued
1,400 shares of Series C Convertible Preferred Stock (the "Series C Preferred
Stock") at a price of $1,000 per share in a private placement for total proceeds
of $1,400 prior to any offering expenses. The stated par value per share is
$.01, resulting in a total par value of fourteen dollars being recorded as
Series C Convertible Preferred Stock, and the balance of approximately $1.4
million is included in Additional Paid-in Capital. An annual dividend of 4%
shall be paid quarterly in arrears either in Preferred Stock of the Company or
cash at the Company's discretion. Each share of Series C Preferred Stock is
convertible into shares of the Company's Common Stock at a conversion price of
91% of the three consecutive day average of the lowest closing bid price of the
Company's Common Stock over the twenty-day trading period ending the day prior
to conversion (the "Conversion Price"). The Conversion Price may not exceed
$1.877, which represents 135% of the ten day average of the closing bid price of
the Company's Common Stock ending on May 28, 1999. As of December 31, 1999,
shares representing $500 of Series C Preferred Stock had been converted into
Common Stock, and all of the remaining outstanding balance of $900 of Series C
Preferred Stock is convertible into Common Stock, at the election of the holder
thereof. The maximum number of shares of Common Stock that may be issued upon
conversion is 1,331,500. The Company has the right to redeem the Series C
Preferred Stock at 115% of par in cash beginning August 31, 1999. The effective
date of the Registration Statement filed with the Securities and Exchange
Commission relating to the Common Stock to be issued upon conversion of the
Series C Convertible Preferred Stock was September 24, 1999, and all necessary
gaming regulatory approvals have been received. All outstanding shares of Series
C Preferred Stock will automatically be converted into Common Stock on June 1,
2001. A holder of Preferred Stock may not convert such stock into Common Stock
if, following such conversion, the holder beneficially owns in excess of 4.9% of
the Company's Common Stock.

     The 9% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series C
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $138, which reduces income available for holders of the Company's
Common Stock and therefore reduces earnings per share on a pro rata basis over
the period from issuance of the Series C Preferred Stock to the earliest
conversion date. Income available to holders of Common Stock was reduced by
approximately $33, $87 and $18 during the second, third and fourth quarters of
1999, respectively.

     During October 1999, the Company issued a total of 2,450 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock") at a price of
$1,000 per share in a private placement for total proceeds of $2,450, prior to
any offering expenses, and warrants (the "Warrants") to acquire 245,000 shares
of the Company's Common Stock at $2.75 per share. The stated par value per share
is $.01, resulting in a total par value of twenty-five dollars being recorded as
Series D Convertible Preferred Stock,
                                        37
<PAGE>   38

and the balance of approximately $2.4 million is included in Additional Paid-in
Capital. An annual dividend of 6% shall be paid quarterly in arrears either in
Common Stock of the Company or cash at the Company's discretion. Each share of
Series D Preferred Stock is convertible into shares of the Company's Common
Stock at a conversion price of the lesser of $3.00 or 75% of the average of
closing bid price of the Company's Common Stock for the five consecutive days
immediately preceding the conversion date. The Company has reserved 1,750,000
shares of Common Stock for issuance upon conversion of the Series D Preferred
Stock and 245,000 shares of Common Stock to be issued upon the exercise of the
Warrants. The Company has the right to redeem the Series D Preferred Stock at
135% of par in cash if the market price is lower than the market price on the
date the Series D Preferred Stock was issued. A Registration Statement related
to the Common Stock to be issued has been filed by, and at the expense of, the
Company pursuant to obligations contained in Registration Rights Agreements
dated October 14 to 22, 1999. Such Registration Statement has not been declared
effective by the Securities and Exchange Commission.

     The 25% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series D
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $816, which reduces income available for holders of the Company's
Common Stock and therefore reduces earnings per share on a pro rata basis over
the period from issuance of the Series D Preferred Stock to the earliest
conversion date. Income available to holders of Common Stock is being reduced by
approximately $408 in the fourth quarter of 1999 and approximately $408 in the
first quarter of 2000. All outstanding shares of Series D Preferred Stock will
automatically be converted into Common Stock on the fifth anniversary of its
issuance. A holder of Preferred Stock may not convert such stock into Common
Stock if, following such conversion, the holder beneficially owns in excess of
4.9% of the Company's Common Stock.

     The Registration Rights Agreements relating to the Company's October 1999
issuance of the Company's Series D Convertible Preferred Stock require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or by April 13, 2000 or pay certain liquidated
damages. These provisions include 2% of the gross proceeds of the Series D
Convertible Preferred Stock sold (i.e. $49) if such Common Stock is not
registered by April 13, 2000 and 3.5% per month (i.e. $86) for each month
thereafter that such Common Stock is not registered. A registration statement
relating to such Common Stock was filed with the Securities and Exchange
Commission on January 13, 2000. A majority of the Company's holders of Series D
Convertible Preferred Stock agreed to amend the Registration Rights Agreement
relating to such shares to provide that the Company can issue additional shares
of Common Stock, at its option, in lieu of any cash payment due for liquidated
damages resulting from the delay in having such registration statement declared
effective.

     On November 1, 2000, the Company issued a total of 416,250 shares of Series
E Convertible Preferred Stock (the "Series E Preferred Stock") at a price of $10
per share in a private placement for total proceeds of $4,162, prior to any
offering expenses, and warrants (the "Warrants") to acquire 210,000 shares of
the Company's Common Stock at $1.00 per share. The stated par value per share is
$.01, resulting in a total par value of four hundred sixteen dollars being
recorded as Series E Convertible Preferred Stock, and the balance of
approximately $4,118 is included in Additional Paid in Capital. An annual
dividend of 6% shall be paid quarterly in arrears either in Common Stock of the
Company or cash at the Company's discretion. Each share of Series E Preferred
Stock is convertible into shares of the Company's Common Stock at a conversion
price of the lesser of $.8125 or 70% of the average of closing bid price of the
Company's Common Stock for the five consecutive days immediately preceding the
conversion date. The Company has reserved 1,935,255 shares of Common Stock for
issuance upon conversion of the Series E Preferred Stock and 416,250 shares of
Common Stock to be issued upon the exercise of the Warrants. The Company has the
right to redeem the Series E Preferred Stock at 135% of par in cash if the
market price is lower than $1.50 per share. A registration statement relating to
such Common Stock was filed February 14, 2001 but had not been declared
effective as of March 30, 2001.

     The 25% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series E
Preferred Stock was issued. The total value of the
                                        38
<PAGE>   39

beneficial conversion feature or dividend is $715, which reduces income
available for holders of the Company's Common Stock and therefore reduces
earnings per share on a pro rata basis over the period from issuance of the
Series E Preferred Stock to the earliest conversion date. Income available to
holders of Common Stock is being reduced by $715 in the fourth quarter of 2000.
All outstanding shares of Series E Preferred Stock will automatically be
converted into Common Stock on the fifth anniversary of its issuance. A holder
of Preferred Stock may not convert such stock into Common Stock if, following
such conversion, the holder beneficially owns in excess of 4.9% of the Company's
Common Stock.

     The Registration Rights Agreements relating to the Company's November 2000
issuance of the Company's Series E Convertible Preferred Stock require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or by April 30, 2001 or pay certain liquidated
damages. These provisions include 2% of the gross proceeds of the Series E
Convertible Preferred Stock sold (i.e. $42) if such Common Stock is not
registered by April 30, 2001 and 3.5% per month (i.e. $74) for each month
thereafter that such Common Stock is not registered. A registration statement
relating to such Common Stock was filed February 14, 2001 but had not been
declared effective as of March 30, 2001.

     On November 1, 2000, the Company issued a total of 100,000 shares of Series
F Convertible Preferred Stock (the "Series F Preferred Stock") at a price of $10
per share in a private placement for total proceeds of $1,000, prior to any
offering expenses, and warrants (the Warrants") to acquire 100,000 shares of the
Company's Common Stock at $1.00 per share. The stated par value per share is
$.01, resulting in a total par value of one thousand dollars being recorded as
Series F Convertible Preferred Stock, and the balance of approximately $999 is
included as Additional Paid-in Capital. An annual dividend of 6% shall be paid
quarterly in arrears either in Common Stock of the Company or cash at the
Company's discretion. Each share of Series F Preferred Stock is convertible into
shares of the Company's Common Stock at a conversion price of the lesser of
$.8125 or 70% of the average of closing bid price of the Company's Common Stock
for the five consecutive days immediately preceding the conversion date.
Concurrent with this issuance, the Company converted 206,250 shares of Series F
Preferred Stock with a private investor for 206,250 shares of Series F preferred
stock. The Company has reserved 2,062,096 shares of Common Stock for these
issuances upon conversion of the Series F Preferred Stock and 100,000 shares of
Common Stock to be issued upon the exercise of the Warrants. The Company has the
right to redeem the Series F Preferred Stock at 135% of par in cash if the
market price is lower than $1.50 per share. A registration statement relating to
such Common Stock was filed February 14, 2001 but had not been declared
effective as of March 30, 2001.

     The 30% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date of the Series F
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $250, which reduces income available for holders of the Company's
Common Stock and therefore reduces earnings per share on a pro rat basis over
the period from issuance of the Series F Preferred Stock to the earliest
conversion date. Income available to holders of Common Stock is being reduces by
$250 in the fourth quarter of 2000. All outstanding shares of Series F Preferred
Stock will automatically be converted into Common Stock on the fifth anniversary
of its issuance. A holder of Preferred Stock may not convert such stock into
Common Stock if, following such conversion, the holder beneficially owns in
excess of 4.9% of the Company's Common Stock.

     The Registration Rights Agreements relating to the Company's November 2000
issuance of the Company's Series F Convertible Preferred Stock require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or by April 30, 2001 or pay certain liquidated
damages. These provisions include 2% of the gross proceeds of the Series F
Convertible Preferred Stock sold (i.e. $61) if such Common Stock is not
registered by April 30, 2001 and 3.5% per month (i.e. $107) for each month
thereafter that such Common Stock is not registered. A registration statement
relating to such Common Stock was filed February 14, 2001 but had not been
declared effective as of March 30, 2001.

                                        39
<PAGE>   40

     On December 1, 2000, the Company approved the issuance of 3,000 shares of
Preferred Stock as Series G 6% Convertible Preferred Stock with a par value of
$.01 per share, and a stated value of $1,000 per share. As of December 31, 2000
no shares had been issued under this series.

COMMON STOCK REDEMPTION

     In March 1999, in order to expedite the timing of gaming regulatory
approval in certain jurisdictions, the Company repurchased 400,000 shares of its
outstanding Common Stock, at market price, from a shareholder. The Company
entered into a Stock Redemption Agreement with such shareholder pursuant to
which the Company redeemed 400,000 shares of Company Common Stock beneficially
owned by such shareholder in exchange for a four year convertible note and a
warrant to purchase 50,000 shares of the Company's Common Stock. In April 1999,
the Company redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on
substantially the same terms as the redemption described above. This redemption
was also to expedite the timing of gaming regulatory approval in certain
jurisdictions. These notes are unsecured, pay interest of 5% per annum and are
convertible at the closing market price of the Company's Common Stock on the
date of the issuance of the notes. The notes may not be converted in the first
year following issuance. The exercise price of the warrants will be the same as
the conversion price of the notes. The Company also granted "piggyback"
registration rights for shares of Common Stock issuable upon conversion of both
the notes and the warrants.

STOCK OPTIONS AND WARRANTS

     The Company has a 1992 Employee Stock Option and Compensation Plan (the
"1992 Plan"), pursuant to which options and other awards to acquire an aggregate
of 1,350,000 shares of the Company's common stock may be granted. Stock options,
stock appreciation rights, restricted stock, other stock and cash awards may be
granted under the Plan. All employees are eligible to participate in the 1992
Plan. The Company also has a 1998 Non-Executive Stock Option Plan (the "1998
Plan"), pursuant to which options to acquire an aggregate of 492,950 shares of
the Company's common stock may be granted. Non-Executive employees who are
full-time employees of the Company are eligible to participate in the 1998 Plan.
Both the 1992 Plan and the 1998 Plan are administered by a stock option
committee which has the discretion to determine the number and purchase price of
shares subject to stock options (which may be below the fair value of the common
stock on the date thereof), the term of each option and the time or times during
its term when the option becomes exercisable. Options are generally exercisable
in equal amounts over a five-year period from the date of grant. During 1995 and
1994, the exercise prices of certain options ranging from $6.00 to $15.75 were
reduced to $4.00 (fair market value on the date of repricing). On October 8,
1996, the exercise prices of certain options ranging from $7.00 to $11.50 were
reduced to $4.75 (fair market value on the date of repricing). In December 1998,
current employees of the Company were allowed to elect repricing of outstanding
options, adjusting the exercise price to the current market price in exchange
for delaying the vesting of one-half of all then unvested options by twelve
months. All current employees elected to reprice their options under the terms
offered. The existing options were cancelled and the repriced options were
recorded as new grants. The new grants to all Non-Executive employees totaled
313,050, which were issued from the 1998 Plan.

                                        40
<PAGE>   41

     The Company accounts for both stock option plans under Accounting
Principles Board ("APB") Opinion No. 25 -- "Accounting for Stock Options Issued
to Employees", under which no compensation cost has been recognized. Statement
of Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation"
(SFAS No. 123), was issued in 1995 and, if fully adopted, changes the methods
for recognition of cost on plans similar to that of the Company. Adoption of
SFAS No. 123 is optional; however, pro forma disclosures as if the Company had
adopted the cost recognition method are required. Had compensation cost for the
Plan been determined consistent with SFAS No. 123, the Company's results of
operations and earnings per share would have been changed to the following pro
forma amounts:

<TABLE>
<CAPTION>
                                                            2000        1999
                                                           -------    --------
<S>                                         <C>            <C>        <C>
Net loss:.................................  As reported    $(2,278)   $(13,547)
                                            Pro forma      $(2,633)   $(14,341)
Primary and fully-diluted EPS:............  As reported    $ (0.23)   $  (1.80)
                                            Pro forma      $ (0.26)   $  (1.91)
</TABLE>

     A summary of the status of the 1992 Employee Stock Option and Compensation
Plan at December 31, 2000, 1999 and 1998, and changes during the periods then
ended is presented in the tables and narrative below:

<TABLE>
<CAPTION>
                                  DECEMBER 31, 2000      DECEMBER 31, 1999      DECEMBER 31, 1998
                                 --------------------   --------------------   --------------------
                                             WTD AVG                WTD AVG                WTD AVG
                                  NUMBER     EX PRICE    NUMBER     EX PRICE    NUMBER     EX PRICE
                                 ---------   --------   ---------   --------   ---------   --------
<S>                              <C>         <C>        <C>         <C>        <C>         <C>
Outstanding at beginning of
  period......................     745,000    $1.53       610,000    $1.56       825,400    $4.69
  Granted.....................     300,000     1.00       250,000     2.06       550,400     1.14
  Exercised...................     (28,000)    1.13            --       --            --       --
  Forfeited...................    (150,000)    1.88      (115,000)    2.87      (765,800)    4.63
  Expired.....................          --       --            --       --            --       --
                                 ---------              ---------              ---------
Outstanding at end of
  period......................     875,000    $1.37       745,000    $1.53       610,000    $1.56
                                 =========              =========              =========
Exercisable at end of
  period......................     875,000    $1.37       383,000    $1.30       361,800    $1.74
Weighted average fair value of
  options granted on grant
  date........................   $     .99              $    1.76              $    0.83
</TABLE>

DETAIL COMPOSITION OF OPTIONS OUTSTANDING DECEMBER 31, 2000:

<TABLE>
<CAPTION>
                                 AVG. CONTRACTUAL
    OPTIONS        EXERCISE       LIFE REMAINING         OPTIONS
  OUTSTANDING       PRICE            (YEARS)           EXERCISABLE
  -----------      --------      ----------------      -----------
  <S>              <C>           <C>                   <C>
  35,000.....      $4.00               4.29               35,000
  600,000....       1.00               8.00              600,000
  40,000.....       1.13               7.96               40,000
  200,000....      $2.0625             8.72              200,000
  -----------                                            -------
      875,000                                            875,000
  ===========                                            =======
</TABLE>

     The fair value of each option granted under the 1992 Employee Stock Option
and Compensation Plan is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for the 2000, 1999 and
1998 grants: risk-free interest rate of 5.0, 6.5 and 4.9; expected dividend
yield of 0.0 percent; expected lives of 5 years; expected volatility of 179.47,
121.5, and 91.5 percent, respectively.

                                        41
<PAGE>   42

     A summary of the status of the 1998 Non-Executive Stock Option Plan at
December 31, 2000 and 1999 and changes during the periods then ended is
presented in the table and narrative below:

<TABLE>
<CAPTION>
                                                        DECEMBER 31, 2000      DECEMBER 31, 1999
                                                       -------------------    -------------------
                                                                  WTD AVG                WTD AVG
                                                       NUMBER     EX PRICE    NUMBER     EX PRICE
                                                       -------    --------    -------    --------
<S>                                                    <C>        <C>         <C>        <C>
Outstanding at beginning of period.................    414,625     $1.36      313,050     $1.11
  Granted..........................................         --        --      194,250      1.64
  Exercised........................................     (9,975)     1.08      (37,600)     1.07
  Forfeited........................................    (89,975)     1.48      (55,075)     1.14
  Expired..........................................         --        --           --        --
                                                       -------                -------
Outstanding at end of period.......................    314,675     $1.33      414,625     $1.36
                                                       =======                =======
Exercisable at end of period.......................    180,600     $1.33      130,000     $1.23
Weighted average fair value of options granted on
  grant date.......................................    $    --                $  1.27
</TABLE>

          DETAIL COMPOSITION OF OPTIONS OUTSTANDING DECEMBER 31, 2000:

<TABLE>
<CAPTION>
    OPTIONS      AVG. CONTRACTUAL    LIFE REMAINING     OPTIONS
  OUTSTANDING     EXERCISE PRICE        (YEARS)       EXERCISABLE
  -----------    ----------------    --------------   -----------
  <S>            <C>                 <C>              <C>
     21,525           $1.00               8.02           11,475
      5,000            1.13               8.02            3,000
     38,300            1.13               7.96           34,575
     68,700            1.18               7.97           43,100
     69,000            1.06               7.97           34,600
     20,000            1.25               8.40           18,000
     49,650            1.82               8.51           34,050
     25,000            1.88               8.57           10,000
     17,500            1.88               8.85            1,800
    -------                                             -------
    314,675                                             180,600
    =======                                             =======
</TABLE>

     The fair value of each option granted under the 1998 Non-Executive Stock
Option Plan is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for the 1999 and 1998 grants:
risk-free interest rate of 6.5 and 4.9 percent; expected dividend yield of 0.0
percent; expected life of 5 years; expected volatility of 99.5% and 92.4%,
respectively.

                                        42
<PAGE>   43

     The Company adopted a Director Stock Option Plan (the "Director Option
Plan") in 1997, pursuant to which options and other awards to acquire an
aggregate of 100,000 shares of the Company's common stock may be granted. A
summary of the status of the Directors Option Plan at December 31, 2000, 1999
and 1998, and changes during the periods then ended is presented in the table
and narrative below:

<TABLE>
<CAPTION>
                                       DECEMBER 31, 2000    DECEMBER 31, 1999    DECEMBER 31, 1998
                                       ------------------   ------------------   ------------------
                                                 WTD AVG              WTD AVG              WTD AVG
                                       NUMBER    EX PRICE   NUMBER    EX PRICE   NUMBER    EX PRICE
                                       -------   --------   -------   --------   -------   --------
<S>                                    <C>       <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of
  period............................    99,000    $1.42      10,000    $5.13      40,000    $5.06
  Granted...........................    60,000     1.00      99,000     1.42          --       --
  Exercised.........................        --       --          --       --          --       --
  Forfeited.........................   (59,000)    1.70     (10,000)    5.13     (30,000)    5.04
  Expired...........................        --       --          --       --          --       --
                                       -------              -------              -------
Outstanding at end of period........   100,000    $1.00      99,000    $1.42      10,000    $5.13
                                       =======              =======              =======
Exercisable at end of period........    90,000    $1.00      15,000    $1.00      10,000    $5.13
Weighted average fair value of
  options granted on grant date.....   $   .96              $  1.09              $    --
</TABLE>

          DETAIL COMPOSITION OF OPTIONS OUTSTANDING DECEMBER 31, 2000

<TABLE>
<CAPTION>
                           AVG. CONTRACTUAL
  OPTIONS       EXERCISE    LIFE REMAINING      OPTIONS
  OUTSTANDING    PRICE         (YEARS)        EXERCISABLE
  -----------   --------   ----------------   -----------
  <S>           <C>        <C>                <C>
    100,000      $1.00           6.36           90,000
    =======                                     ======
</TABLE>

     The fair value of each option granted under the Director Stock Option Plan
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for the 2000 and 1999 grants: risk-free
interest rate of 5.0 and 6.5 percent; expected dividend yield of 0.0 percent;
expected life of 5 years; expected volatility of 182.75% and 92.2%,
respectively.

                                        43
<PAGE>   44

     The Company has issued stock purchase warrants with a variety of terms and
conditions. The following table summarizes stock purchase warrant transactions
during the period:

<TABLE>
<CAPTION>
                                                                   EXERCISE
                                                    NUMBER          PRICES
                                                   ---------    --------------
<S>                                                <C>          <C>
Outstanding December 31, 1996....................    602,500      6.90 - 13.00
  Granted........................................         --                --
  Exercised......................................         --                --
  Canceled/Expired...............................         --                --
                                                   ---------    --------------
Outstanding December 31, 1997....................    602,500      6.90 - 13.00
  Granted........................................      5,000              3.19
  Exercised......................................         --                --
  Canceled/Expired...............................   (325,000)     6.90 - 13.00
                                                   ---------    --------------
Outstanding December 31, 1998....................    282,500      3.19 - 13.00
  Granted........................................  1,285,000       1.063 -2.75
  Exercised......................................         --                --
  Canceled/Expired...............................   (177,500)     7.00 - 13.00
                                                   ---------    --------------
Outstanding December 31, 1999....................  1,390,000    $1.063 - $9.00
  Granted........................................    516,250              1.00
  Exercised......................................         --                --
  Canceled/Expired...............................    (105,00)     1.063 - 3.19
                                                   ---------    --------------
Outstanding December 31, 2000....................  1,801,250    $1.063 - $9.00
                                                   =========    ==============
</TABLE>

     At December 31, 2000, 1,341,250 warrants were exercisable. The warrants
expire at various dates through November, 2005.

7.  INCOME TAXES:

     The provision for income taxes consists of the following components:

<TABLE>
<CAPTION>
                                                        FOR THE YEAR    FOR THE YEAR    FOR THE YEAR
                                                           ENDED           ENDED           ENDED
                                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                            2000            1999            1998
                                                        ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
Current:
  Federal.............................................   $       --      $       --      $       --
  State...............................................   $       --      $       --      $       --
                                                         ----------      ----------      ----------
       Subtotal.......................................   $       --      $       --      $       --
Deferred..............................................   $       --      $       --      $       --
                                                                 --              --              --
                                                         ----------      ----------      ----------
       Total..........................................   $       --      $       --      $       --
                                                         ==========      ==========      ==========
</TABLE>

                                        44
<PAGE>   45

     The tax effects of temporary differences giving rise to the deferred items
are as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Deferred tax assets:
  Net operating loss carry forwards..................    $  9,697    $  8,087
  Inventory reserves.................................         503       2,045
  Other..............................................       1,500         597
                                                         --------    --------
       Total deferred tax assets.....................      11,700      10,729
       Valuation allowance...........................     (11,700)    (10,729)
                                                         --------    --------
       Deferred tax assets, net of allowance.........    $     --    $     --
                                                         ========    ========
</TABLE>

     In accordance with SFAS No. 109, the gross deferred tax asset at December
31, 2000 and 1999, of $11,700 and $10,729, respectively, has been reduced to
zero by a full valuation allowance.

     At December 31, 2000, the Company has approximately $27,707 of net
operating loss carry forwards for federal income tax purposes. These losses
expire beginning 2009 through 2014.

8.  COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

     The Company has entered into certain noncancelable operating lease
agreements related to office and warehouse space and equipment. Total lease
expense under operating leases was $313, $317 and $281 for the years ended
December 31, 2000, 1999 and 1998, respectively. The minimum annual rental
commitments under operating leases are as follows for the years ending December
31:

<TABLE>
<S>                                                           <C>
2001........................................................   240
2002........................................................     4
                                                              ----
       Total................................................  $244
                                                              ====
</TABLE>

LITIGATION

     The Company is involved in legal actions in the ordinary course of its
business. While no reasonable estimates of potential liability can be
determined, management believes that such legal actions will be resolved without
a material effect on the Company's financial position or results of operations.

EMPLOYMENT CONTRACTS

     The Company has employment contracts with various officers with remaining
terms ranging from one to two years at amounts approximating their current
levels of compensation. The Company's remaining aggregate commitment at December
31, 2000, under such contracts is approximately $337. Certain of these
agreements may also include additional compensation to sales staff related to
sales commission bonuses that are contingent on the amount of the Company's
sales.

9.  DISTRIBUTORSHIP AND SALES AGENCY AGREEMENTS:

     In February 1996, the Company entered into an exclusive distribution
agreement with Aristocrat Leisure Industries ("Aristocrat") of New South Wales,
Australia for the marketing and distribution of games in Australia, New Zealand,
Papua New Guinea, Taiwan, New Caledonia, Malaysia, the Philippines and Singapore
(hereinafter "Australasia"). The Company granted Aristocrat an initial five-year
exclusive license expiring February 2001 to distribute its blackjack, craps and
roulette games to all legalized Australasia video gaming jurisdictions. Pursuant
to the agreement, the Company has agreed to sell its games at discounted
distributor's pricing in exchange for a minimum purchase quantity of 100 units
per

                                        45
<PAGE>   46

year. Aristocrat commenced marketing the Company's blackjack, and roulette games
subsequent to obtaining technical approval from New South Wales, Australia
gaming authorities in September 1997. Pursuant to this agreement, the Company
sold an aggregate of 99 games in 1997 and 86 games in 1998. Due to the declining
multi-player game sales in their territory, sales to this distributor declined
in the third and particularly fourth quarters of 1998, there were no sales to
this distributor in 1999, and there were no sales to this distributor in the
first quarter of 2000. In March 2000, the Company and Aristocrat terminated the
distribution agreement.

     In May 1998, the Company entered into a one-year exclusive agency agreement
with Bill Engle, an individual. Under the agreement, the agent represents the
Company's products for sale in the Canadian provinces of British Columbia,
Ontario, Nova Scotia (for casino customers only), Saskatchewan, Alberta and
Manitoba. The agent receives a commission equal to the difference between the
amount received for sales initiated by the agent and prices stated in the
agreement for each product. This agreement provides for up to two successive
one-year terms upon the agreement of the parties and on the terms and conditions
set forth in the agency agreement. In May 1999, this agreement was renewed for
an additional one-year period and expired in May 2000.

     In December 1998, the Company entered into a three-year exclusive agreement
with DGS, Inc. ("DGS") for the distribution and service of the Company's
blackjack and 21 Stud products in the State of South Carolina. The Company and
DGS will negotiate minimum sales targets for each year of the agreement. If DGS
fails to purchase for resale the minimum number of units in any contract year,
the Company may give notice to terminate the agreement. During 2000 the Company
terminated this agreement.

     The Company has submitted its applications for licensure in New Jersey and
Connecticut, and will apply for approval of its various games. Once the Company
is able to sell product in these jurisdictions, it will be represented by Par 4
("Agent") under terms of a two-year exclusive agency agreement entered into in
January 1999. Under the agreement, the agent represents certain of the Company's
products for sale in Atlantic City, New Jersey and the State of Connecticut. The
Company and Agent will negotiate minimum sales targets for each year of the
agreement. If Agent fails to obtain sales orders for at least 75 percent of the
target number of units in any contract year, the Company may give notice to
terminate the agreement. This agreement provides for automatic renewal annually
after the original term and may be terminated by either party under certain
circumstances.

     In April 1999, the Company entered into a two-year exclusive agency
agreement with Stuart Black, an individual. Under the agreement, the agent
represents the Company's products for sale in specific territories in Europe.
The agent receives a commission on sales of the Company's products. The Company
and Agent negotiate minimum sales targets for each year of the agreement. If
Agent fails to obtain sales orders for at least 75 percent of the target number
of units in any contract year, the Company may give notice to terminate the
agreement. This agreement provides for automatic renewal annually after the
original term and may be terminated by either party under certain circumstances.

     The Company also has an exclusive distributorship agreement with Vista
Gaming Corporation.

10.  AGREEMENT FOR MERGER:

     On September 19, 2000, the Company's Board of Directors entered into a
letter of intent with Xertain, Inc., whereby the Company would effect a merger
with Xertain. On October 12, 2000, the Company entered into an Agreement and
Plan of Merger By and Among Xertain, Inc., Innovative Gaming Corporation of
America and IGCA Acquisition Corporation (the "Xertain Merger Agreement").
Pursuant to the Xertain Merger Agreement, Xertain will be merged into IGCA
Acquisition Corporation, a Minnesota corporation and wholly owned subsidiary of
the Company. Following the Merger, Xertain's shareholders will own 45% of the
Company. Concurrent with the signing of the Xertain Merger Agreement, the
Company and Xertain completed an initial closing by the issuance and mutual
purchase of 9.9% of the respective companies' common stock. Final closing of the
Merger is anticipated to occur in mid-2001, subject to shareholder, regulatory
and various governmental agencies' approval.
                                        46
<PAGE>   47

11.  SUBSEQUENT EVENTS:

     On January 19, 2001 the Company authorized the issuance of 460 shares of
Preferred Stock as Series H 6% Convertible Preferred Stock with a par value of
$.01 per share, and a stated value of $1,000 per share.

                                        47
<PAGE>   48

            INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       BALANCE     CHARGED TO    AMOUNT     BALANCE
                                                      BEGINNING    COSTS AND     WRITTEN    END OF
DESCRIPTION                                           OF PERIOD     EXPENSES       OFF      PERIOD
-----------                                           ---------    ----------    -------    -------
<S>                                                   <C>          <C>           <C>        <C>
Reserve for inventory obsolescence and write down
  to market value:
For the year ended 12/31/98.......................     $  881        $  571      $  505     $  947
For the year ended 12/31/99.......................        947         4,488         347      5,088
For the year ended 12/31/00.......................      5,088           882       1,565      2,641
</TABLE>

<TABLE>
<CAPTION>
                                                                    CHARGED/
                                                      BALANCE      (CREDITED)     AMOUNT     BALANCE
                                                     BEGINNING      TO COSTS      WRITTEN    END OF
DESCRIPTION                                          OF PERIOD    AND EXPENSES      OFF      PERIOD
-----------                                          ---------    ------------    -------    -------
<S>                                                  <C>          <C>             <C>        <C>
Allowance for doubtful notes and accounts
  receivable:
For the year ended 12/31/98......................     $  100         $    -       $   15     $   85
For the year ended 12/31/99......................         85            198            3        280
For the year ended 12/31/00......................        280              0          167        113
</TABLE>

                                        48
<PAGE>   49

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information provided under the caption "Election of Directors" in the
Company's Proxy Statement, to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's year ended December
31, 2000 and forwarded to stockholders prior to the Company's 2001 Annual
Meeting of Shareholders (the "2001 Proxy Statement") is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information in the 2001 Proxy Statement under the caption "Executive
Compensation" is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information in the 2001 Proxy Statement under the caption "Voting
Securities and Principal Holders Thereof" is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information in the 2001 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements:

<TABLE>
<CAPTION>
                                                             PAGE
                                                             ----
<S>                                                          <C>
Report of Independent Public Accountants -- Kafoury,
  Armstrong & Co............................................  25
Consolidated Balance Sheets as of December 31, 2000 and
  1999......................................................  26
Consolidated Statements of Operations for the years ended
  December 31, 1999 and 1998................................  27
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 2000, 1999 and 1998..............  28
Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 1999 and 1998..........................  29
Notes to the Consolidated Financial Statements..............  30
</TABLE>

     (a)(3) Exhibits

<TABLE>
<C>                      <S>
          3.1(a)         Articles of Incorporation, as amended (Incorporated herein
                         by reference to Exhibit 3.1 to the Company's registration
                         Statement on Form SB-2 (File No. 33-61492C) (the "SB-2")
          3.1(b)         Certificate of Designation relating to Series B Convertible
                         Preferred Stock (Incorporated herein by reference to Exhibit
                         4 to the Company's report on Form 10-Q for the quarter ended
                         March 31, 1998) (the "March 31, 1998 10-Q")
          3.1(c)         Certificate of Designation relating to Series C Convertible
                         Preferred Stock (Incorporated herein by reference to Exhibit
                         3.1(d) to the Company's Registration Statement on Form S-3
                         filed August 3, 1999)
          3.1(d)         Certificate of Designation relating to Series D Convertible
                         Preferred Stock (Incorporated herein by reference to Exhibit
                         3.1 to the Company's Registration Statement on Form S-3
                         filed January 13, 2000)
          3.2            Bylaws (Incorporated herein by reference to Exhibit 3.2 to
                         the SB-2)
</TABLE>

                                        49
<PAGE>   50
<TABLE>
<C>                      <S>
         10.1            1992 Stock Option and Compensation Plan, as amended
                         (Incorporated herein by reference to Annex B to the
                         Company's Schedule 14A filed April 24, 1997)+
         10.2            Product Development and Revenue Sharing Agreement between
                         the Company and IGT, dated November 18, 1996 (Incorporated
                         herein by reference to Exhibit 10.18 to the Company's report
                         on Form 10-K for the fiscal year ended December 31, 1996)
                         (the "December 31, 1996 10-K")
         10.3            Lease agreement between the Company and Dermody Properties,
                         dated July 9, 1996 (Incorporated herein by reference to
                         Exhibit 10.20 to the Company's December 31, 1996 10-K)
         10.4            Loan Agreement between the Company and Finova Capital
                         Management dated as of April 13, 1998 (Incorporated herein
                         by reference to Exhibit 10.1 to the Company's March 31, 1998
                         10-Q)
         10.5            Form of Subscription Agreement dated June 1, 1999
                         (Incorporated herein by reference to Exhibit 10.8 to the
                         Company's Registration Statement on Form S-3 filed August 3,
                         1999)
         10.6            Securities Purchase Agreement dated October 13, 1999
                         (Incorporated herein by reference to Exhibit 10.1 to the
                         Company's Registration Statement on Form S-3 filed January
                         13, 2000)
         10.7            Form of Registration Rights Agreement dated June 1, 1999
                         (Incorporated herein by reference to Exhibit 10.9 to the
                         Company's Registration Statement on Form S-3 filed August 3,
                         1999)
         10.8            Form of Registration Rights Agreement dated October 13, 1999
                         (Incorporated herein by reference to Exhibit 10.2 to the
                         Company's Registration Statement on Form S-3 filed January
                         13, 2000)
         10.9            1997 Director Stock Option Plan (Incorporated herein by
                         reference to Annex A to the Company's Schedule 14A filed
                         April 24, 1997)
         10.10           1998 Non-Executive Employee Stock Option Plan (Incorporated
                         herein by reference to Exhibit 10.17 to the Company's report
                         on Form 10-K for the fiscal year ended December 31,1998)
                         (the "December 31, 1998 10-K")
         10.11           Agreement between the Company and Edward G. Stevenson dated
                         January 1, 1999 (Incorporated herein by reference to Exhibit
                         10.18 to the Company's December 31, 1998 10-K)
         10.12           Agreement and Plan of Merger dated December 31, 1999, by and
                         among nMortgage Inc., Equitex Inc., Innovative Gaming
                         Corporation of America and IGCA Acquisition Corp,
                         (Incorporated herein by reference to Annex B to the
                         Company's Schedule 14A filed March 1, 2000)
         10.13           Agreement and Plan of Merger by and among Xertain, Inc.,
                         Innovative Gaming Corporation of America and IGCA
                         Acquisition Corp, (Incorporated herein by reference to the
                         Company's Preliminary Schedule 14A filed February 15, 2001)
         21              List of Subsidiaries (Incorporated herein by reference to
                         Exhibit 21 to the Company's December 31, 1998 10-K)
         23              Consent of Kafoury, Armstrong & Co.
</TABLE>

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

+ Agreement relates to Executive Compensation

     (b) Reports on Form 8-K.

     On October 16, 2000, the Company filed Form 8-K to report initial closing
of the merger with Xertain, Inc.

                                        50
<PAGE>   51

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Date: April 9, 2001                     INNOVATIVE GAMING CORPORATION OF AMERICA

                                          By:     /s/ ROLAND M. THOMAS
                                            ------------------------------------
                                          Name: Roland M. Thomas
                                          Title: Chief Executive Officer and
                                          Chairman

     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
indicated on April 9, 2001.

<TABLE>
<CAPTION>
                    NAME                                           TITLE
                    ----                                           -----
<C>                                             <S>

            /s/ ROLAND M. THOMAS
--------------------------------------------
              Roland M. Thomas                  Chief Executive Officer, Chief Financial
                                                Officer and Chairman (principal executive
                                                officer, principal accounting officer)
           /s/ RONALD A. JOHNSON
--------------------------------------------
             Ronald A. Johnson                  Director

            /s/ ANDREW TOTTENHAM
--------------------------------------------
              Andrew Tottenham                  Director

              /s/ THOMAS FOLEY
--------------------------------------------
                Thomas Foley                    Director

             /s/ STEVE PETERSON
--------------------------------------------
               Steve Peterson                   Director
</TABLE>

                                        51