<PAGE>   1
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT      OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                      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

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

            MINNESOTA                                       41-1713864
      (State or other jurisdiction                       (I.R.S. Employer
      of incorporation or organization)                 Identification No.)

            4750 TURBO CIRCLE
            RENO, NEVADA                                     89502
      (Address of principal executive offices)               (Zip Code)

                                (702) 823-3000
             (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 19, 1998, 7,535,211 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 National Market on March 19, 1998,
was $21,115,936. For purposes of this computation, affiliates of the Registrant
are the Registrant's executive officers and directors and Grand Casinos, Inc.

                      DOCUMENTS INCORPORATED BY REFERENCE

PART III - Portions of the Registrant's definitive proxy statement in connection
with the annual meeting of the shareholders to be held on May 29, 1998, 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 innovative group participation and other
specialty gaming machines to the gaming industry. The Company manufactures and
distributes multi-station blackjack, craps, and roulette gaming machines under
the names of BJ Blitz (TM), Hot Shot Dice (TM), Lightning Strike Roulette (TM),
Live Video Blackjack (TM), Live Video Craps (TM), Live Video Roulette (TM) and
Supersuits Progressive Blackjack (TM), and Bonus Streak (TM), a video bonus game
which operates in conjunction with a slant top spinning reel slot machine, to
certain gaming markets worldwide. The Company is also developing and/or
enhancing single player and group participation gaming machines for future
introductions.

Historically, the Company's primary target markets have been gaming
jurisdictions in North America, including casinos on Indian land and in the
states of Arizona, Louisiana, Mississippi, Minnesota and North Carolina, and in
Europe, through distributors. In the first quarter of 1997, the Company's
multi-station blackjack, roulette and craps games were approved in Nevada. In
the third quarter of 1997, the multi-station blackjack and roulette games
received interim approval for use in the club market of New South Wales,
Australia. Subsequent to receiving such approval, the Company's Australian
distributor commenced marketing the Company's products. The Company is in the
process of obtaining technical game approval of its products in Quebec, Canada,
and in France.

In Nevada, 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 sells or leases its products through its
distributor. The Company utilizes distributors primarily on a cash sales basis.

The Company expects that its gaming machines will appeal to:

-      Casinos/Clubs seeking to enhance the entertainment experience by
       providing new and unique forms of gaming.

-      Casinos/Clubs located in jurisdictions that do not allow live versions of
       certain games.

-      Casinos/Clubs seeking to educate potential casino game players in a less
       intimidating setting with lower minimum bet requirements than their live
       game counterparts.

-      Casinos/Clubs seeking to reduce labor and training costs.

-      Casino operators/clubs who are attracted by the security and operating
       controls provided by fully-automated machines.

BUSINESS STRATEGY

The Company's goal is to develop, manufacture, market and distribute unique and
innovative group participation and other specialty gaming machines that are not
offered by traditional slot machine suppliers and manufacturers. The Company
believes that it will be able to implement its strategy because of the following
factors:

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-      Innovative Products. The Company has developed and currently markets
       innovative group video gaming machines that are not presently offered by
       other manufacturers in the regulated primary gaming markets such as
       Nevada.

-      Marketing/Regulatory Advantages. Certain jurisdictions permit video
       versions of games that are not allowed in the live format.

-      Operational Advantages. The Company anticipates that its gaming machines
       will help casinos improve security and operational controls and reduce
       labor costs.

-      Financing Alternative. The Company provides lease and extended payment
       term financing of its games to casino operators. The Company also may
       enter into lease participation agreements, where allowable, under which
       the Company receives a portion of the income generated by each machine.

PRODUCTS

The Company currently manufactures and markets three primary platforms of group
participation video gaming machines; blackjack, craps and roulette. The Company
also currently manufactures and markets Bonus Streak, a video bonus game built
in conjunction with existing slant top spinning reel slot machines, and has
developed and manufactured additional game software such as Supersuits
Progressive Blackjack to run on the existing blackjack platform.

BJ BLITZ AND LIVE VIDEO BLACKJACK are electronic audio/video group participation
blackjack games. Each blackjack machine consists of a central "dealer" and 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.

HOT SHOT DICE AND LIVE VIDEO CRAPS are electronic craps machines management
believes are the first entirely electronic group participation 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 table top. 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.

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LIGHTNING STRIKE ROULETTE AND LIVE VIDEO ROULETTE are roulette machines that
management believes are the first entirely electronic group participation 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 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.

BONUS STREAK is used in conjunction with a slant top spinning reel slot machine.
The video bonus game utilizes the industry's first active, high resolution LCD
display. When players catch the Bonus Streak symbol on the reel slot, they
qualify for bonus play. Bonus play starts with 7 cards dealt face up on the LCD
display. If there are any matching cards (two 4's, two jacks, etc.), bonus play
ends and the player receives a first level award. If there are no matching
cards, the player advances to the next award level. Play continues to subsequent
award levels until there is a match or 13 unique cards are displayed, at which
time the top bonus jackpot is awarded. Bonus Streak has been approved in the
gaming jurisdictions of Nevada and Colorado. The Company sells Bonus Streak to
gaming locations under cash or extended payment terms, and, in Nevada, may also
place them on a participation basis wherein the Company will receive a
percentage of the games' net win at percentages similar to those received by
other specialty game suppliers. This participation amount will be shared with
the manufacturer of the slant top spinning reel slot machine. Under an agreement
with IGT, a wholly-owned subsidiary of International Game Technology, as the
supplier of the slant top slot machines, the Company shares equally in the net
revenues received from the locations under participation agreements until IGT
receives its sales price, after which the Company receives 90% and IGT receives
10% of the net revenues. If the Company sells Bonus Streak games under either
cash or extended payment terms, IGCA must purchase the slant top spinning reel
slot machines from IGT.

MANUFACTURING AND SUPPLY ARRANGEMENTS

The Company's primary products are assembled at its production facility in Reno,
Nevada, utilizing various parts and components from a large base of vendors. On
February 2, 1996, the Company negotiated fixed pricing for a minimum of two
years for specific electronic components with its Japanese suppliers in its
efforts to reduce product cost. With certain electronic parts solidified by
contract, the Company is utilizing a more domestic base of vendors for the
balance of components to reduce the reliance on exchange rate sensitivities and
to negotiate more competitive prices on required components. Except for certain
electronic components purchased from the Japanese vendor, the Company has
identified alternate sources of supply for significant parts and components
should any of its current vendors fail to meet order requirements by the
Company.


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INTELLECTUAL PROPERTY

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 (TM), BJ Blitz (TM), Hot Shot Dice (TM), Lightning Strike Roulette (TM),
Live Video Blackjack (TM), Live Video Craps (TM), Live Video Roulette (TM),
Bonus Streak (TM) and Supersuits (TM) 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 rights 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 ARRANGEMENTS

The Company distributes and/or anticipates to distribute 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.

The Company has a nonexclusive distributorship agreement with Sodak Gaming, Inc.
("Sodak") to market and distribute the Company's products (i) in those limited
geographic areas in the United States (except for the States of Minnesota and
Nevada) and Canada wherever North American Indian, "aboriginal," or "Native
People" (indigenous to Canada) gaming is or becomes permitted during the term of
the distributorship agreement, and (ii) in the states of North Dakota, South
Dakota and Wyoming. At Sodak's option, Sodak may also distribute the Company's
games in any and all non-Indian gaming jurisdictions in which Sodak obtains
exclusive distribution rights from International Game Technology, the world's
largest slot machine manufacturer. The agreement expires August 1998, but may be
renewed for successive one-year terms upon the agreement of Sodak and the
Company on the terms and conditions set forth in the distributorship agreement
or such other terms and conditions as Sodak and the Company may agree, and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its products to Sodak at the Company's
then current retail price less a distributor's discount.

The Company also has an exclusive distributorship agreement with Drew
Distributing ("Drew") to market and distribute the Company's products on all
non-Indian land in South Carolina. Under this agreement, Drew was granted an
initial three-year exclusive license, which expired in October 1997. The
agreement

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may be renewed for successive one-year terms upon the agreement of Drew and the
Company on the terms and conditions set forth in the distributorship agreement,
or such other terms and conditions as Drew and the Company may agree, and may be
terminated by either party under certain circumstances. Drew and the Company
agreed to extend the agreement for an additional one-year term.

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 games in Australia, New Zealand, Papua New Guinea,
Taiwan, New Caledonia, Malaysia, the Philippines and Singapore (hereinafter
"Australasia"). The Company has 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 such 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 year, with a rolling twelve month sales materials forecast. 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.

In March 1996, the Company entered into exclusive agreements with Ludi S.F.M.
and with S.A.M. Eurusa for the exclusive distribution of the Company's games in
France, Monaco, Morocco, Tunisia and Italy. Ludi and Eurusa are affiliated
entities. Under such agreement, Ludi and Eurusa have been granted three-year
exclusive licenses, expiring March 1999, to distribute the Company's blackjack,
craps and roulette games, subsequent to any and all regulatory approvals. These
agreements may be renewed for successive one-year terms upon the agreement of
the parties and on the terms and conditions set forth in the distribution
agreements or such other terms and conditions as the parties may agree and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its games to Ludi and Eurusa at the
Company's then current retail price less a distributor's discount.

In December 1996, the Company entered into an exclusive agreement with Bally
Gaming International ("Bally") for the exclusive distribution of the Company's
games in certain European countries. Under this agreement, Bally has been
granted three-year exclusive license, expiring December 1999, to distribute the
Company's blackjack, craps and roulette games in specified European countries.
Bally may not distribute games prior to receipt of any and all necessary
regulatory approvals. Such agreement provides an automatic renewal annually
after the original term and may be terminated by either party under certain
circumstances.

In January 1997, the Company entered into a three-year exclusive agreement with
Vista Gaming Corporation ("Vista") for the distribution and service of the
Company's products in Colorado. However, if Vista does not distribute on lease
at least 20 machines after six months and/or 35 machines after one year, this
agreement will revert to a non-exclusive distributorship. The lease rates will
be comparable to lease rates charged by other specialty game suppliers. This
agreement provides for automatic renewal annually after the original term and
may be terminated by either party under certain circumstances.


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SIGNIFICANT CUSTOMERS

During fiscal 1997, a substantial portion of the Company's sales were to two
customers. Aristocrat Leisure Industries accounted for 48.4% of sales and
Harrah's Smoky Mountain Casino in North Carolina accounted for 19.4% of sales.
No other single customer accounted for 10% or more of sales. The Company entered
into an initial agreement with Grand Casinos, Inc. ("GCI") in 1992, and a
subsequent agreement in 1994, whereby casinos owned or managed by GCI may
purchase up to 125 of the Company's video gaming machines in quantity purchases
for a price lower than what the Company charges in related markets. In addition
to providing the Company the opportunity for quantity sales of its products,
these agreements provided the Company with initial market and beta test sites
for its products, as well as operational and performance data. The Company made
minimal parts sales and no video gaming machine sales to GCI during 1997.

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,
Bally Gaming International, Inc., International Game Technology and Universal
Distributing of Nevada, Inc. are among the largest and most-established gaming
machine suppliers. Management believes that none of these companies currently
offer group video gaming machines that are similar to the Company's
multi-station products. However, Sega Enterprises, Inc. and Sigma Games
distribute multiplayer gaming and amusement machines. There can be no assurance
that these competitors, or another competitor, will not develop gaming machines
that are similar to the Company's gaming machines in the future.


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.

In addition to the jurisdictions which currently allow casino gaming, the
Company anticipates doing business in other jurisdictions which may authorize
casino gaming in the future, and in jurisdictions which have legalized casino
gaming but have not adopted regulations. The Company cannot predict the nature
of the regulatory scheme in any such jurisdiction.

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

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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, pulltabs, 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
parimutuel 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 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.


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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 with
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.


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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
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

                                    - 10 -
<PAGE>   11
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 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

                                    - 11 -
<PAGE>   12
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 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

                                    - 12 -
<PAGE>   13
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 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.

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
recordkeeping 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.

                                    - 13 -


<PAGE>   14
CERTAIN FACTORS

In addition to the factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.


NEED FOR ADDITIONAL FINANCING - The Company has experienced negative cash flow
from operations of $7.5 million and $2.7 million for the years ended December
31, 1997 and 1996, respectively. The Company will need additional financing on a
short-term basis in order to execute its business. The Company has entered into
a loan commitment agreement with a certain third party lender. The Company is
also in the process of undertaking a private placement of its equity securities.
No assurance can be given that any financings will materialize on a timely
basis, if at all. In the event such financing does materialize, no assurance can
be given that the Company will find additional financing to satisfy its
short-term cash needs. The Company's ability to execute its long-term business
strategy also depends to a significant degree on its ability to finance the
development, marketing and production of its products. In the event that such
financing does materialize, no assurance can be given that the Company will find
additional long-term financing. There can be no assurance that any additional
funds will be available on terms acceptable to the Company or its present
shareholders. New investors may seek and obtain substantially better terms than
were granted to its present investors and the issuance of such securities would
result in dilution to its existing shareholders.

NEW AND EXPANDING BUSINESSES - The Company is continuing to expand and diversify
its business by developing and introducing new products and entering into new
lines of business that complement and enhance the Company's existing businesses.
The Company faces the risks, expenses and difficulties frequently encountered by
new and expanding businesses, including, but not limited to, fluctuating and
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. Furthermore, to the extent that the
Company's products are successful, the Company will need to manage the
transition to higher volume operations, entrance into new markets, integration
of operations and product development, control of overhead expense and the
addition, training and management of qualified personnel.

      The Company's successful entry 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. 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.

RAPIDLY CHANGING TECHNOLOGY - The Company's business is characterized by rapidly
changing technology and frequent new product introductions and enhancements. The
Company's success will depend in part on its ability to continue 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 and
profits are derived from the gaming industry. The continued profitability and
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 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 continued growth or profitability.

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

PRODUCT PROTECTION - 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.

POTENTIAL REVENUE AND STOCK PRICE VOLATILITY - The Company's future operating
results may vary 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. Due to these and other
factors, including the general economy, stock market conditions or announcements
by the Company or its competitors, the market price of the Company's Common
Stock may be highly volatile.

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
member of management could have a substantial adverse effect on the Company's
ability to achieve its objectives.

UNDESIGNATED STOCK - The Board of Directors, without any 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 $229,000 in 1997, with provisions for
annual rent increases. The Company also leases approximately 2,400 square feet
of office and warehouse space in Las Vegas, Nevada for sales and service
operations. The rent under the lease, which expires in July 1999, is
approximately $26,000 annually.


ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation and is not aware of any
threatened litigation that would have a material adverse effect on its business.


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, 1997.


                     EXECUTIVE OFFICERS OF THE REGISTRANT

EDWARD G. STEVENSON, AGE 51, has been the President, Chief Executive Officer,
and a director of the Company since February 1996. Prior to joining the Company,
Mr. Stevenson served as the President and Chief Operating Officer of Little Six,
Inc. d/b/a Mystic Lake Casino in Minneapolis, from January 1995 to March 1996.
From 1988-1991 and from October 1992 to January 1995, Mr. Stevenson was the
President of CMS International/Summit Casinos of Reno, Nevada. From June 1991 to
October 1992, Mr. Stevenson served as president of gaming operations for
International Game Technology and from 1982 through 1987 served in various posts
as chief operating officer and general counsel of Harvey's Resort Hotel/Casino
in Stateline, Nevada.

SCOTT H. SHACKELTON, AGE 48, has been Vice President, Chief Financial Officer
and Secretary since June 1996. Prior to joining the Company, Mr. Shackelton
served as Vice President, Controller and Treasurer of International Game
Technology from December 1981 to May 1996. Mr. Shackelton held various positions
at Harrah's Hotels/Casinos from 1974 to 1981, with his last position being
assistant controller.


                                    - 14 -


<PAGE>   15
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


                          PRICE RANGE OF COMMON STOCK

Since May 28, 1993, the date of the Company's initial public offering, through
September 20, 1994, the Company's Common Stock was traded on NASDAQ Small-Cap
Market under the ticker symbol "IGCA". On September 21, 1994 the Company's
Common Stock began trading on the NASDAQ National Market.

The following table summarizes the high and low 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 12/31/96
------------
First Quarter                             $11.75          $7.25
Second Quarter                             11.13           8.00
Third Quarter                               8.75           5.38
Fourth Quarter                              8.88           4.75

FYE 12/31/97
------------
First Quarter                              $6.94          $4.75
Second Quarter                              6.00           4.13
Third Quarter                               5.75           4.75
Fourth Quarter                              4.94           2.13
</TABLE>


The Company has never declared or paid any dividends on its Common Stock, and
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.

On March 19, 1998, the last reported sale price for the Common Stock was $3.25
per share. As of March 19, 1998, the Company had over 400 shareholders of record
of Common Stock.


                                    - 15 -
<PAGE>   16
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, 1997, 1996 and 1995, the five months ended December 31, 1994, and
the year ended July 31, 1994. 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 Year     Year For the    For the Year      For the Five     For the Year
                                           Ended            Ended           Ended          Months Ended         Ended
                                          December 31,   December 31,   December 31,       December 31,       July 31,
                                           1997              1996          1995              1994              1994
                                         --------------------------------------------------------------------------------
<S>                                     <C>              <C>              <C>              <C>              <C>
Statement of operations data:
  Net sales                             $ 10,292         $  2,664         $  6,352         $    470         $  8,910
  Gross profit                             3,103              529            1,589              199            3,825
  Operating income (loss)                 (2,182)          (6,592)          (2,765)          (2,179)             751
  Net income (loss)                       (1,935)          (6,179)          (2,114)          (1,129)           1,028
  Net income (loss) per
     common share                          (0.43)           (0.97)           (0.38)           (0.20)             .19

Cash flow data:
   Cash provided by (used for):

     Operating activities                 (7,516)          (2,726)             591           (1,226)          (8,702)
     Investing activities                    555            3,784           (4,399)          (1,033)           2,314
     Financing activities                  4,486            1,038              (87)          (1,044)          12,814
   Increase (decrease)in cash
      and cash equivalents                (2,475)           2,096           (3,895)          (3,303)           6,426

Balance sheet data (end of period):
  Cash, cash equivalents and
   available-for-sale securities             518            5,959            8,749            5,796           11,220
  Working capital                         12,603           11,996           16,039           17,616           20,049
  Total assets                            19,181           15,976           18,929           21,417           23,682
  Long-term debt (net of
     current maturities)                     509                -                -                5               21
  Redeemable preferred stock                   -                -                -              983              975
  Total stockholders' equity              17,202           15,450           18,531           19,693           21,851
</TABLE>

                                    - 16 -
<PAGE>   17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and this Form 10-K contains 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: customer acceptance of the Company's products, need for additional
financing, decline in demand for gaming products or reduction in the growth rate
of new markets, failure or delay in obtaining gaming 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 group participation and other specialty video gaming machines. The
Company manufactures, markets and distributes BJ Blitz (TM), Hot Shot Dice (TM),
Lightning Strike Roulette (TM) and Supersuits Progressive Blackjack (TM) 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.

RELATIONSHIP WITH GRAND CASINOS, INC. - The Company and Grand Casinos, Inc.
("GCI") have entered into an agreement which allows casinos owned or managed by
GCI or its affiliates to purchase up to 125 of the Company's video gaming
machines at prices substantially lower than the price the Company charges
unrelated parties. Pursuant to this agreement, the Company has sold 42 blackjack
machines, 11 craps machines and 8 roulette machines to casinos either owned or
managed by GCI. No machine sales were made to GCI in 1997.

REGULATION - The Company distributes its products both directly to the gaming
marketplace and through licensed distributors. The Company is currently licensed
and/or has the necessary regulatory approvals as a gaming product manufacturer
and distributor in Nevada, Colorado, Mississippi, Louisiana, Minnesota, Arizona,
Quebec and the Atlantic Lottery (four Canadian Maritime provinces). In certain
jurisdictions, such as Arizona, Colorado and Australia, the Company may use an
existing licensed distributor to sell its products pursuant to any necessary
tribal or regulatory transaction approvals. As of March 1998, technical game
approvals are being sought by the Company and/or its distributor in France,
Quebec and the Atlantic Lottery. The Company intends to apply for necessary
licenses or approvals in other jurisdictions both domestically and
internationally where Class III gaming is permitted.

DISTRIBUTORS - The Company has granted Sodak Gaming, Inc. a multi-year
non-exclusive license to distribute the Company's products to North American
Indian casinos (excluding the states of Minnesota and Nevada) and to non-Indian
casinos in the states of North Dakota, South Dakota and Wyoming. The Company has
also granted Drew Distributing a multi-year exclusive license to distribute
Company's multi-station products in South Carolina.

On February 7, 1996, the Company entered into a five-year distribution agreement
with Aristocrat Leisure Industries of New South Wales, Australia to exclusively
market and distribute the Company's multi-station products in Australia, New
Zealand and surrounding gaming markets. On March 5, 1996, the Company entered
into a three-year exclusive distribution agreement with Ludi S.F.M. of France
and its related entity Eurusa, to market and distribute the Company's
multi-station products to select western European gaming markets. On December 4,
1996, the Company entered into a three-year exclusive distribution agreement
with Bally Gaming International to market and distribute the Company's
multi-station products in specified European countries. On January 21, 1997, the
Company granted a three-year exclusive distribution license to Vista Gaming
Corporation to distribute and service the Company's multi-station blackjack and
roulette, and Bonus Streak products in Colorado.



                                    - 17 -
<PAGE>   18
OTHER - On February 2, 1996, the Company completed the acquisition of all
remaining patents, trademarks, copyrights and other intellectual property
related to its games from its principal supplier. The Company also signed an
agreement to receive discounted pricing on key game components for a two-year
period, which is expected to lower its per game manufacturing costs.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996.

For the year ended December 31, 1997, the Company reported a net loss of
$2,889,000, or $.43 per share, compared to a net loss of $6,179,000, or $.97 per
share, for the year ended December 31, 1996. For the 1997 period, results from
operations have been adjusted for preferred stock accretion and preferred stock
dividends paid. The greater loss in 1996 was primarily due to a one time
restructuring charge of $1,716,000 and lower sales volume.

SALES, COST OF SALES AND GROSS PROFIT

Sales increased to $10,292,000 during the year ended December 31, 1997 compared
to $2,664,000 in the year ended December 31, 1996, due to an increase in unit
sales from 33 in 1996 to 172 in 1997. The following table summarizes product
sales for the years ending December 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                         Year ended           Year ended
                                        December 31,         December 31,
                                            1997               1996
                                      -------------------------------------
<S>                                        <C>                   <C>
             Sales revenue                 $10,292,000           $2,664,000
                                      =====================================

             Unit sales:
                Blackjack                           99                    6
                Craps                                7                    2
                Roulette                            60                   25
                Bonus Streak                         6                   --
                                      -------------------------------------
                   Total units                     172                   33
                                      =====================================
</TABLE>


Delays in acquiring required gaming licenses in key gaming jurisdictions limited
the markets available to sell the Company's products in 1996. The Company was
granted technical game approval of its blackjack machine in Colorado and its
three multi-player video machines in Nevada in early 1997, allowing the Company
to pursue placement of its products in those jurisdictions. In the third quarter
of 1997, the Company's multi-station blackjack and roulette games received
interim approval for use in the club market of New South Wales, Australia.
Subsequent to receiving such approval, the Company's Australian distributor
commenced marketing the Company's products in this market. A total of 99 games
were sold to the Australian distributor in 1997. Also contributing to the
increased revenue were sales of 30 games, representing replacements and
additional games, to a North Carolina casino.

The gross margin in 1997 was 30.1% compared to 19.8% in 1996. The improved gross
margin in 1997 is primarily attributable to lower cost of games due to design
changes to reduce production costs, purchasing materials domestically at more
competitive prices than were previously paid to foreign sources and increased
direct customer sales versus discounted sales to distributors. In 1996, all of
the games sold by the Company were to distributors, which generally yield lower
gross margins than direct sales. Additionally, the product sales mix in 1996 was
comprised primarily of lower margin products. In the years ended December 31,
1997 and 1996, there were no sales to GCI under their discounted price
arrangement.


                                    - 18 -
<PAGE>   19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expense for the year ended December 31, 1997
was $5,285,000 compared to $5,405,000 during fiscal year 1996. The decrease is
attributable primarily to increased productivity resulting in expenses being
incorporated into the cost of assembled games. During 1996, expenses incurred in
establishing the production operation were charged to operating expense. In
1997, when production operations commenced, the costs were included in cost of
sales as labor and overhead included in the products assembled and sold. This
expense reduction more than offset increased product development, marketing and
administrative expenses.

INTEREST INCOME

Interest income for the year December 31, 1997 was $247,000 compared to $568,000
for fiscal year 1996. This interest income decrease was due to reduced amounts
invested in interest bearing accounts, including interest bearing notes
receivable from the sale of product.

PREFERRED STOCK ACCRETION ADJUSTMENT

On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement (see Note 7 of Notes to Consolidated Financial Statements).
The Preferred Stock was convertible into shares of the Company's Common Stock at
a conversion price of 82% of the average closing bid price of the Company's
Common Stock over the ten-day trading period ending the day prior to conversion.
The intrinsic value of the beneficial conversion feature was $878,048, which was
accreted to Preferred Stock and charged against net income or loss to arrive at
net income or loss attributable to common shareholders over the period in which
the right to convert the Preferred Stock became vested. The $878,048 value of
the beneficial conversion feature was recognized during the second and third
quarters of 1997.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,1996 COMPARED TO THE YEAR
ENDED DECEMBER 31,1995.

For the year ended December 31, 1996, the Company reported a net loss of
$6,179,000, or $.97 per share, compared to a net loss of $2,198,000, or $.38 per
share, for the year ended December 31, 1995. For the prior year period, results
from operations have been adjusted for preferred stock accretion and preferred
stock dividends paid. The increased loss in 1996 was primarily due to: i) a one
time restructuring charge of $1,716,000, ii) lower sales volume and iii) higher
selling, general and administrative expenses.

SALES, COST OF SALES AND GROSS PROFIT

Sales declined to $2,664,000 in 1996 compared to $6,352,000 in 1995, due to a
decrease in unit sales from 94 in 1995 to 33 in 1996. The following table
summarizes product sales for the years ending December 31, 1996 and 1995.
<TABLE>
<CAPTION>
                                           Year ended        Year ended
                                       December 31, 1996    December 31, 1995
                                       -------------------------------------
<S>                                    <C>                  <C>
             Sales Revenue                     $2,664,000        $6,352,000
                                       ====================================

             Unit Sales:
                 Blackjack                              6                76
                 Craps                                  2                 2
                 Roulette                              25                16
                                       ------------------------------------
                    Total units                        33                94
                                       ====================================
             Total units sold to GCI                  - -                 8
                                       ====================================
</TABLE>

                                    - 19 -
<PAGE>   20
In 1995 the Company entered into the markets of Arizona, Wisconsin, North
Carolina and South Carolina, where 72 units were sold. Delays in acquiring
required gaming licenses in key gaming jurisdictions limited the markets
available to sell the Company's products in 1996. The Company was subsequently
granted technical game approval of its blackjack machine in Colorado and its
three multi-player video machines Nevada, and the Company is pursuing placement
of its products in those jurisdictions, which management believes will result in
increased revenues.

The gross margin in 1996 was 19.8% compared to 25.0% in 1995. For the year ended
December 31, 1995, the total gross profit was 25.0%, which included sales to
Grand Casinos, Inc. ("GCI") at a gross profit of 22.8% and gross profit of 25.2%
on sales to other customers. In the year ended December 31, 1996, the total
gross profit was 19.8%, with no sales to GCI. In 1996, all of the games sold by
the Company were to distributors, which generally yield lower gross margins than
direct sales. Additionally, the product sales mix in 1996 was comprised
primarily of lower margin products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31,
1996 increased $1,051,000 to $5,405,000 compared to $4,354,000 for the year
ended December 31, 1995. This expense increase was primarily due to higher
product engineering and development expense related to preparing the Company's
products for introduction into new jurisdictions, and increased payroll
expenses.

INTEREST INCOME

In the year ended December 31, 1996, interest income decreased $83,000 to
$568,000 compared to $651,000 in the year ended December 31, 1995. The decrease
in interest income was due to a decrease in notes receivable and investments in
interest bearing accounts.

RESTRUCTURING COSTS

The Company recognized $1,716,000 in restructuring costs, which included
expenses relating to inventory write downs, the Company's relocation to Reno and
management transition. As part of the restructuring, management focused on the
product lines it felt were necessary to provide the salability, manufacturing
capability, and ultimately the profit margins necessary to achieve and sustain
future growth. As part of this process the Company wrote down certain of its
inventory. All anticipated expenses related to the relocation and restructuring
were accrued in the quarter ended June 30, 1996. During the relocation process,
the Company maintained operations in both Reno, Nevada and Plymouth, Minnesota
for over two months, which resulted in duplication of various expenses.
Additionally, the Company incurred a loss upon the sale and disposal of unusable
office equipment, computer equipment and leasehold improvements when moving out
of the Plymouth office.

PROVISION FOR INCOME TAXES

The Company recorded a $155,000 provision for income taxes during the second
quarter of 1996 to provide a full valuation allowance on its deferred tax asset
relating to its net operating loss carry forwards.

LIQUIDITY AND CAPITAL RESOURCES

On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock at a price of $1,000 per share in a private placement for total
proceeds of $4,000,000. The Company received net proceeds of approximately
$3,744,000 from such private placement after the payment of fees and expenses
associated with such private placement. An annual dividend of 4% was paid
quarterly in arrears in cash. Each share of Preferred Stock was convertible into
shares of the Company's Common Stock at a conversion price of 82% of the average
closing bid price of the Company's Common Stock over the ten-day trading period
ending the day prior to conversion (the "Conversion Price"). The Conversion
Price was not to exceed $8.1725 per share. A holder of Preferred Stock was not
permitted to convert such stock into Common Stock if, following such conversion,
the holder beneficially would own in excess of 4.9% of the Company's Common
Stock. A Registration Statement related to the Common Stock was filed by, and at
the expense of, the Company pursuant to obligations contained in a


                                    - 20 -
<PAGE>   21
Registration Rights Agreement dated April 10, 1997. The Effective Date of the
Registration Statement was July 28, 1997, and all necessary gaming regulatory
approvals were received. As of October 22, 1997, all shares of Preferred Stock
were converted into an aggregate of 1,058,696 shares of Common Stock.

As of December 31, 1997, inventories totaled $10.2 million, approximately 1.4
times the amount recorded as cost of sales in 1997. This increase of inventory
was due to lower than expected product sales and fewer placements of games in
casinos on a participation basis during 1997. Additionally, sales to the
Company's Australian distributor were lower than expected due to delays in
obtaining technical game approval of the Company's product and, subsequent to
obtaining such approvals, this distributor failed to order games in accordance
with forecasts previously provided to the Company. The Company had relied on the
forecasts provided by the distributor as a basis for making inventory purchases.
Additionally, placements of games in Nevada casinos were fewer than planned as
the Company met with resistance to placement of games under revenue sharing
agreements. The Company has subsequently revised its marketing strategies to
include the option of selling games to casinos in Nevada. Management has
evaluated the composition of the inventory for product marketability under its
current business plan and recorded reserves to reduce the carrying value to a
level it believes is realizable. The Company had long-term debt of $509,000 as
of December 31, 1997.

The Company had $518,000 and $5,959,000 in cash, cash equivalents and
available-for-sale securities as of December 31, 1997 and December 31, 1996,
respectively. The Company has experienced negative cash flow from operations of
$7.5 million and $2.7 million for the years ended December 31, 1997 and 1996,
respectively. In addition, sales in the first two months of 1998 are below
management estimates, particularly in the New South Wales market. These
circumstances have reduced the Company's cash reserves at March 25, 1998 to
approximately $300,000.

Management has taken certain steps to address their future liquidity and cash
flow requirements by entering into a loan commitment securing $2 million from a
third party lender. Of this amount, $1 million is expected to close and be
funded in April 1998. The Company estimates that its current level of cash and
anticipated funds from operations will be adequate to fund cash requirements
through the first closing of such third party lender financing. In the event
that such financing does not materialize in such time frame, the Company will
have to seek additional financing. In addition, the Company is actively seeking
equity based financing in the form of a private placement of approximately $3
million in convertible preferred stock. There can be no assurance that the
Company will be successful in obtaining any additional financing on terms
acceptable to the Company, or in completing such private placement. Finally, the
Company has taken steps to reduce labor and other costs.

The Company has a $1,000,000 standby letter of credit primarily to facilitate
acquisition of components and supplies from a foreign vendor. As of December 31,
1997, no amount was outstanding. The facility is collateralized by short-term
investments of the Company.

On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its currently outstanding common stock from
time to time on the open market or in privately negotiated transactions,
depending on market conditions. As of December 31, 1997, the Company had
repurchased 248,500 shares at prices ranging from $3.56 to $6.08 per share. No
shares were repurchased in 1997.

Gains and losses on foreign currency transactions are recognized currently in
earnings. The Company's revenues from foreign markets are expected to increase
in the future, further subjecting the Company to the effects of fluctuations in
exchange rates. The Company does not consider this to be a significant risk at
this time.


                                    - 21 -
<PAGE>   22
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 Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innovative Gaming
Corporation of America and Subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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 consolidated financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


                                                ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 12, 1998 (Except with respect
 to the matter discussed in Note 1, as
 to which the date is March 25, 1998)

                                    - 22 -
<PAGE>   23
             INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                   As of December 31,
                                                                               --------------------------
                                                                                    1997          1996
                                                                               -------------    ---------
<S>                                                                            <C>              <C>

                                                    ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                            $518        $2,993
  Available-for-sale securities                                                           -         2,966
  Restricted investments                                                              1,000         1,000
  Accounts receivable, net of allowances of $100 and $75                              1,929           483
  Current portion of notes receivable, net of allowances of $- and $73                  276           177
  Inventories, net                                                                   10,191         4,729
  Prepaid expenses and other                                                            159           174
                                                                                    -------       -------
     Total current assets                                                            14,073        12,522

NOTES RECEIVABLE, less current portion                                                  552             -
PROPERTY AND EQUIPMENT, net                                                           2,107           653
DEFERRED INCOME TAXES, net                                                              720           720
INTANGIBLE ASSETS, net                                                                1,729         2,081
                                                                                    -------       -------

          TOTAL ASSETS                                                              $19,181       $15,976
                                                                                    =======       =======


                                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                     $568          $246
  Accrued liabilities                                                                   423           254
  Notes payable - current portion                                                       322            26
  Customer deposits                                                                     157             -
                                                                                    -------       -------

     Total current liabilities                                                        1,470           526

  Notes payable - net of current portion                                                509             -
                                                                                    -------       -------

     Total liabilities                                                                1,979           526
                                                                                    -------       -------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value, 100,000,000 shares authorized,
   7,535,211 and 6,476,515 shares issued and outstanding                                 75            65
  Additional paid-in capital                                                         29,575        24,951
  Accumulated deficit                                                               (12,448)       (9,559)
  Net unrealized loss on available-for-sale securities                                    -            (7)
                                                                                    -------       -------

     Total stockholders' equity                                                      17,202        15,450
                                                                                    -------       -------

          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                $19,181       $15,976
                                                                                    =======       =======
</TABLE>


              The accompanying notes are an integral part of these
                          consolidated balance sheets.

                                     - 23 -
<PAGE>   24
             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,
                                                        1997             1996             1995
                                                     ------------     ------------     ------------
<S>                                                   <C>              <C>              <C>
NET SALES                                             $ 10,292         $  2,664         $  6,352

COST OF SALES                                            7,189            2,135            4,763
                                                      --------         --------         --------

    Gross profit                                         3,103              529            1,589


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             5,285            5,405            4,354
RESTRUCTURING COSTS                                          -            1,716                -
                                                      --------         --------         --------

    Operating loss                                      (2,182)          (6,592)          (2,765)

INTEREST INCOME, net                                       247              568              651
                                                      --------         --------         --------

    Loss before income taxes                            (1,935)          (6,024)          (2,114)

PROVISION FOR INCOME TAXES                                   -              155                -
                                                      --------         --------         --------

   Net loss                                             (1,935)          (6,179)          (2,114)

PREFERRED STOCK DIVIDENDS                                   76                -               67

PREFERRED STOCK ACCRETION                                  878                -               17
                                                      --------         --------         --------

  Net loss attributable to common shareholders        ($ 2,889)        ($ 6,179)        ($ 2,198)
                                                      ========         ========         ========


LOSS PER SHARE OF COMMON STOCK                        ($  0.43)        ($  0.97)        ($  0.38)
                                                      ========         ========         ========


  Weighted average common shares outstanding             6,744            6,356            5,856
                                                      ========         ========         ========
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.



                                     - 24 -
<PAGE>   25
             INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                 Class B Non-Voting  Series A Convertible
                                               Common Stock        Common Stock       Preferred Stock
                                         -------------------    -------------------  ------------------
                                          Shares     Amount      Shares     Amount    Shares     Amount
                                         --------   --------    --------   --------  --------   --------
<S>                                      <C>        <C>         <C>        <C>       <C>        <C>
BALANCE, December 31, 1994                  4,783   $     48       1,025   $     10         -        $ -
  Common stock repurchase
   and retirement                             (50)        (1)          -          -         -          -
  Preferred stock conversion                   59          1           -          -         -          -
  Stock options and warrants
   exercised                                  177          2           -          -         -          -
  Unearned compensation
   adjustments                                  -          -           -          -         -          -
  Unrealized gain on
   available-for-sale securities                -          -           -          -         -          -
  Preferred stock dividends
   paid                                         -          -           -          -         -          -
  Preferred stock accretion
   adjustment                                   -          -           -          -         -          -
  Net loss                                      -          -           -          -         -          -
                                         --------   --------    --------   --------  --------   --------

BALANCE, December 31, 1995                  4,969         50       1,025         10         0          0
  Class B common stock exchange
    for common stock                        1,025         10      (1,025)       (10)        -          -
  Stock options and warrants
   exercised                                  258          3           -          -         -          -
  Common stock issued for
   purchase of intangible assets              225          2           -          -         -          -
  Unearned compensation
   adjustments                                  -          -           -          -         -          -
  Unrealized loss on
   available-for-sale securities                -          -           -          -         -          -
  Net loss                                      -          -           -          -         -          -
                                         --------   --------    --------   --------  --------   --------

BALANCE, December 31, 1996                  6,477         65           0          0         0          0
  Series A preferred stock issued               -          -           -          -     4,000      3,122
  Preferred stock accretion
   adjustment                                   -          -           -          -         -        878
  Series A preferred stock
    conversion to  common stock             1,055         10           -          -    (4,000)    (4,000)
  Preferred stock dividends paid                3          -           -          -         -          -
  Unrealized gain on
   available-for-sale securities                -          -           -          -         -          -
  Net loss                                      -          -           -          -         -          -
                                         --------   --------    --------   --------  --------   --------

BALANCE, December 31, 1997                  7,535   $     75           -        $ -         -        $ -
                                         ========   ========    ========   ========  ========   ========
</TABLE>


<TABLE>
<CAPTION>
Unrealized
                                         Additional                               Gain/(Loss) on
                                          Paid-in     Accumulated   Unearned      Available-for-
                                          Capital       Deficit     Compensation   Sale Securities     Total
                                         ----------   -----------   ------------   ---------------   ---------
<S>                                       <C>          <C>          <C>            <C>
BALANCE, December 31, 1994                $ 20,851      $ (1,182)    $    (34)             -         $ 19,693
  Common stock repurchase
   and retirement                             (202)            -            -              -             (203)
  Preferred stock conversion                   249             -            -              -              250
  Stock options and warrants
   exercised                                   966             -            -              -              968
  Unearned compensation
   adjustments                                  (6)            -           24              -               18
  Unrealized gain on
   available-for-sale securities                 -             -            -              3                3
  Preferred stock dividends
   paid                                          -           (67)           -              -              (67)
  Preferred stock accretion
   adjustment                                    -           (17)           -              -              (17)
  Net loss                                       -        (2,114)           -              -           (2,114)
                                          --------      --------     --------       --------         --------

BALANCE, December 31, 1995                  21,858        (3,380)         (10)             3           18,531
  Class B common stock exchange
    for common stock                             -             -            -              -                -
  Stock options and warrants
   exercised                                 1,014             -            -              -            1,017
  Common stock issued for
   purchase of intangible assets             2,079             -            -              -            2,081
  Unearned compensation
   adjustments                                   -             -           10              -               10
  Unrealized loss on
   available-for-sale securities                 -             -            -            (10)             (10)
  Net loss                                       -        (6,179)           -              -           (6,179)
                                          --------      --------     --------       --------         --------

BALANCE, December 31, 1996                  24,951        (9,559)           0             (7)          15,450
  Series A preferred stock issued              622             -            -              -            3,744
  Preferred stock accretion
   adjustment                                    -          (878)           -              -                0
  Series A preferred stock
    conversion to  common stock              3,990             -            -              -                0
  Preferred stock dividends paid                12           (76)           -              -              (64)
  Unrealized gain on
   available-for-sale securities                 -             -            -              7                7
  Net loss                                       -        (1,935)           -              -           (1,935)
                                          --------      --------     --------       --------         --------

BALANCE, December 31, 1997                $ 29,575      $(12,448)         $ -            $ -         $ 17,202
                                          ========      ========     ========       ========         ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                     - 25 -
<PAGE>   26
             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,
                                                                   1997             1996             1995
                                                                -----------      ------------      -----------
<S>                                                              <C>              <C>              <C>
OPERATING ACTIVITIES:
  Net loss                                                       ($ 1,935)        ($ 6,179)        ($ 2,114)
   Adjustments to reconcile net loss to
    cash flows from operating activities -
   Depreciation and amortization                                      889              566              338
   Stock option compensation earned                                     -               10               17
   Loss on sale of assets                                               2              103                -
   Deferred income taxes                                                -              134                -
   Provision for inventory obsolescence                               112            1,308              649
   Book value of fixed assets charged to cost of sales                424                -                -
   Provision for bad debts                                              9               78               70
   Changes in operating assets and liabilities:
     Accounts and notes receivable                                 (2,106)           1,202            1,388
     Inventories                                                   (5,574)            (232)             802
     Prepaid expenses and other                                        14              177             (251)
     Accounts payable and accrued expenses                            492              107             (308)
     Customer deposits                                                157                -                -

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

     Net cash provided by (used for) operating activities          (7,516)          (2,726)             591
                                                                 --------         --------         --------

INVESTING ACTIVITIES:
  Purchases of available-for-sale securities                       (1,042)          (5,936)         (15,092)
  Proceeds from sale of available-for-sale securities               4,013           10,350           10,800
  Payment on covenant not to compete                                    -              (92)               -
  Inventory capitalized for use in gaming operations               (2,028)               -                -
  Proceeds from sale of property and equipment                          -               45                -
  Purchases of property and equipment                                (388)            (583)            (107)
                                                                 --------         --------         --------

     Net cash provided by (used for) investing activities             555            3,784           (4,399)
                                                                 --------         --------         --------

FINANCING ACTIVITIES:
  Proceeds from financing agreements                                  873               26                -
  Payments on long-term obligations                                   (67)              (5)             (34)
  Redemption of Series A Preferred Stock                                -                -             (750)
  Preferred stock dividends paid                                      (64)               -              (67)
  Net proceeds from sale of common stock                                -            1,017              967
  Net proceeds from sale of preferred stock                         3,744                -                -
  Payments on repurchase of common stock                                -                -             (203)
                                                                 --------         --------         --------

     Net cash provided by (used for) financing activities           4,486            1,038              (87)
                                                                 --------         --------         --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   (2,475)           2,096           (3,895)

CASH AND CASH EQUIVALENTS, beginning of period                      2,993              897            4,792
                                                                 --------         --------         --------

CASH AND CASH EQUIVALENTS, end of period                         $    518         $  2,993         $    897
                                                                 ========         ========         ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
  Cash paid for interest                                         $      1         $      3         $      5
                                                                 ========         ========         ========
  Cash paid (refund received) for income taxes                   ($     3)        $      4         $     55
                                                                 ========         ========         ========
  Noncash transactions:
     Preferred Stock converted to common stock                   $  4,000               $-         $    250
                                                                 ========         ========         ========
     Preferred Stock dividends paid with common stock            $     12               $-               $-
                                                                 ========         ========         ========
     Exchange of common stock for intangible assets                    $-         $  2,081               $-
                                                                 ========         ========         ========
</TABLE>

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

                                     - 26 -
<PAGE>   27
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., is in the business of developing,
manufacturing, marketing and distributing gaming equipment. The Company
distributes its products to certain gaming markets worldwide.

The Company has experienced negative cash flow from operations of $7.5 million
and $2.7 million for the years ended December 31, 1997 and 1996, respectively.
In addition, sales in the first two months of 1998 are below management
estimates, particularly in the New South Wales market. These circumstances have
reduced the Company's cash reserves at March 25, 1998 to approximately $300.

Management has taken certain steps to address their future liquidity and cash
flow requirements by entering into a loan commitment securing $2 million from a
third party lender. Of this amount, $1 million is expected to close and be
funded in April 1998. The Company estimates that its current level of cash and
anticipated funds from operations will be adequate to fund cash requirements
through the closing of such third party lender financing. In the event that such
financing does not materialize in such time frame, the Company will have to seek
additional financing. In addition, the Company is actively seeking equity based
financing in the form of a private placement of approximately $3 million in
convertible preferred stock. There can be no assurance that the Company will be
successful in completing such private placement. Finally, the Company has taken
steps to reduce labor and other costs.

No assurance can be given that such additional financing will be available, or
will be available on terms acceptable to the Company. In addition, it cannot be
assured the Company's cost reduction efforts or marketing strategies will be
sufficient, in conjunction with the above financing alternatives, to permit the
Company to meet future obligations as they come due.

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, or plans to seek,
licenses and product approval in several jurisdictions. Failure to successfully
obtain licenses, approvals, or meet other regulatory requirements could
materially impact the expansion and future operation of the Company.

                                    - 27 -
<PAGE>   28
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 subsidiary, Innovative Gaming, Inc.
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. Cash equivalents consist primarily of
demand deposits.

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.

RESTRICTED INVESTMENTS

At December 31, 1997 and 1996, $1,000 of investments were pledged as collateral
against certain bank credit arrangements.

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, 1997,
1996 and 1995 was $537, $146 and $90, respectively.
<TABLE>
<CAPTION>
                                                   Useful Life           1997         1996
                                                   ----------------------------------------
<S>                                                  <C>               <C>          <C>
       Office equipment                              5 years           $   453      $   250
       Display games                                 5 years               142          142
       Gaming operations equipment                   2.5 years           1,459            -
       Manufacturing equipment                       5 years               345          240
       Leasehold improvements                        Life of lease         303          224
                                                                       --------------------
         Total property and equipment                                    2,702          856
         Less:  Accumulated depreciation                                  (595)        (203)
                                                                       --------------------
             Total property and  equipment, net                        $ 2,107      $   653
                                                                       ====================
</TABLE>

                                       - 28 -
<PAGE>   29
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>
                                         1997          1996
                                     ----------------------
<S>                                  <C>           <C>
       Game components and parts     $  6,602      $  6,269
       Work in process                    698           128
       Finished goods                   3,772           225
       Inventory reserves                (881)       (1,893)
                                     ----------------------
          Total inventories, net     $ 10,191      $  4,729
                                     ======================
</TABLE>

INTANGIBLES

The Company amortizes intangibles on a straight line basis over their estimated
economic lives (see Note 5).

PRODUCT SALES/REVENUE RECOGNITION

The Company makes product sales for cash, on normal terms of 90 days or less,
over longer term installments, and, in Nevada, through participation in the net
win of the games until the purchase price is paid. Revenue from the sale of
products is 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 1997, a majority of the Company's sales were to two customers. Sales to
one distributor, Aristocrat Leisure Industries ("Aristocrat"), accounted for
48.4% of sales and direct sales to one customer, Harrah's Smoky Mountain Casino,
accounted for 19.4% of sales. During 1996, a majority of the Company's sales
were to three distributors. These three distributors accounted for 37%, 32% and
24% of sales, respectively. During 1995, a majority of the Company's sales were
to three customers. One customer accounted for 14% of sales and two of the
Company's distributors accounted for 41% and 16% of sales, respectively. For the
years ended December 31, 1997, 1996 and 1995, no other distributors or customers
accounted for greater than 10% of sales.

The Company purchases certain key electronic components, which are not available
from other sources, from a Japanese supplier, Irem Software Engineering, Inc.,
at a negotiated fixed price for a period extending to mid-1999. The Company is
developing an alternative product design to eliminate dependence on this sole
source vendor.

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 $1,884, $1,132 and $476 for the years ended December 31, 1997,
1996 and 1995, respectively.

                                    - 29 -
<PAGE>   30
RESTRUCTURING COSTS

In 1996, the Company recognized $1,716 of restructuring costs, which included
expenses related to the Company's relocation to Reno, Nevada, management
transition and product focus.

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 statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the 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 128). SFAS No. 128 is effective for periods ending
after December 15, 1997, and replaces previously reported earnings per share
with "basic" and "diluted" earnings per share. 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 which 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

During 1995, the Company adopted Statement of Financial Accounting Standards No.
121 - "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes accounting
standards for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles and goodwill either to be held or
disposed of.


                                    - 30 -
<PAGE>   31
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 an impairment exists. For assets which do not produce quantifiable
future cash flows, such as intangibles, impairment is measured at the enterprise
level. No impairment existed at December 31, 1997 and 1996.

2.    RELATIONSHIP WITH GRAND CASINOS, INC.:

Grand Casinos, Inc. ("GCI") is in the business of managing and developing
casinos. The Chief Executive Officer and Chairman of the Board of GCI is also
Chairman of the Board of the Company. The Company has agreed to sell up to 125
machines to GCI under the terms of a discount machine agreement at significantly
reduced prices for the purpose of testing, evaluating and marketing the
Company's products. Through December 31, 1997, the Company has sold 61 machines
to GCI, pursuant to the agreement. No machines were sold to GCI in 1997.

3.    AVAILABLE-FOR-SALE SECURITIES:

Available-for-sale securities at December 31, 1996, consisted of United States
government and corporate securities and certificates of deposit.
Available-for-sale securities at December 31, 1996, were reported at fair value,
and consisted of government and corporate debt securities and certificates of
deposit with an amortized cost of $2,966 and no significant gross unrealized
holding gains or losses. All available-for-sale securities were due within one
year of December 31, 1996, except for $750 and $100 government debt securities,
which were due in July 1998 and December 1998, respectively. Proceeds from the
sale of available-for-sale securities were $4,013 for the year ended December
31, 1997, $10,350 for the year ended December 31, 1996, and $10,800 for the year
ended December 31, 1995. All securities were sold in 1997.

4.    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. Stated interest rates in the contracts range from 10% to 10.5%. On
contracts with no stated interest to be paid, interest is imputed at prime plus
2%. At December 31, 1997, the face amount of notes receivable was $973. 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, 1997:

<TABLE>
<CAPTION>
             Years Ending December 31,        Estimated
                                               Receipts
<S>                                     <C>
             1998                                  $276
             1999                                   276
             2000                                   276
                                        ---------------
                Total                              $828
                                        ===============
</TABLE>

                                     - 31 -
<PAGE>   32
The financial instruments that subject the Company to concentrations of credit
risk consist 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, 1997, the following
concentrations of credit risk existed:

<TABLE>
<S>                                              <C>
            Nevada                               30%
            North Carolina                       21%
            Arizona                              16%
            Australia                            14%
            Germany                               7%
            Colorado                              6%
            South Carolina and Other              6%
                                          ----------
                Total                           100%
                                          ==========
</TABLE>

5.    INTANGIBLE ASSETS:

Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                Useful Life           1997       1996
                                                -------------------------------------------
<S>                                             <C>              <C>             <C>
       Product patent rights                    5 to 10 years           $2,332      $2,332

       Nevada distribution rights               10 years                   250         250
                                                                 -------------------------
          Total intangible assets                                        2,582       2,582
          Less: accumulated  amortization                                 (853)       (501)
                                                                 -------------------------
            Total intangible assets, net                                $1,729      $2,081
                                                                 =========================
</TABLE>

Amortization recorded for intangibles was $352, $420 and $248 in the years ended
December 31, 1997, 1996 and 1995, respectively.

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.

6.    FINANCING ARRANGEMENTS:

LETTER OF CREDIT

At December 31, 1997 and 1996, the Company had a $1,000 standby letter of credit
with a bank that was secured by a $1,000 certificate of deposit, which is
included in the accompanying balance sheets as restricted investments. This
standby letter of credit is primarily to facilitate the acquisition of component
parts and supplies. At December 31, 1997 and 1996, no amount was outstanding on
the standby letter of credit.



                                    - 32 -
<PAGE>   33
NOTES PAYABLE

Notes payable consists of amounts owed IGT, a wholly-owned subsidiary of
International Game Technology, for the purchase of slant top machines
incorporated in the Company's Bonus Streak game, and financed insurance
premiums.

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. Management has
estimated the portion of current notes payable to represent those amounts
expected to be paid to IGT under participation arrangements in 1998.

The financed insurance premiums are repaid in monthly installments over a period
of less than twelve months.

7.    STOCKHOLDERS' EQUITY:

PREFERRED STOCK

In April 1993, the Company sold 7,500 shares of Redeemable Non-Voting Series A
Preferred Stock, 2,500 shares of Convertible Redeemable Non-Voting Series B
Preferred Stock, 150,000 Redeemable Warrants to purchase common stock at a price
of $4.00 per share, and the right to designate 100,000 shares of outstanding
common stock for registration for resale at the Company's expense. Both Series A
and Series B Preferred Stocks required the Company to pay a cumulative mandatory
dividend at the annual rate of $8.00 per share. On October 2, 1995, the Series A
Preferred Stock was redeemed for its stated value of $750 and the 2,500 shares
of Series B Convertible Redeemable Preferred Stock were converted into 58,822
shares of common stock.

On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock at a price of $1,000 per share in a private placement for total
proceeds of $4,000. The Company received net proceeds of approximately $3,744
from such private placement after the payment of fees and expenses associated
with such private placement. An annual dividend of 4% was paid quarterly in
arrears in cash. Each share of Preferred Stock was convertible into shares of
the Company's Common Stock at a conversion price of 82% of the average closing
bid price of the Company's Common Stock over the ten-day trading period ending
the day prior to conversion (the "Conversion Price"). The Conversion Price was
not to exceed $8.1725 per share. A holder of Preferred Stock was not permitted
to convert such stock into Common Stock if, following such conversion, the
holder beneficially would own in excess of 4.9% of the Company's Common Stock. A
Registration Statement related to the Common Stock was filed by, and at the
expense of, the Company pursuant to obligations contained in a Registration
Rights Agreement dated April 10, 1997. The Effective Date of the Registration
Statement was July 28, 1997, and all necessary gaming regulatory approvals were
received. As of October 22, 1997, all shares of Preferred Stock were converted
into an aggregate of 1,058,696 shares of Common Stock.


                                    - 33 -
<PAGE>   34
STOCK REPURCHASE PLAN

On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock from time to
time on the open market or in privately negotiated transactions. As of December
31, 1997, the Company had repurchased 248,500 shares at prices ranging from
$3.56 to $6.08 per share, for total consideration of $1,199. No shares were
repurchased in 1997.

ISSUANCE AND EXCHANGE OF CLASS B STOCK

On October 20, 1994, the Company issued 1,025,000 shares of its Class B
Non-Voting Common Stock in exchange for 1,025,000 shares of common stock held by
Grand Casinos, Inc. ("GCI"). On December 1, 1995, the Company and GCI amended
their earlier agreement to provide that if the Company did not receive certain
approvals from the Nevada Gaming Commission ("the Nevada Approvals") on or
before December 31, 1995, GCI would, subject to approval of the Minnesota
Commissioner of Commerce, exchange its 1,025,000 shares of Class B non-voting
common stock for 1,025,000 shares of the Company's common stock. The Company did
not receive the Nevada Approvals on or before December 31, 1995. On March 21,
1996, GCI converted 1,025,000 shares of Class B non-voting common stock into
1,025,000 shares of the Company's common stock.

At the time of the original exchange, the Company granted GCI certain
registration rights and the option to purchase 102,500 shares of common stock at
$7.00 per share, increased the number of games GCI may purchase under the
existing discount machine purchase agreement by 50 games (up to an aggregate 125
games) and entered into a transition plan with respect to Board of Directors'
positions based upon the timing of the Company's receipt of regulatory
approvals.

STOCK OPTIONS AND WARRANTS

The Company has an Employee Stock Option and Compensation Plan (the "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 Plan.
The Plan is 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).

The Company accounts for the Plan under APB Opinion No. 25 - "Accounting for
Stock Options Issued to Employees", under which no compensation cost has been
recognized. Statement of Financial 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


                                    - 34 -
<PAGE>   35
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>
                                                                          1997       1996
                                                                          ----       ----
<S>                                               <C>                   <C>       <C>
       Net loss:                                  As reported           $(2,888)  $(6,179)
                                                  Pro forma             $(3,831)  $(6,465)
       Primary and fully-diluted EPS:             As reported           $ (0.43)  $(0.97)
                                                  Pro forma             $ (0.57)  $(1.02)
</TABLE>


A summary of the status of the Employee Stock Option and Compensation Plan at
December 31, 1997, 1996 and 1995, and changes during the periods then ended is
presented in the tables and narrative below:
<TABLE>
<CAPTION>
                                  December 31, 1997   December 31, 1996    December 31, 1995
                                  ------------------  -------------------  -------------------
                                           Wtd Avg              Wtd Avg              Wtd Avg
                                   Number   Ex         Number    Ex         Number    Ex
                                           Price                Price                Price
                                  ------------------  -------------------  -------------------
<S>                                <C>        <C>    <C>           <C>     <C>          <C>
Outstanding at
 beginning of period               606,500    $4.67   352,600      $3.99    510,200     $4.56
  Granted                          271,550     4.75   540,500       4.75     45,000      4.61
  Exercised                            -        -    (207,600)      3.94   (176,600)     5.48
  Forfeited                        (52,650)    4.91   (79,000)      4.16    (26,000)     5.38
  Expired                              -        -          -          -          -         -
                                   -------            -------               -------
Outstanding at end of
 period                            825,400    $4.69   606,500      $4.67    352,600     $3.99
                                   =======            =======               =======
Exercisable at end of
 period                            290,933    $4.61   131,000      $4.52    133,100     $3.89
Weighted average
 fair value of options
 granted on grant date               $2.91              $2.95                 $2.69
</TABLE>

<TABLE>
<CAPTION>
           Detail composition of options outstanding December 31, 1997:
         --------------------------------------------------------------
                                      Avg. contractual
           Options        Exercise     life remaining      Options
         outstanding       price          (Years)        exercisable
         ------------    -----------   --------------    ------------
<S>      <C>             <C>           <C>               <C>
             543,300          $4.75             8.35         220,933
             124,650           4.13             9.45          10,000
              51,450           5.75             9.00             - -
              50,000           5.00             9.46          10,000
              49,000           4.00             6.35          43,000
               7,000           4.25             7.00           7,000
             -------                                         -------
             825,400                                         290,933
             =======                                         =======
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for the
1997, 1996 and 1995 grants: risk-free interest rate of 6.5, 6.2 and 7.6 percent;
expected dividend yield of 0.0 percent; expected lives of 5 years; expected
volatility of 90.3, 61.8 and 63.3 percent, respectively.

                                    - 35 -
<PAGE>   36
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, 1997, and
changes during the period then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
                                              December 31, 1997
                                         --------------------------
                                                           Wtd Avg
                                           Number          Ex Price
                                         --------------------------
<S>                                      <C>       <C>     <C>
      Outstanding at
      beginning of period                    -             $ -
        Granted                            40,000           5.06
        Exercised                            -               -
        Forfeited                            -               -
        Expired                              -               -
                                         -----------------------
      Outstanding at end of period         40,000          $5.06
                                         -----------------------
      Exercisable at end of period         10,000          $5.06
      Weighted average fair value of
      options granted on grant date                $3.80
</TABLE>

As of December 31, 1997, the 40,000 options outstanding in the Director Option
Plan had an average exercise price of $5.06, with a weighted average remaining
contractual life of 9.46 years. The options exercisable had exercise prices of
$5.00 to $5.13.

The Company has issued stock purchase warrants with a variety of terms and
conditions. During 1996, the exercise prices of certain warrants were reduced
from $11.00 and $15.00 to $10.00 and $13.00, respectively.

The following summarizes stock purchase warrant transactions during the period:
<TABLE>
<CAPTION>
                                                 Number      Exercise Prices
                                                 ------      ---------------
<S>                                             <C>         <C>
             Outstanding December 31, 1994      652,500      4.00 - 15.00
               Granted                                -                 -
               Exercised                              -                 -
               Canceled/Expired                       -                 -
                                               --------------------------
             Outstanding December 31, 1995      652,500      4.00 - 15.00

               Granted                                -                 -
               Exercised                        (50,000)             4.00
               Canceled/Expired                       -                 -
                                               --------------------------
             Outstanding December 31, 1996      602,500      6.90 - 13.00

               Granted                                -                 -
               Exercised                              -                 -
               Canceled/Expired                       -                 -
                                               --------------------------
             Outstanding December 31, 1997      602,500     $6.90 -$13.00
                                               ==========================
</TABLE>


At December 31, 1997, 602,500 warrants were exercisable. The warrants expire at
various dates through September, 2001.


                                     - 36 -

<PAGE>   37
8.    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
                                      Dec. 31, 1997    Dec. 31, 1996        Dec. 31, 1995
                                      -------------    -------------        -------------
<S>                                   <C>              <C>                  <C>
Current:
   Federal                                   $ -                $21                 $ -
   State                                       -                  -                   -
                                     --------------------------------------------------
      Subtotal                                 -                 21                   -
Deferred                                       -                134                   -
                                     --------------------------------------------------
      Total                                  $ -               $155                 $ -
                                     ==================================================
</TABLE>


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

<TABLE>
<CAPTION>

                                                  1997       1996
                                                 ------     -------
<S>                                              <C>           <C>
Deferred tax assets:
   Net operating loss carryforwards              $3,603     $ 3,354

   Inventory reserves                             1,115       1,261
   Other                                            787         691
                                                 ------     -------
      Total deferred tax assets                   5,505       5,306
   Valuation allowance                           (4,785)     (4,586)
                                                 ------     -------
      Deferred tax assets, net of allowance        $720     $   720
                                                 ======     =======
</TABLE>

In accordance with SFAS No. 109, the gross deferred tax asset at December 31,
1997, of $5,505, has been reduced by a valuation allowance of $4,785, resulting
in a net deferred tax asset of $720. The valuation allowance reduces the
deferred tax asset to an amount which management believes is more likely than
not to be realized.

At December 31, 1997, the Company has approximately $10,294 of net operating
loss carryforwards for federal income tax purposes. These losses expire
beginning 2009 through 2012. The use of approximately $1,250 of these losses is
limited to approximately $250 per year for the next five years because the loss
was generated in a short tax year.

9.    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 $272, $222 and $124 for



                                    - 37 -
<PAGE>   38
the years ended December 31, 1997, 1996 and 1995, respectively. The minimum
annual rental commitments under operating leases are as follows for the years
ending December 31:
<TABLE>
<S>                                  <C>
             1998                       $280
             1999                        301
             2000                        300
             2001                        259
             2002                          2
                                     -------
                Total                 $1,142
                                      ======
</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, 1997,
under such contracts is approximately $701. These agreements may also include
additional compensation to officers related to sales commission bonuses that
could be equal to two percent of the Company's sales.

10.   DISTRIBUTORSHIP AGREEMENTS:

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 games in Australia, New Zealand, Papua New Guinea,
Taiwan, New Caledonia, Malaysia, the Philippines and Singapore (hereinafter
"Australasia"). The Company has 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 year, with a rolling twelve month sales materials forecast. In the third
quarter of 1997, the multi-station blackjack and roulette games received interim
approval for use in the club market of New South Wales, Australia. Subsequent to
receiving such approval, Aristocrat commenced marketing these products.

In March 1996, the Company entered into exclusive agreements with Ludi S.F.M.
and with S.A.M. Eurusa for the exclusive distribution of the Company's games in
France, Monaco, Morocco, Tunisia and Italy. Ludi and Eurusa are affiliated
entities. Under the agreement, Ludi and Eurusa have been granted three-year
exclusive licenses, expiring March 1999, to distribute the Company's blackjack,
craps and roulette games, subsequent to any and all regulatory approvals. The
agreements may be renewed for successive one-year terms upon the agreement of
the parties and on the terms and conditions set forth in the distribution
agreements or such other terms and conditions as the parties may agree and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its games to Ludi and Eurusa at the
Company's then current retail price less a distributor's discount.

The Company also has exclusive or nonexclusive distributorship agreements
with Bally Gaming International, Drew Distributing, Sodak Gaming, Inc. and
Vista Gaming Corporation.

                                    - 38 -
<PAGE>   39
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY

                Schedule II - Valuation and Qualifying Accounts
                                (In Thousands)
<TABLE>
<CAPTION>
Description                              Balance      Charged to       Amount     Balance
                                         Beginning    Costs and        Written    End of
                                         of Period    Expenses          Off       Period
                                        -----------   ----------     ----------   --------
<S>                                     <C>           <C>            <C>          <C>
Reserve for inventory obsolescence:

 For the year ended 12/31/95                  $ -        $ 649         $ -          $ 649

 For the year ended 12/31/96                  649        1,308          64          1,893

 For the year ended 12/31/97                1,893          112       1,124            881
</TABLE>

<TABLE>
<CAPTION>
                                                      Charged/
Description                              Balance      (Credited)       Amount     Balance
                                         Beginning    to Costs and     Written    End of
                                         of Period    Expenses          Off       Period
                                        -----------   ----------     ----------   --------
<S>                                     <C>           <C>            <C>          <C>
Allowance for doubtful notes and
accounts receivable:

 For the year ended 12/31/95                $ -       $ 70           $ -          $ 70

 For the year ended 12/31/96                 70         78             -           148

 For the year ended 12/31/97                148        (48)            -           100
</TABLE>

                                    - 39 -
<PAGE>   40
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

No change of accountants or disagreements on any matters of accounting
principles or practices or Financial Statement disclosures have occurred.


                                    - 40 -
<PAGE>   41
                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information beginning immediately following the caption "Election of
Directors" to, but not including, the caption "Executive Compensation" 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, 1997 and forwarded to stockholders prior to the Company's 1998 Annual
Meeting of Shareholders (the "1998 Proxy Statement"), is incorporated herein by
reference.


ITEM 11. EXECUTIVE COMPENSATION

The information in the 1998 Proxy Statement beginning immediately following the
caption "Executive Compensation" to, but not including, the caption
"Compensation Committee Interlocks and Insider Participation," is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The information in the 1998 Proxy Statement beginning immediately following the
caption "Voting Securities and Principal Holders Thereof " to, but not
including, the caption "Election of Directors," is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the 1998 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.

                                    - 41 -
<PAGE>   42
                                    PART IV

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

(a)(1) Financial Statements:

                                                                            Page

Report of Independent Public Accountants ...............................     22


Consolidated Balance Sheets as of December 31, 1997 and 1996 ...........     23


Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 .......................................     24


Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 .................................     25


Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 .......................................     26


Notes to the Consolidated Financial Statements .........................     27


                                    - 42 -
<PAGE>   43
(a)(3) Exhibits

3.1    Articles of Incorporation, as amended*

3.2    Bylaws*

10.1   1992 Stock Option and Compensation Plan, as amended** +

10.2   Non-exclusive Distributorship Agreement between Innovative Gaming, Inc.
       and Sodak Gaming, Inc. dated August 23, 1993**

10.3   Agreement by and between the Company and Grand Casinos, Inc., dated as of
       July 28, 1994 **

10.4   Agreement between the Company and NANAO dated as of January 21, 1994*

10.5   Agreement between the Company and IREM, dated as of January 22, 1994*

10.6   Exclusive Distributorship Agreement by and among the Company, Drew
       Distributing and Hugh Andrews, dated as of January 24, 1994*

10.7   Employment Agreement between the Company and Edward G. Stevenson dated
       February 15, 1996***

10.8   Option Agreement between the Company and Edward G. Stevenson dated
       February 15, 1996***

10.9   Exclusive Distributorship Agreement between the Company and Aristocrat
       Leisure Industries PTY LTD dated February 7, 1996***

10.10  Assignment between the Company, NANAO and IREM dated February 2, 1996***

10.11  Parts Supply Agreement between the Company and IREM dated February
       2, 1996***

10.12  Agreement between the Company and H Square Corporation dated April 26,
       1996***

10.13  Second Amendment to Share Exchange Agreement between the Company and
       Grand Casinos, Inc. dated December 1, 1995***

10.14  Exclusive Distributorship Agreement between the Company and Ludi S.F.M.
       dated March 5, 1996***

10.15  Exclusive Distributorship Agreement between the Company and S.A.M. EURUSA
       dated March 5, 1996***

10.16  Product Development and Revenue Sharing Agreement between the Company and
       IGT, dated November 18, 1996****

10.17  Sublease agreement between the Company and Thomas & Betts Corporation,
       dated May 14, 1996****

10.18  Lease agreement between the Company and Dermody Properties, dated July 9,
       1996****

21     List of Subsidiaries*

23     Consent of Arthur Andersen LLP

27     Financial Data Schedule - which is only submitted electronically to the
       Securities and Exchange Commission for EDGAR information purposes.

*      Incorporated herein by reference to the Registrant's Registration
       Statement on Form SB-2 (File No. 33-61492C)

**     Incorporated herein by reference to the Registrant's Registration
       Statement on Form SB-2 (File No. 33-70450)

***    Incorporated herein by reference to the Registrant's Report on Form 10-K
       for the year ended December 31, 1995

****   Incorporated herein by reference to the Registrant's Report on Form 10-K
       for the year ended December 31, 1996

+      Agreement relates to Executive Compensation


                                    - 43 -
<PAGE>   44
(b)    Reports on Form 8-K.

       No current Reports on Form 8-K were filed by the Company during the
       fourth quarter ended December 31, 1997.



                                    - 44 -
<PAGE>   45
                                  SIGNATURES

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


                                INNOVATIVE GAMING CORPORATION OF AMERICA
                                Registrant



Date: March 27, 1998            By:  /s/ Edward G. Stevenson
                                   --------------------------

                                Name:  Edward G. Stevenson
                                Title: President


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
March 27, 1998.


            Name                Title


   /s/ Edward G. Stevenson      President, Chief Executive Officer and Director
   -----------------------       (principal executive officer)
      Edward G. Stevenson


   /s/ Scott Shackelton         Vice President-Finance, Chief Financial Officer
   -----------------------       (principal accounting officer)
      Scott Shackelton


                                Director
  -----------------------
      Lyle Berman


  /s/ Paul A. Bible             Director
  -----------------------
      Paul A. Bible


  /s/ Ronald Zideck             Director
  -----------------------
      Ronald Zideck


                                     - 45 -



<PAGE>   46
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                        Description
------                        -----------
<S>    <C>
3.1    Articles of Incorporation, as amended*

3.2    Bylaws*

10.1   1992 Stock Option and Compensation Plan, as amended** +

10.2   Non-exclusive Distributorship Agreement between Innovative Gaming, Inc.
       and Sodak Gaming, Inc. dated August 23, 1993**

10.3   Agreement by and between the Company and Grand Casinos, Inc., dated as of
       July 28, 1994 **

10.4   Agreement between the Company and NANAO dated as of January 21, 1994*

10.5   Agreement between the Company and IREM, dated as of January 22, 1994*

10.6   Exclusive Distributorship Agreement by and among the Company, Drew
       Distributing and Hugh Andrews, dated as of January 24, 1994*

10.7   Employment Agreement between the Company and Edward G. Stevenson dated
       February 15, 1996***

10.8   Option Agreement between the Company and Edward G. Stevenson dated
       February 15, 1996***

10.9   Exclusive Distributorship Agreement between the Company and Aristocrat
       Leisure Industries PTY LTD dated February 7, 1996***

10.10  Assignment between the Company, NANAO and IREM dated February 2, 1996***

10.11  Parts Supply Agreement between the Company and IREM dated February
       2, 1996***

10.12  Agreement between the Company and H Square Corporation dated April 26,
       1996***

10.13  Second Amendment to Share Exchange Agreement between the Company and
       Grand Casinos, Inc. dated December 1, 1995***

10.14  Exclusive Distributorship Agreement between the Company and Ludi S.F.M.
       dated March 5, 1996***

10.15  Exclusive Distributorship Agreement between the Company and S.A.M. EURUSA
       dated March 5, 1996***

10.16  Product Development and Revenue Sharing Agreement between the Company and
       IGT, dated November 18, 1996****

10.17  Sublease agreement between the Company and Thomas & Betts Corporation,
       dated May 14, 1996****

10.18  Lease agreement between the Company and Dermody Properties, dated July 9,
       1996****

21     List of Subsidiaries*

23     Consent of Arthur Andersen LLP


27     Financial Data Schedule - which is only submitted electronically to the
       Securities and Exchange Commission for EDGAR information purposes.

*      Incorporated herein by reference to the Registrant's Registration
       Statement on Form SB-2 (File No. 33-61492C)

**     Incorporated herein by reference to the Registrant's Registration
       Statement on Form SB-2 (File No. 33-70450)

***    Incorporated herein by reference to the Registrant's Report on Form 10-K
       for the year ended December 31, 1995

****   Incorporated herein by reference to the Registrant's Report on Form 10-K
       for the year ended December 31, 1996

+      Agreement relates to Executive Compensation
</TABLE>


                                    - 46 -