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                                  UNITED STATES
                       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 [Fee Required]
                     FOR THE FISCAL YEAR ENDED JUNE 30, 1999

                          (Commission File No.) 0-22498

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

                            ACRES GAMING INCORPORATED
             (Exact name of Registrant as specified in its charter)

            NEVADA                                               88-0206560
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

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

                 7115 AMIGO, SUITE 150, LAS VEGAS, NEVADA 89119
                    (Address of principal executive offices)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

                                 (702) 263-7588

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          Common Stock, $.01 par value

                                (Title of class)

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

Yes [X]  No [ ]

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of August 31, 1999 was $12,486,000. For purposes of this computation,
all executive officers and directors of the Registrant have been deemed
affiliates. This shall not be deemed an admission that such persons are
affiliates.

The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share, as of August 31, 1999 was 8,913,281 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 1999 Annual Meeting of Stockholders to be held
December 3, 1999.

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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                  PAGE
                                        PART I
<S>         <C>                                                                   <C>
ITEM 1.     BUSINESS.................................................................1
              General................................................................1
              The Market.............................................................1
              Products...............................................................1
              Strategic Alliance with IGT............................................4
              Communication Protocol.................................................4
              Research and Development...............................................4
              Customers..............................................................5
              Marketing..............................................................5
              Production and Manufacturing...........................................5
              Patents................................................................6
              Competition............................................................6
              Government Regulation..................................................7
              Employees.............................................................11
              Forward-Looking Statements............................................11

ITEM 2.     PROPERTIES..............................................................11

ITEM 3.     LEGAL PROCEEDINGS.......................................................12

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................13

            EXECUTIVE OFFICERS OF REGISTRANT........................................14

                                            PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................15

ITEM 6.     SELECTED FINANCIAL DATA.................................................16

ITEM 7      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS...................................................16

            FACTORS THAT MAY AFFECT FUTURE RESULTS..................................19

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................23

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE....................................................37

                                            PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................37

ITEM 11.    EXECUTIVE COMPENSATION..................................................37

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........37

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................37

                                            PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..................38

            SIGNATURES..............................................................39
</TABLE>

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                                     PART I

ITEM 1.  BUSINESS

GENERAL

        The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology(TM)
and are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. Acres Bonusing Technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible bonus and incentive programs that have not previously been
offered.

THE MARKET

        In recent years, legalized gaming has significantly expanded in the
United States. As part of this expansion, casino-style gaming has become an
increasingly important component of the "leisure time" industry. The expansion
resulted from the introduction of riverboat-style gaming in the Midwestern
United States, the growth of Native American casino gaming and growth in the
established Nevada market.

        Casino gaming has also grown rapidly worldwide, including in Australia,
Canada, Europe and Africa, as well as in parts of the former Soviet Union and
South America. The Company estimates that approximately 800,000 casino-style
gaming machines are currently in use throughout the world, including
approximately 430,000 in the United States.

        The Company believes that increased competition among casinos will lead
to increased demand for game promotions and entertainment enhancements of the
type offered by the Company. New or expanding casinos represent a significant
part of the potential market for the Company's products. Existing casinos also
represent a significant potential market as casino managers seek to maintain or
improve casino profitability by employing bonusing and other promotional
programs for gaming machines.

PRODUCTS

        Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the Company
also offers slot accounting and visual analysis modules that may be purchased
and installed individually or as components of an integrated system. The Company
offers products primarily in two major categories:

        1)  Casino-wide, fully integrated applications offered as the Acres
            Advantage(TM)

        2)  Bonus Games comprised of single or a linked group of traditional
            slot machines that activate a secondary "bonus" game when certain
            milestones are reached on the traditional games.

        ACRES ADVANTAGE

        An Acres Advantage installation in a casino includes electronic hardware
installed in the gaming machines, microprocessor-based controllers for groups of
gaming machines and computers and software that gather data, operate bonuses and
generate reports for casino management. The Acres Advantage is based on a
Microsoft(R) SQL Server(TM) version 7.0 platform and is designed to take
advantage of future improvements in Microsoft's SQL technology. The Acres
Advantage system has more than enough capacity to serve the world's largest
casinos.



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Various components of the Acres Advantage casino-wide system are installed in
high profile casinos such as Mandalay Resort Group's Mandalay Bay in Las Vegas,
Nevada and Mirage Resort's Bellagio and Beau Rivage located in Las Vegas and
Biloxi, Mississippi, respectively. International Acres Advantage installations
include Star City in Sydney Australia and Crown South Bank Casino in Melbourne,
Australia. The Company is currently installing Acres Advantage in Mandalay
Resort Group's MotorCity Casino in Detroit, Michigan.

        Components of the Acres Advantage and the software used in many popular
gaming machines that support the Acres Advantage have been approved by the
Nevada Gaming Control Board and regulatory authorities for several other states
and for two states in Australia. (See "Communication Protocol" and "Government
Regulation").

        The Acres Advantage casino-wide system currently includes Wizard(TM)
slot accounting, Merlin(TM) casino mapping and Acres Bonusing(TM). The Company
has developed the Prophet(TM) player tracking module that is expected to be
available for installation in the fall of 1999 and Coinless Transit(TM), a
method of using a player tracking card to facilitate cashless and coinless
wagering, that is expected to be available for installation by December 1999.

        Wizard Slot Accounting. Wizard slot accounting products collect play
data about each gaming device. This information is transmitted to a central
computer system where it is immediately available to the casino management, and
where it is stored for future analysis and reporting. The equipment is
configured to monitor all slot machine functions including coins deposited in
the machine, coins paid out of the machine, coins available to "drop", number of
games played, jackpot occurrences and other machine functions.

        Merlin Casino Mapping. This software product provides a visual rendition
of the casino's slot accounting database, graphically projected as a map of the
casino floor, which allows casino management to graphically see the numerical
statistics of the casino operations. This product allows for quick recognition
of the play and service activity occurring at each gaming machine on the casino
floor.

        Prophet Player Tracking. Scheduled for availability in the fall of 1999,
the Company's Prophet player tracking module builds upon a casino's accounting
system to gather and record information about individual players, much like an
airline's "frequent flyer" program. Each customer who elects to enroll in the
casino's "players club" is given a plastic card that uniquely identifies the
player. The player inserts the card into an electronic card reader on the gaming
machine and the system automatically records the player's level of play. Casino
management can use this information to provide special incentives and rewards to
individual players or groups of players in order to increase player loyalty.
Acres Advantage is designed to further enhance player loyalty by requiring the
use of a player tracking card to qualify for certain bonuses.

        Coinless Transit. Scheduled for availability in December 1999, this
product allows players club members to transfer game credits from one gaming
machine to another or to a redemption kiosk at which the game credits can be
cashed out. By reducing the number of cash replenishments, or machine fills,
that are required when slot players cash out their winnings, this feature
reduces the casino's floor staffing expenses. Players also receive greater
convenience by eliminating delays caused when machines run out of coins.

        The following bonuses and promotions are contained in the Acres Bonusing
module of Acres Advantage. Customers may purchase and implement these bonuses
individually or collectively.

        XtraCredit(TM). This patent pending feature is used to award special
incentive bonuses to players club members. With just a few keystrokes, casino
personnel can establish XtraCredit bonuses to provide incentives for players
club members to attend the casino's special promotional events or to celebrate
the player's special events such as birthdays or anniversaries at the casino.
XtraCredit bonus awards dramatically reduce the casino's existing cash voucher
mailing and redemption costs and provide a wide variety of marketing
opportunities for the casino to retain customers.

        XtraCredit may also be used by other bonus applications as an award
mechanism to allow the players to redeem their points earned or bonus awards won
for free games on the gaming machines. Nevada gaming



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regulators have ruled that amounts wagered by the player through the use of
XtraCredits are excluded for gaming tax purposes. This ruling results in savings
from using XtraCredit of nearly 6.25% of the cost of players club awards. In
addition to the tax savings, players' time at the gaming machine may be
increased, as players no longer have to visit the players club booth to collect
their rewards. Finally, by offering the XtraCredit redemption, the casino may
reduce the amount of players club points that are exchanged for cash awards that
can be spent outside of their casino.

        PointPlay(TM). This feature allows casino players to earn points for
slot play in a manner consistent with a standard player tracking system where
the casino can configure the rates at which points are earned and values at
which they are redeemed. PointPlay allows players to redeem their points for
free games directly at the gaming machine.

        ReturnPlay(TM). To encourage players to return to the casino at a later
date, the ReturnPlay feature awards a bonus to players that earn a predetermined
number of slot club points. The ReturnPlay bonus is automatically redeemed when
the player returns to the casino at a future date and inserts their players club
card into the game.

        Personal Progressive(R). Although the vast majority of gaming machine
players never experience the excitement of winning a progressive jackpot, the
Personal Progressive bonus creates an individual progressive jackpot for each
players club member that only they can win. The Personal Progressive jackpot
grows as the customer plays, which adds excitement and provides an incentive to
continue to visit the casino.

        Appreciation Time(TM). Casino personnel may reward players with multiple
jackpots anywhere from two to nine times the normal payout for winning
combinations. This promotion can be used to reward a casino's best customers or
can be used to improve play in certain areas or at slow times of the day.
Appreciation Time can be applied to the whole casino or only to a specific bank
of gaming machines. This bonus provides greater control over appreciation gifts
by insuring the gifts go to customers who are actually playing the games.

        Random Riches(TM) and Lucky Coin(TM). These progressive jackpot bonuses
are granted to the player inserting the "nth coin" where the frequency of "n"
and the funding parameters of the bonus are established by the casino. Awards
can be created that vary between small jackpots every few minutes and
life-changing jackpots every few weeks. These bonuses can be applied to any
number of gaming machines (from one machine to every machine in the casino) and
any one gaming machine may be tied to multiple bonuses. These promotions also
have the ability to alert players with custom audio sequences just before the
bonus is awarded. The casino may elect to award smaller Celebration Prizes(TM)
or Near Winner(TM) prizes to some or all of the players in the casino at the
time the Lucky Coin bonus is awarded. Celebration Prizes may be awarded to
players club members only or in varying amounts to players club VIPs, regular
players club members and non-members.

        BONUS GAMES

        The Company develops proprietary bonus games that it operates on a
revenue-sharing basis.

        The Company has four bonus games that are approved for distribution in
Nevada. Two of these games, Money Mint(TM) and Add `Em Up(TM), have been
installed under revenue-sharing arrangements in casinos in Las Vegas. All of the
Company's bonus games incorporate full-color, high-resolution plasma screens
over one or more traditional slot machines. Dynamic animated sequences are
displayed on the plasma screens to attract, instruct, entertain and communicate
bonus awards to the players. State-of-the-art sound packages complement the
animation. These bonus games have not been in operation long enough to indicate
if there will be a strong demand for either game.

        The Money Mint bonus game incorporates a linked bank of four to six
traditional slot machines, or base games. Players of these base games are
selected to play the secondary "bonus" game when a Money Mint symbol appears in
the base game's payline. The bonus game, viewed on a single overhead plasma
display, includes animated minting equipment and allows the player to spin a
bonus wheel for a guaranteed award.



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        The Add `Em Up bonus game is comprised of a single slot machine under a
single overhead plasma display picturing three spinning slot machine reels. An
Add `Em Up symbol on the base game's payline allows the player to play the bonus
game by spinning the video reels of the bonus game. The dollar amounts on the
video reels are added together to arrive at the bonus game award. Every play on
the secondary bonus game results in a bonus being awarded to the slot player.

        The Company is also jointly developing a Three Stooges(TM) themed bonus
game with Shuffle Master, Inc. that is expected to be released in the Fall of
1999. This bonus game incorporates the novelty of the famous comedy trio where
players reaching the bonus round win cash bonuses as vintage Three Stooges video
clips are displayed on overhead and in-machine video displays.

STRATEGIC ALLIANCE WITH IGT

        In January 1997, the Company entered into a strategic alliance (the
"Strategic Alliance") with International Game Technology ("IGT") which included
a Master Agreement for Product Development, Purchase and Sales and a $5 million
investment by IGT in the Company's preferred stock. At that time, the Company
discontinued development of the Company's DOS-based slot accounting and player
tracking system (the "Legacy" products) and instead, developed and sold
component parts and Acres Bonusing to IGT for inclusion in casino installations
with the IGT Smart System and IGS slot accounting and player tracking systems.

        Sales to IGT under the Strategic Alliance did not meet the Company's
expectations. Certain casinos expressed an interest in purchasing Acres Bonusing
without also purchasing IGS. In October 1998 the Company signed a sales
agreement to install Acres Bonusing in Mandalay Bay in Las Vegas, Nevada. The
Company decided that pursuing direct sales of Acres Bonusing while also selling
through IGT would not be feasible. The Company ended the Strategic Alliance on
January 2, 1999. The Company continues to work with IGT to support existing
installations of the combined Acres/IGS system.

        In September 1998, Albert Crosson, Vice Chairman of IGT, resigned from
the Company's Board of Directors.

COMMUNICATION PROTOCOL

        The Company and IGT have jointly developed a communication protocol
known as SAS4. The protocol is used to communicate instructions and messages
between Acres Bonusing and gaming machines. The communication of these
instructions and messages is essential to the operation of bonuses. Although the
Company and IGT have agreed that the Company can use SAS4 in connection with
certain installations, IGT has stated that the Company does not have an
unrestricted right to use SAS4 with non-IGT games. The Company believes that it
has joint ownership of the protocol and the ability to use and license the
protocol.

        The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.

RESEARCH AND DEVELOPMENT

        The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 46 full-time
employees involved in research and development as of August 31, 1999. Research
and development expenses were $6.4 million, $5.2 million and $5.1 million in the
years ended June 30, 1999, 1998 and 1997, respectively.



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CUSTOMERS

        Large casinos with more than 1,000 gaming machines represent the
principal market for Acres Advantage. Casinos of this size are generally large
enough to support a professional management staff capable of using the
analytical and promotional tools provided by Acres Advantage. This market
includes many casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic
City, New Jersey, as well as a number of Native American and riverboat casinos
in various other states and a number of casinos in Australia, South Africa and
Europe.

        Sales of Acres Advantage to Mandalay Bay accounted for 51 percent of the
Company's net revenues in 1999. Sales to IGT accounted for 23 percent, 75
percent and 28 percent of the Company's net revenues in 1999, 1998 and 1997,
respectively. (See "Strategic Alliance with IGT"). Sales of components to Anchor
Gaming ("Anchor"), primarily related to their Wheel of Gold bonusing game,
accounted for 18 percent and 28 percent of the Company's net revenues in 1998
and 1997, respectively. Sales of the system components and bonusing applications
to Aristocrat for the Crown Casino in Melbourne, Australia accounted for 12
percent of the Company's net revenues in 1997.

        The Company's backlog of orders for its products were approximately $9.6
million, $2.1 million and $6.1 million as of June 30, 1999, 1998 and 1997,
respectively. Backlog, however, may not be a meaningful indication of future
sales. Sales to the Company's customers are made pursuant to purchase orders or
sales agreements for specific system installations and products are often
delivered within several months of receipt of the order. The Company does not
have any ongoing long-term sales contracts. At its current stage of operations,
the Company's revenues and results of operations may be materially affected, in
the near term, by the receipt or loss of any one order.

MARKETING

        The Company currently markets its products and provides service to
customers from its headquarters in Las Vegas, Nevada and its office in
Corvallis, Oregon.

PRODUCTION AND MANUFACTURING

        Through fiscal 1999, the Company's manufacturing operation consisted
primarily of the assembly of electronic circuit boards and cables from
components purchased from third parties. In July 1999, in conjunction with the
relocation of the Company's headquarters to Las Vegas, Nevada, the Company began
outsourcing almost all of the hardware components of its products. The circuit
boards are manufactured and assembled to the Company's specifications by
contract manufacturers. A key component of each product is computer software
that is copied onto electronic chips by contract manufacturers. The Company
believes that its component parts and services can be obtained from multiple
sources and therefore that it is not overly reliant on any single vendor.
Company engineers conduct the development, testing and maintenance of the
software.



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PATENTS

        The Company has applied for United States and foreign patents on certain
features of its product line, and may in the future apply for other United
States patents and corresponding foreign patents. The following patents have
been issued to the Company:

<TABLE>
<CAPTION>
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   ISSUE DATE      PATENT                        EXAMPLES OF PATENT PROTECTION
                     NO.
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<S>               <C>        <C>
August 1997       5,655,961  This patent protects the implementation of a bonus pay table in a
                             gaming machine and the implementation of a "Bonus Pool."  A Bonus
                             Pool is configurable by casino management to control the total
                             amount of special bonuses paid, thus making it possible for such
                             promotions to be kept within a casino's budget.

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January 1998      5,702,304  This patent protects the Company's illuminated card reader, a
                             player tracking system component, which indicates the point of
                             card insertion and communicates bonus eligibility to the players
                             and communicates game and player status to the casino through the
                             use of various colors.

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April 1998        5,741,183  This patent protects a method of identifying and categorizing
                             individual gaming devices that are connected to a casino's
                             computer network.  It includes a memory device which allows for
                             the identification and coding of each piece of gaming equipment
                             with its individual configurations even when they are disconnected
                             or moved to another location within the casino.

-------------------------------------------------------------------------------------------------
May 1998          5,752,882  This patent protects a method of operating gaming machines in
                             which the casino is able to pre-select which games participate in
                             a variety of bonusing promotions such as linked progressive
                             jackpots or linked random bonuses.

-------------------------------------------------------------------------------------------------
October 1998      5,820,459  This patent protects a networked gaming bonusing system which
                             enables a casino to pre-select which games participate in bonusing
                             promotions.

-------------------------------------------------------------------------------------------------
November 1998     5,836,817  This patent protects a method of operating gaming machines in
                             which the casino is able to pre-select which games participate in
                             a variety of bonusing promotions such as linked
                             progressive jackpots or linked random bonuses.

-------------------------------------------------------------------------------------------------
December 1998     5,854,542  This patent protects the Company's proprietary fluorescent
                             flashing and diming lamps which are placed on gaming machines and
                             operate to indicate promotional features.

-------------------------------------------------------------------------------------------------
March 1999        5,876,284  The patent protects a networked gaming bonusing system, namely the
                             Company's Hurricane Zone(R) bonus promotion.

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</TABLE>

        No assurance can be given that any patents that are applied for will be
issued or, if issued, will provide any significant competitive advantage to the
Company. In addition, the Company has a variety of other intellectual property
which it treats as trade secrets. The Company takes reasonable steps to protect
its intellectual property but it is possible that others may make unauthorized
use of such intellectual property and the Company may or may not be able to
prevent such use. (See "Legal Proceedings").

COMPETITION

        The Company believes that its products compete principally on the basis
of functionality, price and service. The Company believes that its proprietary
Acres Bonusing Technology provides a competitive advantage. In addition to the
recently issued patents discussed above, the Company has several other patents
pending which cover many additional aspects of its Acres Bonusing Technology.



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        Several other companies have products that compete with the slot
accounting and player tracking modules of the Acres Advantage product line. Each
of these competitors has financial and other resources that are greater than
those of the Company. IGT, the largest manufacturer of gaming machines in the
world, has an additional competitive advantage in selling its slot accounting
and player tracking systems to its existing gaming machine customer base. (See
"Strategic Alliance with IGT").

        Although several competitors claim to have the ability to offer bonusing
products with functionality similar to Acres Advantage, the Company is aware of
significant installations of those products only by Casino Data Systems ("CDS")
and Mikohn Gaming Corporation ("Mikohn"). The Company believes that CDS and
Mikohn's initial bonusing products, which have been installed in several
casinos, infringe the Company's recently issued patents and will infringe
certain of the Company's pending patents, if issued. The Company has notified
CDS, Mikohn and their customers of the patent infringement and initiated patent
infringement litigation. (See "Legal Proceedings").

        While the Company attempts to differentiate its bonusing products from
progressive jackpot systems, the Company's bonusing products compete for casino
floor space with other companies' progressive jackpot systems. The market for
progressive jackpot systems is served primarily by Mikohn and CDS.

        The Company's bonus game product line competes with the products of
major gaming machine manufacturers and resellers including IGT, Anchor, Williams
Gaming Inc. and Bally Gaming. Each of these competitors has financial and other
resources that are greater than those of the Company. Several smaller
competitors, some of which have financial and other resources that are greater
than those of the Company, also offer games that compete with the Company's
bonus game product line.

GOVERNMENT REGULATION

        The Company is subject to the licensing and regulatory control of the
gaming authorities in each jurisdiction in which its products are sold or used
by persons licensed to conduct gaming activities. Although licensing of the
Company may not be required in a jurisdiction, its products generally must be
approved by the regulatory authority for use in each licensed location within
the jurisdiction.

        REGULATION OF PRODUCTS

        The Company has complied with the approval process and has either been
issued a license, temporary license, certificate, approval or other permit
allowing it to sell its products in Arizona, Colorado, Connecticut, Indiana,
Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Dakota,
Wisconsin and Victoria and New South Wales, Australia. Not all of the Company's
products have been approved for sale in all jurisdictions. In most
jurisdictions, a model of the gaming equipment that the Company seeks to place
in operation must be submitted for testing by an approved testing laboratory
prior to use in any gaming operation. To obtain such approval, the Company must
submit, at its expense, each model of its equipment to the specified laboratory
for testing, examination and analysis. Upon completion of the testing, the
laboratory submits a report of its findings and conclusions to the applicable
gaming authority, together with any recommendations for modifications to the
equipment or the addition of equipment or devices to such gaming equipment.

        The Company has filed applications for licenses in Minnesota and
Ontario, Canada, and intends to seek approval of its bonusing technology for use
in any other jurisdiction in which a sale arises. Failure of the Company to
obtain approval for the use of bonusing technology by a gaming licensee in a
jurisdiction would prevent the use of such technology at the licensee's location
and also will prevent any other gaming licensee within that jurisdiction from
using the products until the appropriate approvals have been obtained or
requirements complied with.



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        CORPORATE REGULATION

               Nevada

        The manufacture, sale and distribution of gaming devices are subject to:
(i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulation. 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.

        On December 21, 1995, the Nevada Commission registered the Company as a
publicly traded corporation ("Registered Corporation") and granted
manufacturer's and distributor's licenses to the Company's wholly-owned
subsidiary, AGI Distribution, Inc. ("AGID"), a Nevada corporation. The
Commission also granted AGID a nonrestricted license as the operator of a slot
machine route ("Slot Route License"). As a Registered Corporation, the Company
is required to periodically submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require.

        AGID's manufacturer's, distributor's and Slot Route 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, AGID without
first obtaining licenses and approvals from the Nevada Gaming Authorities. The
Company and AGID have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.

        The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or AGID 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 AGID 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 the Company who are actively and directly
involved in the gaming activities of AGID may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing or a finding of suitability for any cause
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.

        If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or to continue having a relationship with
the Company or AGID, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or AGID



                                       8
<PAGE>   11

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

        If it was determined that the Nevada Act was violated by the Company or
AGID, the gaming registrations, licenses and approvals they hold could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, AGID, the Company 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 AGID and 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 corporate charter, bylaws, management,
policies or operations of the Company or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent with holding
the Company's voting securities for investment purposes only. Activities that
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.

        Any person who fails or refuses to apply for a finding of suitability or
a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or AGID, 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
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.



                                       9
<PAGE>   12

        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 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



                                       10
<PAGE>   13

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

        Other jurisdictions in which the Company's products are sold or used
require various licenses, permits, and approvals in connection with such sale or
use, typically involving restrictions similar in most respects to those of
Nevada. The Company has complied with the approval process for use of the
products it has sold in these other jurisdictions, including the receipt of
manufacturer and distributor licenses, permits, or certificates in each such
state. Not all of the Company's products have been approved for sale in all
jurisdictions. No assurances can be given that such required licenses, permits,
certificates or approvals will be given or renewed in the future.

EMPLOYEES

        At August 31, 1999, the Company had 89 full-time employees of whom 46
were involved in research and development, 16 in customer service and support, 6
in material control, 5 in sales and marketing and 16 in administration and
management. None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and believes that its employee relations are good.

FORWARD-LOOKING STATEMENTS

        Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties that may cause actual results to
differ materially from those predicted in the forward-looking statements.
Forward-looking statements can be identified by their use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
If any of the Company's assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, the Company's actual
results could materially differ from those anticipated by such forward-looking
statements.

        Forward-looking statements relate to the Company's plans and
expectations as to: future performance, growth opportunities, expansion,
competition, communication protocols, sales backlog, adequacy of cash and
equivalents balances to fund the Company's operations; anticipated future sales;
anticipated costs of relocating the Company's headquarters and the amount of
expected annual operating cost savings related to such relocation; revenue
recognition; cash collections; scheduled product installation dates; new product
development and introduction; patent protection; and anticipated effects of the
Year 2000.

        Such plans and expectations involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
For a discussion of these risk factors, see "Factors that May Affect Future
Results." In addition, from time to time, the Company may issue other
forward-looking statements. Any forward-looking statements, including other
written or oral forward-looking statements made by the Company or persons acting
on its behalf, should be considered in light of these risk factors and other
risk factors referred to from time to time in the Company's press releases,
periodic reports or communications with stockholders.

ITEM 2.   PROPERTIES

        In July 1999, the Company's administrative headquarters was relocated
and combined with the Company's sales, marketing, customer service and new
product development office in Las Vegas, Nevada at 7115 Amigo Street, Suite 150,
Las Vegas, Nevada. This facility encompasses approximately 31,500 square feet.
The



                                       11
<PAGE>   14

lease commenced on June 15, 1998 and will expire on June 15, 2003. The base rent
is approximately $36,000 per month, plus $5,000 per month for property taxes,
building insurance and common area maintenance.

        In September 1999, the Company's leased facility at 815 N.W. Ninth
Street, Corvallis, Oregon was reduced to approximately 11,000 square feet from
approximately 39,000 square feet. The new lease commenced on September 1, 1999
and will expire on February 28, 2002. The base rent for the total facility is
approximately $15,000 per month, which includes property taxes, building
insurance and common area maintenance.

        The Company owns manufacturing and engineering equipment which it uses
in its assembly operations and research and development efforts. Such equipment
is available from a variety of sources and the Company believes that it
currently owns or can readily acquire equipment required for its current and
anticipated levels of operations.

ITEM 3.  LEGAL PROCEEDINGS

        Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada that allege violation of the federal securities laws by the
Company and its executive officers: Townsend, et al. v. Acres Gaming
Incorporated, et al. CV-S-97-01848-PMP (RJJ) and Jason, et al. v. Acres Gaming
Incorporated, CV-S-98-00262-PMP (RJJ). Those suits have been consolidated into
one combined action styled: In re Acres Gaming Securities Litigation,
CV-S-97-01848-PMP (RJJ). The combined action seeks class certification for a
proposed class consisting of the purchasers of the Company's stock during the
period from March 26, 1997 to December 11, 1997. The court has not yet ruled on
class certification. No trial date or discovery cut-off date has been set. The
defense of this suit has been tendered to and accepted by the Company's
directors and officer's insurance carrier. The Company denies the allegations
and intends to vigorously defend itself.

        Two lawsuits have been filed regarding ownership of the Wheel of Gold
("WOG") technology that is the subject of two patents (the "WOG Patents"). In
the first suit, Anchor, Anchor Coin, and Spin for Cash Wide Area Progressive
Joint Venture, Anchor's partnership with IGT, (together, the "Plaintiffs") sued
the Company for infringement of the WOG Patents, breach of warranty and breach
of contract: Anchor Gaming, et al. v. Acres Gaming Incorporated, No.
CV-S-99-00245-LDG (LRL). This action is now pending in U.S. District Court.
Plaintiffs seek to enjoin the Company from infringing the WOG Patents and from
competing with it in the sale of wheel styled bonus gaming devices. The
Plaintiffs also seek unspecified compensatory damages, treble damages, costs of
suit, and attorney's fees. The Company has filed a counterclaim in that
proceeding for a declaration that the Company is the sole or joint owner of the
WOG Patents. The defense of this suit has been tendered to and accepted by the
Company's general liability insurance carrier.

        In the second action, the Company has filed suit against Anchor and Spin
for Cash Wide Area Progressive Joint Venture and is now pending in U.S. District
Court for the District of Oregon in Eugene, Oregon: Acres Gaming Incorporated v.
Anchor Gaming, et al., No. CV99-698-HO. The Company alleges that Anchor
wrongfully used the Company's intellectual property to obtain the WOG Patents,
that the filing of the patent applications was fraudulently concealed from the
Company, that Anchor was unjustly enriched by retaining the benefits of the
Company's technology without compensating the Company and that Anchor breached
fiduciary duties owed to the Company. The Company seeks $40 million in
compensatory damages, treble damages, costs of suit, and attorney's fees.

        Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company and its efforts to enforce its patent
rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM
(LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No.
CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated v. Mikohn Gaming
Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset
Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and Acres
Gaming Incorporated v. Mikohn Gaming Corporation, et al., No. CV-S-98-01462 PMP
(RJJ) ("Suit IV"). Suits I, II and III have now been consolidated. The Company
denies all asserted allegations and intends to vigorously defend itself and its
intellectual property rights.



                                       12
<PAGE>   15

        In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.

        In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the Court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.

        In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations" under
11 U.S.C. Section 1125, "interference with prospective economic relations,"
"unfair competition: trade libel" and "unfair competition: disparagement."
Mikohn's counterclaims seek unspecified damages, as well as a trebling of the
damages, punitive damages, attorney's fees and an injunction against the
Company's "continuing to commit the unlawful acts" alleged in the counterclaims.
The Company has tendered the defense of Mikohn's counterclaims to its former
general liability insurance carrier. The insurer has not responded to the tender
of Suit III's defense.

        In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse"; "Sherman Act
Section 2 - Attempted Monopolization"; "spoilation of evidence"; "unfair
competition - intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees.

        In separate but related actions, the Company has filed suit in U.S.
District Court for the District of Oregon against its former general liability
insurance carrier for breach of insurance contract: Acres Gaming Incorporated v.
Atlantic Mutual Insurance Company. The Company's suit is based on the insurer's
refusal to pay more than nominal amounts of the costs of defense in Suit I. In
addition, the Company has filed suit in U.S. District Court for the District of
Oregon against its current general liability insurance carrier for breach of
insurance contract: Acres Gaming Incorporated v. St. Paul Fire & Marine
Insurance Co. This suit is based on the insurer's refusal to defend the Company
against CDS's counterclaims in Suit IV. The Company anticipates that each of
these matters will be resolved by cross motions for summary judgment.

        Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.

        The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.

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

There were no matters submitted to a vote of security holders during the quarter
ended June 30, 1999.



                                       13
<PAGE>   16

EXECUTIVE OFFICERS OF REGISTRANT

        As of August 31, 1999, the executive officers of the Company were as set
forth below:

<TABLE>
<CAPTION>
                                                                       EXECUTIVE
       NAME                     AGE       POSITIONS AND OFFICES      OFFICER SINCE
       ----                     ---       ---------------------      -------------
<S>                             <C>    <C>                           <C>
       John F. Acres            45     Chairman                           1985

       Floyd W. Glisson         52     Chief Executive Officer,           1998
                                       President and Director

       Reed M. Alewel           35     Vice President, Chief              1999
                                       Financial Officer,
                                       Treasurer and Assistant
                                       Secretary

       Richard J. Schneider     42     Vice President and Chief           1999
                                       Operating Officer

       Gerald D. Haynes         41     Vice President, General            1999
                                       Counsel and Secretary
</TABLE>


        There are no family relationships among executive officers of the
Company.

        John F. Acres, the founder of the Company, has served as the Chairman of
the Company since its inception in 1985. Mr. Acres served as the Chief Executive
Officer from January 1985 until July 1998. He also served as President of the
Company from January 1985 to January 1996 and from February 1998 to July 1998
and as Secretary from January 1985 to January 1997. Mr. Acres has been involved
in the gaming industry since 1972 and has designed slot data collection systems,
player tracking systems and equipment for progressive jackpot systems that are
widely used in the industry. In 1981, he founded Electronic Data Technology
("EDT") to manufacture and sell progressive jackpot system designs. While with
EDT, he designed one of the first slot data collection systems and invented the
electronic player tracking system. He sold a majority interest in EDT to IGT in
1983 and remained as president of EDT until 1985. The player tracking system
designed by Mr. Acres while with EDT is installed on approximately 100,000
gaming machines throughout the world and was actively marketed by IGT until
1997. In 1985, Mr. Acres co-founded Mikohn. He served as vice president and a
director of Mikohn until 1988.

        Floyd W. Glisson became President and Chief Executive Officer of the
Company in July 1998. Mr. Glisson was senior vice president, finance and
administration and chief financial officer for ConAgra Grocery Products Company,
a unit of ConAgra, Inc., from June 1993 to July 1998. Prior to June 1993, Mr.
Glisson was senior vice president, finance and administration and chief
financial officer of Hunt Wesson, Inc., a food processing company that is a
subsidiary of ConAgra, Inc. In addition to normal staff functions, Mr. Glisson
was also responsible for Food Service and International Operations.

        Reed M. Alewel joined the Company in October 1996 as Controller and
Assistant Secretary. He was elected Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary in July 1999. Mr. Alewel was the manager of
financial planning and analysis for the American Italian Pasta Company, a food
manufacturing company, from May 1992 to October 1996. Mr. Alewel is a Certified
Public Accountant.

        Richard J. Schneider joined the Company in December 1997 as the Vice
President of Game Development. In July 1999, Mr. Schneider was elected Vice
President and Chief Operating Officer. From July 1997 to December 1997, Mr.
Schneider was the vice president of game engineering for CDS. From 1992 to 1997,
Mr. Schneider was the director of engineering for United Coin Machine Company.



                                       14
<PAGE>   17

        Gerald D. Haynes joined the Company in December 1997 as Vice President,
Corporate Counsel. In February 1999, Mr. Haynes was promoted to Vice President
and General Counsel and in July 1999, Mr. Haynes was also elected as Secretary
of the Company. From January 1997 to December 1997, Mr. Haynes was general
counsel and vice president of Oxis International, Inc., a biopharmaceutical
company. From November 1994 to January 1997, Mr. Haynes, as a sole practitioner,
functioned among other things, as patent counsel for Kaiser Aluminum & Chemical
Corp. and general counsel for Oxis International, Inc.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock trades on the Nasdaq SmallCap Market under
the symbol "AGAM". The following table sets forth, for the periods indicated,
the range of high, low and end of period market prices for the Company's common
stock as reported by the Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
                                                        MARKET PRICE PER SHARE
                                                        ----------------------

                                                     LOW          HIGH      END OF PERIOD
                                                     ---          ----      -------------
<S>                                                 <C>          <C>        <C>
       FISCAL YEAR ENDED JUNE 30, 1999:
           First quarter.....................       $3.19       $ 6.00        $ 3.19
           Second quarter....................        1.63         4.38          2.44
           Third quarter.....................        2.00         3.13          2.75
           Fourth quarter....................        1.06         3.50          2.00

       FISCAL YEAR ENDED JUNE 30, 1998:
           First quarter.....................       $7.63       $12.00        $11.31
           Second quarter....................        3.75        12.75          4.38
           Third quarter.....................        4.31         6.56          4.88
           Fourth quarter....................        4.31         5.25          5.00
</TABLE>

        The Company estimates that there are approximately 4,160 beneficial
owners of the Company's common stock.

        The Company has never paid or declared any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors.



                                       15
<PAGE>   18

ITEM 6.   SELECTED FINANCIAL DATA

        The following table sets forth selected financial information concerning
the Company and should be read in conjunction with the audited financial
statements and notes included in "Financial Statements and Supplementary Data".

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED JUNE 30,
                                                        -------------------------------------------------------------------------
                                                          1999              1998              1997          1996           1995
                                                        --------          --------          --------      --------       --------
                                                                            (in thousands except per share data)
<S>                                                     <C>               <C>               <C>           <C>            <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues .....................................      $ 13,972          $ 17,573          $ 20,455      $  6,942       $  4,006
Gross profits ....................................         5,719             6,623            10,902         3,355          1,436
Income (loss) from operations ....................        (7,248)(1)        (4,660)(2)         1,425        (1,665)        (2,489)
Net income (loss) ................................        (6,988)(1)        (4,177)(2)         1,798        (1,641)        (2,505)
Net income (loss) per common share-basic .........      $   (.79)(1)      $   (.47)(2)      $    .21      $  (0.22)      $  (0.35)
Net income (loss) per common share-diluted .......      $   (.79)(1)      $   (.47)(2)      $    .20      $  (0.22)      $  (0.35)
</TABLE>

(1) During 1999, the Company recorded a non-recurring charge of $400,000 ($.04
    per share) for the costs of the Company's relocation of its headquarters to
    Las Vegas, Nevada.

(2) During 1998, the Company recorded a non-recurring charge of $745,000 ($.08
    per share) for the costs of the Company's change in business focus to the
    Acres Bonusing and bonus game product lines.


<TABLE>
<CAPTION>
                                                                          AS OF JUNE 30,
                                                   -----------------------------------------------------------
                                                    1999         1998         1997         1996         1995
                                                   -------      -------      -------      -------      -------
                                                                          (in thousands)
<S>                                                <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Working capital .............................      $ 4,649      $12,091      $16,474      $ 2,552      $ 3,458
Total assets ................................       16,097       17,194       21,323        7,631        6,264
Current liabilities .........................        8,050        2,435        2,545        3,644        1,302
Long-term debt ..............................           --           --           --           --           --
Redeemable convertible preferred stock ......        4,948        4,948        4,948           --           --
Stockholders' equity ........................        3,099        9,811       13,830        3,987        4,962
</TABLE>


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

OVERVIEW

        The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology and are designed
to enhance casino profitability by providing entertainment and incentives to
players of gaming machines. The bonusing technology improves the efficiency of
bonus and incentive programs currently offered by many casinos, and makes
possible some bonus and incentive programs that have not previously been
offered.

        At its current stage of operations, the Company's financial position and
operating results may be materially affected by a number of factors, including
the timing of receipt, installation and regulatory approval of any one order,
availability of additional capital, competition and technological change.
Historically, three or fewer customers have accounted for more than 65 percent
of annual revenues. (See "Business - Customers" and "Factors That May Affect
Future Results").



                                       16
<PAGE>   19

RESULTS OF OPERATIONS

        COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND 1998

        The Company's net revenues during the year ended June 30, 1999 were
$14.0 million, a decrease of $3.6 million from the $17.6 million of net revenues
in 1998. The Company's revenues can fluctuate significantly based on the timing
of the delivery of any large order. In the current year, sales to IGT decreased
by $9.9 million of which $4.1 million was due to the Company's granting of
manufacturing rights to IGT pursuant to which the Company receives royalty
payments on certain hardware manufactured by IGT. In the prior year, when the
Company manufactured and sold hardware to IGT, the Company recorded higher per
unit revenue on the hardware, although gross profit was approximately the same.
Additionally, sales of components to Anchor decreased by $2.7 million from the
prior year. These decreases in revenue were partially offset by $8.2 million of
system sales made directly to casinos.

        Component materials purchased primarily from computer and electronics
vendors comprised 55 percent of the cost of revenues in 1999 and 66 percent in
1998. Manufacturing, procurement, software customization, service and
installation labor and expenses accounted for the remaining cost of revenues.
Changes in the components of the cost of revenues result from changes in the mix
of products sold.

        Gross profit margin improved to 41% in fiscal 1999 from 38% in fiscal
1998. The shift to royalty-based revenues resulted in an increase in gross
profit margin of 9 percentage points. This increase was partially offset by the
absorption of certain fixed manufacturing and service costs over a smaller sales
volume and changes in the mix of products sold.

        The Company's research and development expenses increased to $6.4
million in 1999, from $5.2 million in the prior year. This increase is primarily
due to the cost of development of enhancements and additional modules for Acres
Advantage and the increased size of the Las Vegas office facility, a large
portion of which is used for research and development activities. The Company
expects to continue to spend a significant portion of its revenue on research
and development in order to enhance and expand the capabilities of Acres
Advantage and develop additional bonus games.

        Selling, general and administrative costs increased to $6.1 million in
1999 from $5.3 million in the prior year. This increase was the result of
approximately $1.4 million of incremental legal fees incurred to secure and
defend the Company's intellectual property rights for new and existing bonusing
products. The increase in legal fees was partially offset by changes in the
Company's business focus to the Acres Bonusing and bonus game product lines
which resulted in reductions in sales and marketing salaries and promotional
activities.

        Operating expenses in fiscal 1999 include a non-recurring charge of
$400,000 ($.04 per share) related to the Company's relocation of its
headquarters to Las Vegas, Nevada.

        Other income, primarily comprised of interest income, decreased by
$223,000 as a result of reduced balances of invested cash and equivalents. The
Company has cumulative net operating losses of approximately $15.5 million
available to offset future taxable income through 2019. As the realizability of
these net operating loss carryforwards is uncertain, the Company has provided a
valuation allowance for the entire amount and did not record an income tax
benefit for the years ended June 30, 1999 or 1998. The net loss for the year
ended June 30, 1999 was $7.0 million ($0.79 per share) compared to a net loss of
$4.2 million ($0.47 per share) in the prior year.

        COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997

        The Company's net revenues during the year ended June 30, 1998 were
$17.6 million, a decrease of $2.9 million from the $20.5 million of net revenues
in 1997. Although sales to IGT during the year ended June 30, 1998 increased
over the prior year by approximately $7.5 million, sales of products for the
Crown Casino in Melbourne, Australia decreased by $3.8 million, sales of the
Company's Legacy slot accounting and player tracking system



                                       17
<PAGE>   20

decreased by $2.7 million, sales of components to Anchor decreased by $2.6
million and sales of custom bonusing applications decreased by $1.3 million from
the prior year.

        Component materials purchased primarily from computer and electronics
vendors comprised 66 percent of the cost of revenues in 1998 and 72 percent in
1997. Manufacturing, procurement, service and installation labor and expenses
accounted for the remaining cost of revenues. Changes in the components of the
cost of revenues result from changes in the mix of products sold.

        Gross profit as a percentage of net revenue was 38 percent for 1998,
compared to 53 percent for 1997. Gross profit is generally higher on products
that feature Acres Bonusing Technology, including the Company's Legacy products,
the system for the Crown Casino and components sold to Anchor. During the year
ended June 30, 1998, these sales were substantially replaced with sales of lower
margin hardware components to IGT that resulted in a decrease in gross margin of
approximately 7 percentage points. Gross margin was also reduced by 5 percentage
points due to the costs of installing and removing certain custom bonus
applications that were unsuccessfully placed under revenue-sharing arrangements
in 1998 and an additional 3 percentage points as a result of absorbing certain
fixed manufacturing costs over a smaller sales volume.

        The Company's research and development expenses increased slightly to
$5.2 million in 1998, from $5.1 million in the prior year.

        Selling, general and administrative costs increased to $5.3 million in
1998 from $4.4 million in the prior year. This increase was primarily the result
of approximately $450,000 of incremental legal fees incurred to secure and
defend the Company's intellectual property rights for new and existing bonusing
products and approximately $250,000 of incremental rent expense resulting from
the expansion of the Company's production facility in Corvallis, Oregon in May
1997.

        During the second quarter of fiscal 1998, the Company changed its
business focus to providing Acres Bonusing products and to developing and
marketing bonus games. In conjunction with this change, the Company recorded a
non-recurring charge of $745,000 to recognize severance and inventory costs of
discontinuing its Legacy slot accounting and player tracking system. The Company
originally expected to be able to liquidate the majority of the excess Legacy
inventory to existing slot accounting and player tracking customers and smaller
casinos. These sales have not been realized and the significant improvements
available in currently offered products make future sales unlikely.

        Other income increased by $110,000 as a result of interest income
received on investments of cash and equivalents. In fiscal 1998, the Company had
cumulative net operating loss carryforwards for which the realizability was
uncertain. The Company provided a valuation allowance for the entire amount and
did not record an income tax benefit in fiscal 1998. An income tax provision was
not recorded in fiscal 1997 due to the utilization of net operating loss
carryforwards that were available at that time. The net loss for the year ended
June 30, 1998 was $4.2 million ($0.47 per share) compared to a net income of
$1.8 million ($0.20 per share - diluted) in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

        As of June 30, 1999, the Company had cash and equivalents of $5.9
million, compared to $9.9 million as of June 30, 1998. The Company invests its
cash in highly liquid marketable securities with maturities of three months or
less at date of purchase. The Company does not invest in market risk sensitive
instruments.

        At June 30, 1999, the Company had collected $4.2 million in advance
deposits against its order backlog of approximately $9.6 million. In September
1999, the Company signed a sales agreement with Mandalay Resorts Group for their
MotorCity Casino being built in Detroit, Michigan that should generate an
additional $3.6 million



                                       18
<PAGE>   21

of revenue in fiscal 2000. Backlog, however, may not be a meaningful indication
of future sales. Sales are made pursuant to purchase orders or sales agreements
for specific system installations and products are often delivered within
several months of receipt of an order. The Company does not have any material
ongoing long-term sales contracts. At its current stage of operations, the
Company's revenues and results of operations may be materially affected, in the
near term, by the receipt or loss of any one order.

        The Company expects to complete the deliveries and installations
comprising its order backlog, including the order for the MotorCity Casino, and
expects that payments under those contracts will provide sufficient operating
cash flow for fiscal 2000. Failure to successfully deliver the products
comprising the order backlog or failure to subsequently collect the resulting
revenues could have a material adverse affect on the Company's liquidity. The
Company does not have any debt outstanding at June 30, 1999 but intends to
obtain a short-term line of credit. There can be no assurances that a line of
credit will be obtained. The Company has the ability to reduce operating
expenses by reducing staffing and other expenses.

        In July 1999, the Company moved its headquarters to Las Vegas, Nevada
from Corvallis, Oregon. Expenses associated with the relocation are anticipated
to total approximately $400,000 and were accrued as of June 30, 1999. The
Company expects that this relocation will allow it to better serve its customers
and reduce its annual operating expenses by an excess of $1.0 million.

        The Company's operations have historically used cash. During the year
ended June 30, 1999, $1.7 million of cash was used by operating activities
primarily as a result of the Company's net operating loss, net of non-cash
items, and to fund the purchase of inventory necessary to support Acres
Advantage installations scheduled for the first half of fiscal 2000. These uses
of cash were partially offset by increases in the collection of advance deposits
from customers and increases in amounts payable for purchases of inventory and
services. During the year ended June 30, 1998, $2.3 million of net cash was
generated by operating activities as the collection of accounts receivable and
reductions in inventories more than offset the effects of the Company's net
operating loss. During the year ended June 30, 1997, net cash used by operating
activities was $4.4 million, primarily resulting from volume-related increases
in working capital, including changes in accounts receivable, inventory and
customer deposits.

        The Company made capital expenditures of $1.8 million, $1.9 million, and
$1.5 million in 1999, 1998 and 1997, respectively, primarily on computers and
equipment to support research and development efforts. In fiscal 1999, the
Company capitalized $734,000 of software development costs incurred in the
development of additional modules of the Acres Advantage product line.

         The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993 and $6.2 million
from the exercise of the Redeemable Warrants in October 1996. In addition, as
part of the Strategic Alliance with IGT entered into in January 1997, the
Company issued 519,481 shares of Series A Convertible Preferred Stock for net
proceeds of $4.9 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS

        Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties that could cause actual results to
differ materially from the results discussed in the forward-looking statements.
Such factors include, but are not limited to, the following:

YEAR 2000

        The Year 2000 issue results from computer programs operating incorrectly
when the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in



                                       19
<PAGE>   22

normal business activities.

        The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its Legacy
products and in its internal operations and has identified no significant Year
2000 issues. The Company's core business systems are compliant. Compliant
upgrades for the Company's Legacy slot accounting and player tracking products
have been developed and will be made available to all customers prior to
December 31, 1999. The Company has tested its most recent generation of products
and did not identify any material Year 2000 issues. The Company has not incurred
material costs associated with addressing the Year 2000 issue and believes that
future costs will not have a material effect on the Company's financial results.

        Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that it is not overly
reliant on any single vendor because its component parts and services can be
obtained from multiple sources. Failure of telephone service providers or other
utilities could have a significant detrimental effect on the Company's
operations. The Company does not know the status of its customers' Year 2000
compliance initiatives. Failure of the Company's customers to adequately address
such issues could negatively affect their ability to purchase the Company's
products.

        The Company has developed a contingency plan to address the most
reasonably likely "worst-case" scenario. Such contingency plan includes manually
conducting operations in the short-term, which would be less efficient, but
would not be expected to have a material adverse effect on the Company.

COMMUNICATION PROTOCOL

        The Company and IGT have jointly developed a communication protocol
known as SAS4. The protocol is used to communicate instructions and messages
between Acres Bonusing and gaming machines. The communication of these
instructions and messages is essential to the operation of bonuses. Although the
Company and IGT have agreed that the Company can use SAS4 in connection with
certain installations, IGT has stated that the Company may not have an
unrestricted right to use SAS4 with non-IGT games. The Company believes that it
has joint ownership of the protocol and the ability to use and license the
protocol.

        The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.

OTHER RISKS

        Bonus Games. The creation of bonus games and the deployment of those
games into casinos on a revenue-sharing basis are key parts of the Company's
business plan. The Company may not be able to develop successful bonus games or
convince casinos to implement such games on a revenue-sharing basis.

        Government Regulation; Potential Restrictions on Sales. The Company is
subject to gaming regulations in each jurisdiction in which its products are
sold or are used by persons licensed to conduct gaming activities. The Company's
products generally are regulated as "associated equipment", pursuant to which
gaming regulators have discretion to subject the Company, its officers,
directors, key employees, other affiliates, and certain shareholders to
licensing, approval and suitability requirements. In the event that gaming
authorities determine that any person is unsuitable to act in such capacity, the
Company would be required to terminate its relationship with such person, and
under certain circumstances, the Company has the right to redeem its securities
from persons who are found unsuitable. Products offered and expected to be
offered by the Company include features that are not available on products
currently in use. These new features may, in some cases, result in additional
regulatory review and licensing requirements for the products or the Company.
Compliance with such regulatory requirements may be time consuming and
expensive, and may delay or prevent a sale in one or more jurisdictions.



                                       20
<PAGE>   23

In addition, associated equipment generally must be approved by the regulatory
authorities for use by each licensed location within the jurisdiction,
regardless of whether the Company is subject to licensing, approval, or
suitability requirements. Failure by the Company to obtain, or the loss or
suspension of, any necessary licenses, approvals or suitability findings, may
prevent the Company from selling or distributing its product in such
jurisdiction. Such results may have a material adverse effect on the Company.
The Company often enters into contracts that are contingent upon the Company
and/or the customer obtaining the necessary regulatory approvals to sell or use
the Company's products or to operate a casino. Failure to timely obtain such
approvals may result in the termination of the contract and the return of
amounts paid pursuant to such contract.

        Changes in Business and Economic Conditions Generally and in the Gaming
Industry. The strength and profitability of the Company's business depends on
the overall demand for bonusing products and growth in the gaming industry.
Gaming industry revenues are sensitive to general economic conditions and
generally rise or fall more rapidly in relation to the condition of the overall
economy. In a period of reduced demand, the Company may not be able to lower its
costs rapidly enough to counter a decrease in revenues.

        Product Concentration; Competition; Risks of Technological Change. The
Company expects to derive most of its revenues from the sale of bonusing
products and the Company's future success will depend in part upon its ability
to continue to generate sales of these products. A decline in demand or prices
for the Company's bonusing products, whether as a result of new product
introduction or price competition from competitors, technological change, or
failure of the Company's bonusing products to address customer requirements or
otherwise, could have a material adverse effect on the Company's revenues and
operating results. The markets in which the Company competes are highly
competitive and subject to frequent technological change and one or more of the
Company's competitors may develop alternative technologies for bonusing or game
promotions. The Company's future results of operations will depend in part upon
its ability to improve and market its existing products and to successfully
develop, manufacture and market new products. While the Company expends a
significant portion of its revenues on research and development and on product
enhancement, the Company may not be able to continue to improve and market its
existing products or develop and market new products, or technological
developments may cause the Company's products to become obsolete or
noncompetitive. Many of the Company's competitors have substantially greater
financial, marketing and technological resources than the Company and the
Company may not be able to compete successfully with them.

        Patents and Trademarks. The Company relies on a combination of patent,
trade secret, copyright and trademark law, nondisclosure agreements and
technical security measures to protect its products. The Company has received
U.S. patents on certain features of its bonusing product line, has applied for
additional U.S. patents and may in the future apply for other U.S. patents and
corresponding foreign patents. The Company may also file for patents on certain
features of products that the Company may develop in the future. Notwithstanding
these safeguards, it is possible for competitors of the Company to obtain its
trade secrets and to imitate its products. Furthermore, others may independently
develop products similar or superior to those developed or planned by the
Company. While the Company may obtain patents with respect to certain of its
products, the Company may not have sufficient resources to defend such patents,
such patents may not afford all necessary protection and competitors may develop
equivalent or superior products which may not infringe such patents.

        Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have fluctuated in the past, and may fluctuate significantly
in the future, due to a number of factors, including, among others, the size and
timing of customer orders, the timing and market acceptance of new products
introduced by the Company, changes in the level of operating expenses,
technological advances and new product introductions by the Company's
competitors, competitive conditions in the industry, regulatory approval and
general economic conditions. Product development and marketing costs are often
incurred in periods before any revenues are recognized from the sales of
products, and gross margins are lower and operating expenses are higher during
periods in which such product development expenses are incurred and marketing
efforts are commenced. At its current stage of operations, the Company's
quarterly revenues and results of operations may be materially affected by the
receipt or loss of any one order and by the timing of the delivery, installation
and regulatory approval of any one order. The Company may not be able to achieve
or maintain profitable operations on a consistent basis. The Company believes
that period to period comparisons of its financial results may not be meaningful
and should not



                                       21
<PAGE>   24

be relied upon as indications of future performance. Fluctuations in operating
results may result in volatility in the price of the Company's Common Stock.

        Management of Growth; Liquidity. To compete effectively and to manage
future growth, the Company must continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employees. Any failure by the Company to implement and improve
any of the foregoing could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, sufficient
funds to maintain new product development efforts and expected levels of
operations may not be available and additional capital, if and when needed by
the Company, may not be available on terms acceptable to the Company.



                                       22
<PAGE>   25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>

Report of Independent Public Accountants................................     24

Consolidated Balance Sheets.............................................     25

Consolidated Statements of Operations...................................     26

Consolidated Statements of Stockholders' Equity.........................     27

Consolidated Statements of Cash Flows...................................     28

Notes to Consolidated Financial Statements..............................     29
</TABLE>



                                       23
<PAGE>   26

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Acres Gaming Incorporated:

        We have audited the accompanying consolidated balance sheets of Acres
Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Acres Gaming
Incorporated and subsidiary as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.



                                             ARTHUR ANDERSEN LLP

Portland, Oregon,
July 29, 1999



                                       24
<PAGE>   27

                            ACRES GAMING INCORPORATED

                           CONSOLIDATED BALANCE SHEETS

                          AS OF JUNE 30, 1999 AND 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                                       1999           1998
                                                                     --------       --------
                                                                          (in thousands)
<S>                                                                  <C>            <C>
CURRENT ASSETS:
    Cash and equivalents                                             $  5,949       $  9,887
    Receivables, net of allowance of $15,000 and $50,000                1,576          1,929
    Inventories                                                         4,909          2,607
    Prepaid expenses                                                      265            103
                                                                     --------       --------

        Total current assets                                           12,699         14,526
                                                                     --------       --------

PROPERTY AND EQUIPMENT:
    Furniture and fixtures                                                743            540
    Equipment                                                           4,778          4,003
    Leasehold improvements                                                954            627
    Accumulated depreciation                                           (4,101)        (2,919)
                                                                     --------       --------

        Property and equipment, net                                     2,374          2,251
                                                                     --------       --------

OTHER ASSETS, NET                                                       1,024            417
                                                                     --------       --------

                                                                     $ 16,097       $ 17,194
                                                                     ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                                 $  2,407       $    982
    Accrued expenses                                                    1,491            438
    Customer deposits                                                   4,152          1,015
                                                                     --------       --------

        Total current liabilities                                       8,050          2,435
                                                                     --------       --------

REDEEMABLE CONVERTIBLE PREFERRED STOCK                                  4,948          4,948

STOCKHOLDERS' EQUITY:
    Common Stock, $.01 par value, 50 million shares authorized,
      8.9 and 8.8 million shares issued and outstanding in                 89             88
      1999 and 1998, respectively
    Additional paid-in capital                                         19,904         19,554
    Accumulated deficit                                               (16,894)        (9,831)
                                                                     --------       --------

        Total stockholders' equity                                      3,099          9,811
                                                                     --------       --------

                                                                     $ 16,097       $ 17,194
                                                                     ========       ========
</TABLE>

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



                                       25
<PAGE>   28

                            ACRES GAMING INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                               1999           1998           1997
                                             --------       --------       --------
                                              (in thousands except per share data)
<S>                                          <C>            <C>            <C>
NET REVENUES                                 $ 13,972       $ 17,573       $ 20,455

COST OF REVENUES                                8,253         10,950          9,553
                                             --------       --------       --------

GROSS PROFIT                                    5,719          6,623         10,902
                                             --------       --------       --------

OPERATING EXPENSES:
    Research and development                    6,440          5,210          5,090
    Selling, general and administrative         6,127          5,328          4,387
    Non-recurring charge                          400            745             --
                                             --------       --------       --------
        Total operating expenses               12,967         11,283          9,477
                                             --------       --------       --------

INCOME (LOSS) FROM OPERATIONS                  (7,248)        (4,660)         1,425

OTHER INCOME                                      260            483            373
                                             --------       --------       --------
NET INCOME (LOSS)                            $ (6,988)      $ (4,177)      $  1,798
                                             ========       ========       ========

NET INCOME (LOSS) PER SHARE - BASIC          $   (.79)      $   (.47)      $    .21
                                             ========       ========       ========

NET INCOME (LOSS) PER SHARE - DILUTED        $   (.79)      $   (.47)      $    .20
                                             ========       ========       ========
</TABLE>


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



                                       26
<PAGE>   29

                            ACRES GAMING INCORPORATED

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                      COMMON STOCK          ADDITIONAL
                                 ----------------------      PAID-IN     ACCUMULATED
                                  SHARES        AMOUNT       CAPITAL       DEFICIT          TOTAL
                                 --------      --------     ----------   -----------      --------
                                                          (in thousands)
<S>                              <C>           <C>          <C>          <C>              <C>
Balance as of June 30, 1996         7,601      $     76      $ 11,224      $ (7,313)      $  3,987
  Issuance of common stock          1,163            12         8,097            --          8,109
  Net income                           --            --            --         1,798          1,798
  Preferred stock dividends            --            --            --           (64)           (64)
                                 --------      --------      --------      --------       --------
Balance as of June 30, 1997         8,764            88        19,321        (5,579)        13,830
  Issuance of common stock             56            --           233            --            233
  Net loss                             --            --            --        (4,177)        (4,177)
  Preferred stock dividends            --            --            --           (75)           (75)
                                 --------      --------      --------      --------       --------
Balance as of June 30, 1998         8,820            88        19,554        (9,831)         9,811
  Issuance of common stock             93             1           350            --            351
  Net loss                             --            --            --        (6,988)        (6,988)
  Preferred stock dividends            --            --            --           (75)           (75)
                                 --------      --------      --------      --------       --------
Balance as of June 30, 1999         8,913      $     89      $ 19,904      $(16,894)      $  3,099
                                 ========      ========      ========      ========       ========
</TABLE>


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



                                       27
<PAGE>   30

                            ACRES GAMING INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                         1999           1998           1997
                                                       --------       --------       --------
                                                                   (in thousands)
<S>                                                    <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                  $ (6,988)      $ (4,177)      $  1,798
    Adjustments to reconcile net income (loss) to
      net cash from operating activities:
        Depreciation and amortization                     1,806          1,493            931
        Non-recurring charge                                400            745             --
        Changes in assets and liabilities:
           Receivables                                      353          1,951         (2,970)
           Inventories                                   (2,302)         2,098         (2,674)
           Prepaid expenses                                (162)           352           (361)
           Accounts payable and accrued expenses          2,078           (726)           166
           Customer deposits                              3,137            532         (1,265)
                                                       --------       --------       --------

               Net cash from operating activities        (1,678)         2,268         (4,375)
                                                       --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                   (1,815)        (1,922)        (1,502)
    Capitalized software costs                             (734)            --             --
    Other, net                                               13             65           (298)
                                                       --------       --------       --------

               Net cash from investing activities        (2,536)        (1,857)        (1,800)
                                                       --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of common stock              351            233          8,109
    Net proceeds from issuance of preferred stock            --             --          4,948
    Preferred stock dividends                               (75)           (75)           (64)
                                                       --------       --------       --------

               Net cash from financing activities           276            158         12,993
                                                       --------       --------       --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS          (3,938)           569          6,818

CASH AND EQUIVALENTS AT BEGINNING OF YEAR                 9,887          9,318          2,500
                                                       --------       --------       --------

CASH AND EQUIVALENTS AT END OF YEAR                    $  5,949       $  9,887       $  9,318
                                                       ========       ========       ========
</TABLE>


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



                                       28
<PAGE>   31

                            ACRES GAMING INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:

COMPANY OPERATIONS AND BASIS OF CONSOLIDATION

        The consolidated financial statements include the accounts of Acres
Gaming Incorporated and its wholly owned subsidiary, AGI Distribution, Inc. (the
"Company"). All intercompany accounts and transactions have been eliminated.

        The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology and
are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible bonus and incentive programs that have not previously been
offered. The Company primarily sells its products in the United States and in
Australia. Sales in Australia totaled $384,000, $1.2 million and $4.8 million,
for the years ended June 30, 1999, 1998 and 1997, respectively.

        At its current stage of operations, the Company's financial position and
operating results may be materially affected by a number of factors, including
the timing of receipt, installation and regulatory approval of any one order,
availability of additional capital, competition and technological change.

        Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the results
of operations or stockholders' equity as previously reported.

REVENUE RECOGNITION

        The Company sells certain of its products under contracts that generally
provide for a deposit to be paid before commencement of the project and for a
final payment to be made after completion of the project. Revenue is recognized
as individual units are installed or, in those instances where the contract does
not provide for the Company to install the equipment, upon shipment. Customer
deposits received under sales agreements are reflected as liabilities until the
related revenue is recognized.

        The Company has entered into certain manufacturing royalty agreements
where revenue is recognized as the licensed manufacturer sells the related
hardware products.

        For certain contracts requiring significant product customization,
revenue is recognized on the percentage-of-completion method. Labor costs
incurred for customization and installation are the basis for determining
percentage-of-completion, giving effect to the most recent estimates of such
total labor costs. The effect of changes to total estimated customization and
installation labor costs is recognized in the period in which such changes are
determined. The Company defers revenue subject to forfeiture, refund, or other
concession until such revenue meets the criteria for collectibility. Provisions
for estimated losses are made in the period in which the loss first becomes
apparent.

        Included in accounts receivable are unbilled receivables of $1.0 million
at June 30, 1999. The Company did not have any unbilled receivables at June 30,
1998. Unbilled receivables represent revenues recognized in excess of billings
on certain contracts. Unbilled receivables were not billable at the balance
sheet date but are recoverable as billings are made in accordance with the
contract terms.



                                       29
<PAGE>   32

MAJOR CUSTOMERS

        One customer accounted for 51 percent of the Company's net revenues in
1999. Another customer accounted for 23 percent, 75 percent and 28 percent of
the Company's net revenues in 1999, 1998 and 1997, respectively. A third
customer accounted for 18 percent and 28 percent of the Company's net revenues
in 1998 and 1997, respectively. A fourth customer provided 12 percent of the
Company's net revenues in 1997.

INCOME TAXES

        The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates in effect in the years
in which the differences are expected to reverse.

CASH AND EQUIVALENTS

        Cash and equivalents include cash on hand, amounts held in and due from
banks and highly liquid marketable securities with maturities of three months or
less at date of purchase.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The Company's financial instruments consist of receivables. At June 30,
1999 and 1998, the fair value of the Company's receivables approximated their
carrying value.

INVENTORIES

        Inventories consist of electronic components and other hardware, which
are recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:

<TABLE>
<CAPTION>
                                                  INVENTORIES AT JUNE 30,
                                                  ----------------------
                                                    1999           1998
                                                  -------        -------
                                                       (in thousands)
<S>                                               <C>            <C>
       Raw materials                              $ 1,114        $   957
       Work-in-progress                             1,398            124
       Finished goods                               2,397          1,526
                                                  -------        -------
       Total inventories                          $ 4,909        $ 2,607
                                                  =======        =======
</TABLE>

PROPERTY AND EQUIPMENT

        Property and equipment is stated at cost. Depreciation is computed on
the straight-line basis over the assets' estimated useful lives of two to five
years. Leasehold improvements are amortized over the lease term. Expenditures
for maintenance and repairs are charged to operations when incurred.

INTANGIBLE ASSETS

        Intangible assets consist of costs associated with the establishment of
patents, gaming licenses and gaming product approvals in various jurisdictions.
Amortization of patents is calculated using the straight-line method over the
estimated life of the patent. Gaming licenses and product approvals are
amortized over periods of five years and two years, respectively. Intangible
assets, net of accumulated amortization, were $259,000 and $345,000 at June 30,
1999 and 1998, respectively, and are included in other assets.



                                       30
<PAGE>   33

CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS

        Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting software
product is commercially feasible. Capitalized software costs, net of accumulated
amortization, were $647,000 at June 30, 1999 and are included in other assets.
There were no capitalized software costs at June 30, 1998. Capitalized costs are
amortized on a straight-line basis over the estimated life of the product
beginning when the product becomes commercially feasible. All research and
development costs are expensed as incurred.

NON-RECURRING CHARGES

        During the fourth quarter of fiscal 1999, the Company elected to
outsource almost all of its manufacturing functions and initiated a relocation
of its headquarters from Corvallis, Oregon to Las Vegas, Nevada. The Company
recorded a $400,000 non-recurring charge to recognize the related severance,
recruiting and moving expenses.

        During the second quarter of fiscal 1998, the Company changed its
business focus to the Acres Bonusing and bonus game product lines and recorded a
non-recurring charge of $745,000 to recognize severance and inventory costs of
discontinuing its Legacy slot accounting and player tracking system.

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, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.

2.    INCOME TAXES:

        At June 30, 1999, the Company had cumulative net operating losses
totaling approximately $15.5 million that are available to offset future taxable
income through 2019. A portion of the net operating loss carryforwards was used
to offset income for the year ended June 30, 1997. The Company has provided a
valuation allowance for the remaining amount of the benefit related to these net
operating loss carryforwards as realizability is uncertain.

        Deferred income taxes are provided for the temporary differences between
the carrying amounts of the Company's assets and liabilities for financial
statement purposes and their tax bases. Deferred tax liabilities were
insignificant as of June 30, 1999 and 1998. The sources of the differences that
give rise to the deferred income tax assets as of June 30, 1999 and 1998, along
with the income tax effects of each, are as follows:

<TABLE>
<CAPTION>
                                                          DEFERRED INCOME TAX
                                                           ASSETS AT JUNE 30,
                                                        -----------------------
                                                          1999            1998
                                                        -------         -------
                                                              (in thousands)
<S>                                                     <C>             <C>
      Operating loss carryforwards                      $ 5,899         $ 3,621
      Research and development tax credit                   921             632
      Property and equipment                                429             367
      Accruals and reserves                                 273             355
      Intangible assets                                      34              23
                                                        -------         -------
                                                          7,556           4,998
      Less valuation allowance                           (7,556)         (4,998)
                                                        -------         -------
      Net deferred tax assets                           $     0         $     0
                                                        =======         =======
</TABLE>

        The valuation allowance related to deferred tax assets increased by $2.6
million and $2.7 million in 1999 and 1998, respectively.



                                       31
<PAGE>   34

3.    COMMITMENTS AND CONTINGENCIES:

LITIGATION

        Two related lawsuits have been filed in the U.S. District Court that
allege violation of the federal securities laws by the Company and its executive
officers. Those suits have been consolidated into one combined action that seeks
class certification for a proposed class consisting of the purchasers of the
Company's stock during the period from March 26, 1997 to December 11, 1997. The
court has not yet ruled on class certification. No trial date or discovery
cut-off date has been set. The defense of this suit has been tendered to and
accepted by the Company's directors and officer's insurance carrier. The Company
denies the allegations and intends to vigorously defend itself.

        Two lawsuits have been filed regarding ownership of the WOG technology
that is the subject of two patents (the "WOG Patents") that have been assigned
to Anchor. In the first suit, now pending in U.S. District Court, the WOG
plaintiffs brought patent infringement, breach of warranty and breach of
contract actions against the Company based on the WOG Patents and the Company's
supply agreement with Anchor. Plaintiffs seek to enjoin the Company from
infringing the WOG Patents and from competing with it in the sale of wheel
styled bonus gaming devices. The plaintiffs also seek unspecified compensatory
damages, treble damages, costs of suit, and attorney's fees. The Company has
filed a counterclaim in that proceeding for a declaration that the Company is
the sole or joint owner of the WOG Patents. The defense of this suit has been
tendered to and accepted by the Company's general liability insurance carrier.

        In the second action, the Company has filed suit alleging that Anchor
wrongfully used the Company's technology to obtain the WOG Patents, that the
filing of the patent applications was fraudulently concealed from the Company,
that Anchor was unjustly enriched by retaining the benefits of the Company's
technology without compensating the Company and that Anchor breached fiduciary
duties owed to the Company. The Company seeks $40 million in compensatory
damages, treble damages, costs of suit, and attorney's fees.

        Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company denies all asserted
allegations and intends to vigorously defend itself and its intellectual
property rights.

        In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.

        In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.

        In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations,"
"interference with prospective economic relations," "unfair competition: trade
libel" and "unfair competition: disparagement." Mikohn's counterclaims seek
unspecified damages, as well as a trebling of the damages, punitive damages,
attorney's fees and an injunction against the Company's "continuing to commit
the unlawful acts" alleged in the counterclaims. The Company has



                                       32
<PAGE>   35

tendered the defense of Mikohn's counterclaims to its former general liability
insurance carrier. To date the insurer has not responded to the tender of Suit
III's defense.

        In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse," "Sherman Act
section 2 - attempted monopolization," "spoilation of evidence," "unfair
competition - intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees. No trial date has been set.

        In a separate but related action, the Company has filed suit in U.S.
District Court against its former general liability insurance carrier for breach
of insurance contract. The Company's suit is based on the insurer's refusal to
pay more than nominal amounts of the costs of defense in Suit I. In addition,
the Company has filed suit against its current general liability insurance
carrier for breach of insurance contract based on the insurer's refusal to
defend the Company against CDS's counterclaims in Suit IV. The Company
anticipates that each of these matters will be resolved by cross motions for
summary judgment.

        Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.

        The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.

OPERATING LEASES

        The Company leases its office facilities under operating leases that
extend through June 15, 2003. Future minimum lease payments under these
non-cancelable operating leases as of June 30, 1999 are $709,000, $674,000,
$613,000, and $472,000 in 2000, 2001, 2002 and 2003, respectively. Total lease
expense was $822,000, $567,000 and $255,000 for the years ended June 30, 1999,
1998 and 1997, respectively.

4.    REDEEMABLE PREFERRED STOCK:

        In January 1997, the Company created an initial series of preferred
stock, consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock (the "Series A Stock") and issued 519,481 shares for net
proceeds of approximately $4.9 million. The Series A Stock is entitled to
receive non-cumulative dividends at a rate per share equal to 3 percent of
$9.625, the initial per share purchase price. Holders of the Series A Stock have
the option, upon notice to the Company, to convert shares of Series A Stock into
shares of Common Stock based upon the applicable conversion price in effect at
the time of conversion. The initial conversion price for each share of Series A
Stock is the lesser of the price at which the Series A Stock was initially
issued and the average closing price of the Company's Common Stock for the
period of thirty trading days prior to the date of conversion of shares of
Series A Stock. The conversion price is subject to adjustments for certain
events relating to the Common Stock including stock splits and combinations,
dividends and distributions, reclassification, exchange, substitution,
reorganization, merger, or sale of assets. The Series A Stock is subject to
redemption, subject to certain conditions, at a price equal to the purchase
price plus any declared but unpaid dividends. As of June 30, 1999, all declared
dividends have been paid. Due to the Company's financial position and results of
operations, no dividends related to the year ended June 30, 1999 were declared
or paid. In July 1998, $75,000 of dividends related to the six month period
ended June 30, 1998 were declared and paid.

        So long as at least 130,000 of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director and must approve any amendments to the
Company's articles of incorporation including, among other things, amendments to
facilitate the sale or merger of the Company. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Series A Stock will be entitled to receive a liquidation preference of



                                       33
<PAGE>   36

$9.625 per share, plus any declared but unpaid dividends, prior to the
distribution of any of the Company's assets to holders of the Common Stock. Any
assets remaining after the distribution to holders of the Series A Stock will be
distributed to holders of the Common Stock.

5. STOCKHOLDERS' EQUITY:

        In November 1993, the Company completed its initial public offering and
issued 1,667,500 units (the "Units") consisting of 1,667,500 shares of Common
Stock and 833,750 Redeemable Warrants. In connection with the offering, the
Company granted the underwriter warrants to purchase 145,000 Units at $6.00 per
share. The net proceeds of the offering were $7.2 million. In October 1996,
substantially all of the Redeemable Warrants were exercised, resulting in net
proceeds to the Company of approximately $6.2 million. The underwriter warrants
were exercised in October 1996 resulting in net proceeds to the Company of
approximately $1.4 million.

        In June 1995, the Company issued 400,000 shares of Common Stock to a
group of private investors for net proceeds of approximately $2.3 million. In
connection with this offering, the Company granted warrants which expire in June
2000 to purchase 40,000 shares of Common Stock at $7.20 per share, which
approximated market value at that date.

        In 1995, the Company issued warrants to purchase 195,000 shares of
Common Stock to two companies and two individuals in exchange for services. At
June 30, 1999, warrants to purchase 125,000 shares at $9.00 remain outstanding
with an expiration date in September 2000.

        The Company has a Stock Option Plan (the "Plan") which permits the
granting of awards to directors, employees and consultants of the Company in the
form of stock options. Stock options granted under the Plan may be incentive
stock options or nonqualified options. Options generally vest over five years
and expire in ten years. The Company accounts for the Plan under APB Opinion No.
25 "Accounting for Stock Issued to Employees", under which no compensation cost
is recognized. Had compensation cost for the Plan been determined consistent
with FASB Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and
earnings (loss) per share would have approximated the following pro forma
amounts:

<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED JUNE 30,
                                                               -----------------------------------------
                                                                  1999           1998             1997
                                                               ---------       ---------       ---------
                                                                   (in thousands except per share data)
<S>                                           <C>              <C>             <C>             <C>
       NET INCOME (LOSS):                     As reported      $  (6,988)      $  (4,177)      $   1,798
                                              Pro forma           (8,226)         (4,863)            535


       EARNINGS (LOSS) PER SHARE - BASIC:     As reported      $    (.79)      $    (.47)      $     .21
                                              Pro forma             (.92)           (.55)            .06

       EARNINGS (LOSS) PER SHARE - DILUTED:   As reported      $    (.79)      $    (.47)      $     .20
                                              Pro forma             (.92)           (.55)            .06
</TABLE>



                                       34
<PAGE>   37

        A total of 1,750,000 shares of the Company's Common Stock have been
reserved for issuance pursuant to awards granted under the Plan. The Company has
granted 1,403,550 options, net of cancellations, through June 30, 1999. Activity
under the Plan is summarized below:

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED JUNE 30,
                                         ---------------------------------------------------------------------------------------
                                                    1999                           1998                           1997
                                         -------------------------      -------------------------      -------------------------
                                                          WEIGHTED                       WEIGHTED                       WEIGHTED
                                                          AVERAGE                        AVERAGE                        AVERAGE
                                                          EXERCISE                       EXERCISE                       EXERCISE
                                           SHARES          PRICE          SHARES          PRICE          SHARES          PRICE
                                         ----------       --------      ----------       --------      ----------       --------
<S>                                      <C>              <C>           <C>              <C>           <C>              <C>
Outstanding at beginning of year          1,041,175       $   5.34       1,132,950       $   6.25         756,375       $   4.23
Granted at exercise prices equal to
  market prices                             422,500           4.40         329,750           5.18         352,450           9.53
Granted at exercise prices
  exceeding market prices                        --             --              --             --         230,500          10.47
Exercised                                   (93,300)          3.75         (55,525)          4.19         (77,625)          4.67
Canceled                                   (173,450)          5.94        (366,000)          8.18        (128,750)         11.92
                                         ----------                     ----------                     ----------
Outstanding at end of year                1,196,925           5.05       1,041,175           5.34       1,132,950           6.25
                                         ==========                     ==========                     ==========

Exercisable at end of year                  702,991           4.81         523,748           4.76         468,007           4.71
                                         ==========                     ==========                     ==========
Weighted average fair value of
  options granted                        $     3.28                     $     3.79                     $     5.35
                                         ==========                     ==========                     ==========
</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:

<TABLE>
<CAPTION>
                                1999           1998           1997
                               -------        -------        -------
<S>                            <C>            <C>            <C>
Risk free interest rate          5.0%           5.8%           6.2%
Expected life of option        5 years        5 years        5 years
Expected volatility              93%            91%            97%
Dividends                       none            none           none
</TABLE>

        The following table summarizes the options to purchase Common Stock
outstanding at June 30, 1999:


<TABLE>
<CAPTION>
                                                                 WEIGHTED                          WEIGHTED
                             OPTIONS FOR      WEIGHTED           AVERAGE        OPTIONS FOR    AVERAGE EXERCISE
          EXERCISE              SHARES         AVERAGE         CONTRACTUAL        SHARES       PRICE OF SHARES
           PRICES            OUTSTANDING    EXERCISE PRICE        LIFE          EXERCISABLE      EXERCISABLE
       ---------------      -------------  ----------------   -------------    -------------  -----------------
<S>                         <C>            <C>                <C>              <C>            <C>
       $1.75 - $ 3.00           155,000        $    2.83        6.4 years          117,000        $    2.96
       $3.13 - $ 5.00           776,275             4.48        8.2 years          411,349             4.27
       $5.06 - $ 9.00           201,600             6.82        7.4 years          146,242             6.74
       $9.13 - $15.00            64,050            11.64        7.7 years           28,400            10.34
       --------------         ---------                                          ---------
       $1.75 - $15.00         1,196,925             5.05        7.8 years          702,991             4.81
       ==============         =========                                          =========
</TABLE>

6.      EMPLOYEE BENEFIT PLAN:

        The Company has a profit sharing plan that operates under the provisions
of section 401(k) of the Internal Revenue Code and covers substantially all
full-time employees. Employer contributions may be made at the discretion of the
Board of Directors. To date, there have been no employer contributions.



                                       35
<PAGE>   38

7.      PER SHARE COMPUTATION:

        The Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding are used to
compute basic earnings per share. The computation of diluted earnings per share
includes the effect of stock options, warrants and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year amounts
have been restated.

<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED JUNE 30,
                                                                           ------------------------------------------
                                                                             1999             1998             1997
                                                                           --------         --------         --------
                                                                               (in thousands except per share data)
<S>                                                                        <C>              <C>              <C>
       Net income (loss)                                                   $ (6,988)        $ (4,177)        $  1,798
                                                                           ========         ========         ========

       Weighted average number of shares of common stock and common
       stock equivalents outstanding:

           Weighted average number of common shares outstanding               8,897            8,804            8,399

           Dilutive effect of warrants and employee stock
           options after application of the treasury stock
           method                                                                --               --              400

           Dilutive effect of redeemable convertible preferred
           stock after application of the if-converted method                    --               --              272
                                                                           --------         --------         --------
           Weighted average number of common shares outstanding
           for computing diluted earnings per share                           8,897            8,804            9,071
                                                                           ========         ========         ========

       Earnings (loss) per share - basic                                   $   (.79)        $   (.47)        $    .21
                                                                           ========         ========         ========

       Earnings (loss) per share - diluted                                 $   (.79)        $   (.47)        $    .20
                                                                           ========         ========         ========
</TABLE>

        The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:

<TABLE>
<CAPTION>
                                                                       BALANCE OUTSTANDING AS OF JUNE 30,
                                                                     -------------------------------------
                                                                      1999            1998           1997
                                                                     -------        -------        -------
                                                                                 (in thousands)
<S>                                                                  <C>            <C>            <C>
       Warrants and employee stock options                             1,361          1,206            101
       Redeemable convertible preferred stock, if converted,
           assuming conversion at rates in effect at June 30,
           1999 and 1998, respectively                                 2,603          1,053             --
</TABLE>



                                       36
<PAGE>   39

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

        No changes in, or disagreements with, accountants which required
reporting on Form 8-K have occurred within the three-year period ended June 30,
1999.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information with respect to Directors of the Company is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 1999.

ITEM 11.  EXECUTIVE COMPENSATION

        Information with respect to Executive Compensation is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 1999.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Company's Proxy
Statement that will be filed pursuant to Regulation 14A within 120 days of June
30, 1999.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's Proxy
Statement that will be filed pursuant to Regulation 14A within 120 days of June
30, 1999.



                                       37
<PAGE>   40

                                     PART IV

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


        (a)    (1)    FINANCIAL STATEMENTS
                      See "Item 8.  Financial Statements and Supplementary Data"

               (2)    FINANCIAL STATEMENT SCHEDULES

               REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT
               SCHEDULE

To Acres Gaming Incorporated:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Acres Gaming Incorporated's 1999
Annual Report on Form 10-K, and have issued our report thereon dated July 29,
1999. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The Valuation and Qualifying Accounts schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.

                                                  ARTHUR ANDERSEN LLP
Portland, Oregon
July 29, 1999


                            ACRES GAMING INCORPORATED
                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                BALANCES                     AMOUNTS
                                                   AT         ADDITIONS      CHARGED       BALANCES
                                                BEGINNING      CHARGED     OFF, NET OF    AT END OF
                                                 OF YEAR      TO INCOME    COLLECTIONS       YEAR
                                               -----------   -----------  -------------  ------------
                                                                   (in thousands)
<S>                                            <C>           <C>          <C>            <C>
     ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
          1999                                   $   50        $   --        $  (35)        $   15
          1998                                      322            25          (297)            50
          1997                                        0           317             5            322

     ALLOWANCE FOR NON-RECURRING CHARGES
          1999                                   $  475        $  400        $ (489)        $  386
          1998                                        0           745          (270)           475
</TABLE>


               (3)    EXHIBITS

                      See "Index to Exhibits".

        (b)    REPORTS ON FORM 8-K.

               No reports on Form 8-K were filed during the last quarter of the
               period covered by this report.



                                       38
<PAGE>   41

                                   SIGNATURES

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

                                   ACRES GAMING INCORPORATED


Date:  September 24, 1999          By:  /s/ Floyd W. Glisson
                                        ----------------------------------------
                                            Floyd W. Glisson
                                            Chief Executive Officer, President
                                            and Director

        Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.


Date:  September 24, 1999          /s/  John F. Acres
                                   ---------------------------------------------
                                            John F. Acres
                                            Chairman of the Board


Date:  September 24, 1999          /s/  Floyd W. Glisson
                                   ---------------------------------------------
                                            Floyd W. Glisson
                                            Chief Executive Officer, President
                                            and Director
                                            (Principal Executive Officer)


Date:  September 24, 1999          /s/  Reed M. Alewel
                                   ---------------------------------------------
                                            Reed M. Alewel
                                            Vice President, Chief Financial
                                            Officer, Treasurer and Assistant
                                            Secretary
                                            (Principal Financial and Accounting
                                            Officer)


Date:  September 24, 1999          /s/  Jo Ann Acres
                                   ---------------------------------------------
                                            Jo Ann Acres
                                            Director


Date:  September 24, 1999          /s/  Richard A. Carone
                                   ---------------------------------------------
                                            Richard A. Carone
                                            Director


Date:  September 24, 1999          /s/  Donald J. Massaro
                                   ---------------------------------------------
                                            Donald J. Massaro
                                            Director



                                       39
<PAGE>   42

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
    EXHIBIT
       NO.     DESCRIPTION
    -------    -----------
<S>            <C>
      3.1      Articles of Incorporation of Acres Gaming Incorporated, as
               amended(4)

      3.2      Bylaws of Acres Gaming Incorporated, as amended(3)

    +10.1      Acres Gaming Incorporated 1993 Stock Option and Incentive Plan,
               as amended(4)

     10.2      Lease dated January 4, 1994, between the Company and Avery
               Investments(1)

     10.3      Agreement dated April 12, 1999 and executed purchase order dated
               May 17, 1999 between Star City Pty Ltd and the Company for the
               Supply of Goods and Services

     10.4      System Upgrade Agreement dated June 7, 1999 between Crown Limited
               and the Company

    +10.5      Employment Agreement dated July 1, 1996 between the Company and
               John F. Acres(4)

     10.6      Stock Purchase Agreement between the Company and IGT dated
               January 28, 1997(4)

     10.7      Registration Rights Agreement between the Company and IGT dated
               January 28, 1997(4)

     10.8      Master Agreement for Product Development, Purchase and Sale
               between the Company and International Game Technology, Inc. dated
               January 27, 1997(4)

     10.9      Form of sublease between the Company and Hewlett-Packard dated
               May 22, 1998(5)

     10.10     Lease dated March 3, 1998 between the Company and #26 McCarran
               Center, LC(2)

     10.11     Equipment Sale Agreement dated October 29, 1998 between AGI
               Distribution, Inc., dba Acres Gaming Incorporated and Mandalay
               Corp., dba Mandalay Bay Resort & Casino(6)

    +10.12     Amendment to Employment Agreement dated July 20, 1998 between the
               Company and John F. Acres(7)

     10.13     Equipment Sales Agreement dated effective June 30, 1999 between
               AGI Distribution, Inc., dba Acres Gaming and Detroit
               Entertainment, L.L.C. dba MotorCity Casino

     21.1      Subsidiaries of the Registrant

     23.1      Consent of Arthur Andersen LLP, Independent Public Accountants

     27.1      Financial Data Schedule for year ended June 30, 1999
</TABLE>
--------------
+       Management contract or compensatory plan or arrangement.

(1)     Incorporated by reference to the exhibits to the Company's Annual Report
        on Form 10-KSB for the year ended June 30, 1994, previously filed with
        the Commission.

(2)     Incorporated by reference to the exhibits to the Company's Annual Report
        on Form 10-K for the year ended June 30, 1998, previously filed with the
        Commission.

(3)     Incorporated by reference to the exhibits to the Company's Quarterly
        Report on Form 10-Q for the quarterly period ended September 30, 1996,
        previously filed with the Commission.

(4)     Incorporated by reference to the exhibits to the Company's Quarterly
        Report on Form 10-Q for the quarterly period ended December 31, 1996,
        previously filed with the Commission.

(5)     Incorporated by reference to the exhibits to the Company's Annual Report
        on Form 10-K for the year ended June 30, 1997, previously filed with the
        Commission.

(6)     Incorporated by reference to the exhibits to the Company's Quarterly
        Report on Form 10-Q for the quarterly period ended December 31, 1998,
        previously filed with the Commission.

 (7)    Incorporated by reference to the exhibits to the Company's Quarterly
        Report on Form 10-Q for the quarterly period ended September 30, 1998,
        previously filed with the Commission.