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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, 1997

                          (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.)
                     ---------------------------------------

                  815 NW NINTH STREET, CORVALLIS, OREGON 97330
                    (Address of principal executive offices)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

                                 (541) 753-7648

           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, 1997 was $66,577,000.

The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share, as of August 31, 1997 was 8,783,818 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 1997 Annual Meeting of Stockholders to be held
November 12, 1997.



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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                    PAGE
                                     PART I
<S>         <C>                                                                      <C>
ITEM 1.     BUSINESS.................................................................1
              General................................................................1
              The Market.............................................................1
              Strategic Alliance with IGT............................................2
              Bonusing Technology Products...........................................2
              Research and Development...............................................5
              Customers..............................................................5
              Marketing..............................................................7
              Production and Manufacturing...........................................8
              Patents................................................................8
              Competition............................................................8
              Government Regulation..................................................9
              Employees.............................................................12
              Forward-Looking Statements............................................12

ITEM 2.     PROPERTIES..............................................................12

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

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................12

            EXECUTIVE OFFICERS OF REGISTRANT........................................13

                                     PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................14

ITEM 6.     SELECTED FINANCIAL DATA.................................................15

ITEM 7      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS...............................................15

            FACTORS THAT MAY AFFECT FUTURE RESULTS..................................18

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................20

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE................................................32

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................32

ITEM 11.    EXECUTIVE COMPENSATION..................................................32

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........32

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................32

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..................33

            SIGNATURES..............................................................34

</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
products are based on its proprietary 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
primary manufacturers of gaming machines have made extensive changes to the
software used in their machines to support the Company's bonusing technology.
The Company offers products in four major categories:

         1.       Bonusing

                  -     Casino-wide, fully integrated applications offered as
                        the Acres Bonusing SystemTM ("ABS")

                  -     Custom bonusing applications and themes designed for
                        specific gaming machines or casino areas

                  -     Progressive jackpot systems

         2.       Slot accounting/player tracking

                  -     ABS compatible component parts for IGT's slot
                        accounting/player tracking systems (See "Strategic
                        Alliance with IGT".)

                  -     Existing Company-installed systems (most of which have
                        bonusing capabilities)

         3.       Slot products

                  -     Meters and displays

                  -     Sound systems

                  -     Component parts for other game manufacturers

         4.       Proprietary games


        Bonusing products provide players with opportunities for additional play
and special pay-outs and are designed to enhance interest in the machines and
games to which they are attached. The slot accounting products collect, analyze
and report data to casino managers to satisfy accounting and regulatory
requirements and to enable casino management to analyze the performance of each
gaming device by type and location. Player tracking systems allow a casino to
monitor the playing patterns of individual players or selected groups of players
and to develop incentives and promotions which target those players. Slot
products are accessories, available to both casinos and gaming equipment
manufacturers, that are designed to improve the visual and auditory experience
for the slot player. Proprietary games are new gaming machines that the Company
has developed primarily in conjunction with International Game Technology
("IGT") (See "Strategic Alliance with IGT.").

THE MARKET

        In the past few 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 the Native American Class III-style casino gaming,
and growth in the established Nevada market.



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        Casino gaming has also grown rapidly world-wide, 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 750,000 casino-style
gaming machines are currently in use throughout the world, including
approximately 400,000 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.

STRATEGIC ALLIANCE WITH IGT

        In January 1997, the Company entered into a strategic alliance with IGT
(the "Strategic Alliance"), the largest manufacturer of gaming machines in the
world. The agreement includes a $5 million investment from IGT in return for
519,481 newly issued shares of the Company's three percent convertible preferred
stock. IGT also has the right to elect one member to the Company's Board of
Directors.

        The Company anticipates that the Strategic Alliance will enhance the
Company's ability to:

        1) create proprietary games, using IGT gaming machines as the
foundation, to be installed in casinos under leasing or revenue sharing
agreements;

        2) sell its ABS bonusing technology and player tracking components for
use in IGT's Smart System(R) and new Integrated Gaming SystemTM ("IGS") player
tracking/slot accounting installations;

        3) incorporate the Company's displays and other game enhancement tools
into IGT's gaming machines and progressive systems; and

        4) develop promotions for use on IGT's MegaJackpots system that supports
"Megabucks", "QuarterMania" and other progressive jackpot promotions.

        The Company believes that the Strategic Alliance provides it significant
benefits in the slot system market by providing access to IGT's larger sales and
service organizations and by creating the potential to provide its bonusing
technology to a large installed base. The agreement also allows the Company to
focus its resources on development of applications and promotions utilizing its
bonusing technology by reducing the resources required to maintain and develop
slot accounting and player tracking applications.

BONUSING TECHNOLOGY PRODUCTS

        Casinos provide an opportunity to wager money on a variety of
propositions. This act of wagering, or gambling, provides entertainment for a
wide range of customers. For example, some of the casinos' customers are
entertained by the notion that one pull of a slot handle may change their life.
For others, entertainment is achieved by receiving an unexpected reward,
profiting from an act of skill or luck, receiving a reward for loyalty or by
simply winning some amount, regardless of the amount wagered. The Company's
bonusing products are designed to allow the casino to provide and facilitate
multiple entertainment aspects to meet their wide range of customers' needs.

        The 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. The Company's bonusing 




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products form a modular system and may be purchased and installed individually
or as components of an integrated system.

        ACRES BONUSING SYSTEM

        An ABS installation in a casino includes electronic hardware installed
in the gaming machines, microprocessor-based controllers for groups of gaming
machines and computers and software to operate bonuses and communicate with the
casino's back office system which analyzes data and generates reports to casino
management. The Company's Strategic Alliance with IGT has resulted in an
integrated system that incorporates the Company's ABS components and bonusing
software with IGT's back office system to create a comprehensive slot
accounting, player tracking and bonusing capable business solution.

        ABS employs personal computer technology and is designed to take
advantage of future improvements in such technology. The Company's largest ABS
installation is currently running approximately 2,500 gaming machines and has
the capability to include over two times the approximately 4,000 gaming machines
at the world's largest casino.

        The primary manufacturers of gaming machines, which include IGT and
Alliance Gaming (manufacturer of Bally Gaming machines) ("Bally"), have made
extensive changes to the software used in their machines to support the
Company's bonusing technology. The changes permit the gaming machines to accept
instructions from the Company's ABS system, primarily in connection with the
operation of bonuses. The ABS system and new software supporting the ABS system
on IGT's S+ series and Players Edge Plus series of machines and Bally's 5500 Pro
Series of machines have been approved by the Nevada Gaming Control Board and
regulatory authorities for several other states and for the state of Victoria,
Australia. See "Government Regulation."

        Aristocrat Leisure Industries of Australia ("Aristocrat") is the leading
manufacturer of gaming machines in Australia and the second largest in the
world. In fiscal 1997, the Company completed delivery and installation of the
ABS system to Aristocrat for the Crown South Bank casino opened by Crown Ltd.
(the "Crown Casino") in Melbourne, Australia.

        BONUSING APPLICATIONS

        Many casinos offer promotions such as double jackpots at certain times
of the day. While such promotions have in many cases been successful in
increasing play at gaming machines during the double jackpot periods, they have
required extensive administrative effort to manage. The Company's bonusing
products, with their ability to deliver instructions to the gaming machine,
enable the casino to automate the payment of and accounting for double jackpot
and other bonus programs. In addition, the bonusing technology allows a double
jackpot or other bonus program to operate on a random basis, or to operate only
when a minimum level of activity is present. A display can be mounted on the
slot machine to inform players when the bonus program is operative.

        Many casinos have also offered promotions where they provide free play
to entice players to visit the casino. Such promotions have required extensive
administrative effort to manage with no assurance that the money given to
potential customers will be played in the casino's gaming machines. Using the
capabilities of the Company's bonusing products, this type of promotion can be
automated to match each coin played in the slot machine ("Match PlayTM") or
provide free play ("Reel MoneyTM") by adding a free coin under parameters
controlled by the casino.

        In addition, the bonusing system can include lighting, sound, signage
and other special effects to call players' attention to the bonusing event as it
begins and progresses. The Company uses such special effects to simulate clouds,
lightning, thunder and wind which are combined with an up to nine-time jackpot
bonus payout to create a promotion called Hurricane ZoneTM. The same technology
has been integrated with other signage and special effects to produce other
promotions including Rodeo GrandeTM, and custom promotions such as "The Big
Picture" at MGM Grand Hotel & Casino, "Armada Slots" at Sunset Station Hotel &
Casino, "Desert Wins" at the Sahara Hotel & Casino and "Celebration Slots" at
the Stardust Resort & Casino.



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        The capabilities of the bonusing technology also allow implementation of
the Personal Progressive(R) promotion, in which each qualifying player can build
up a progressive jackpot which only that player is eligible to win. The "Mystery
Prize" bonus promotion, such as the Crown Casino's monthly "Million Dollar
Bonus", can be granted to the player inserting the "nth coin" where the
frequency of "n" and the funding parameters of the bonus are controlled by the
casino utilizing the Company's bonusing software. This bonusing product also
includes a consolation prize feature where some or all of the players in the
casino at the time the mystery bonus is awarded receive a smaller Near WinnerTM
prize. Additional promotions have been created and implemented to reward loyalty
to repeat customers by offering varying levels of match play on the customers'
future visits.

        Some casinos use roaming employees to randomly distribute free benefits
such as meals, gaming chips or show tickets to customers actively playing on the
gaming floor. Controls to ensure these benefits are distributed to the target
customers has been automated through the Company's bonusing products. Instead of
distributing them manually, the casino employee automatically awards the
benefits to the customers actively playing at a bank of machines via an
interface to the ABS system. For example, a casino employee can insert a
magnetically encoded "benefit" card into a card reader attached to a bank of
gaming machines. That benefit card would instruct the gaming machines to give
the benefit, such as additional coins or a period of multiplied jackpots,
directly and automatically to the customers actively playing at that bank of
machines.

        The bonuses described above can be directed to target customers by
requiring the use of a player tracking card to qualify for the bonus. (See "Slot
Accounting and Player Tracking".) For example, the Company's bonusing software
allows the casino to elect to offer Near Winner prizes, issued in conjunction
with the "Mystery Prize" bonus promotion, to only those players who have their
player tracking card inserted in the machine at the time the "Mystery Prize" is
awarded. Utilizing bonusing technology in conjunction with the casino's player
tracking capabilities creates a powerful marketing tool.

        PROGRESSIVE JACKPOTS FOR GAMING MACHINES

        A progressive jackpot system links a number of gaming machines to
generate a collective jackpot. As coins are played in the machines, a portion of
each coin is allocated to the creation of the jackpot. The Company's progressive
jackpot system is programmed remotely from a personal computer. This method of
programming enables the casino manager to determine which machines are to be
linked to the progressive jackpot, and to establish various parameters such as
starting jackpot amounts, rates of increment, and limits, if any, on the
jackpot. The flexibility provided by the bonusing technology enables the casino
manager to design, alter and readily implement new progressive jackpot
promotions.

        SLOT ACCOUNTING AND PLAYER TRACKING

        As part of the Strategic Alliance with IGT, the Company no longer
directly participates in the slot accounting and player tracking business. The
Company develops and sells component parts to IGT for inclusion in the IGT Smart
System and IGS slot accounting/player tracking systems. The Company continues to
support existing installations of the Company's slot accounting/player tracking
systems.

        The slot accounting product automatically collects play data about each
gaming device. This information is transmitted to a central computer system
where it is immediately available to the casino manager, 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. The slot accounting product also
recognizes players who use player identification cards.

        Player tracking systems collect performance data about individual
players or groups of players. The player tracking product builds upon the casino
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 "slot club" is given a plastic card that uniquely
identifies the player. The player inserts the card into an electronic card



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reader on the gaming machine, and the system automatically records the player's
level of play. The casino management can use this information to provide special
incentives and rewards to individual players or groups of players.

        SLOT PRODUCTS

        Many of the products developed for specific applications also have other
uses within the gaming industry. Displays developed as player tracking
components also may be used as in-machine progressive jackpot displays for
gaming machines. The Company markets these products to both developers and
manufacturers of gaming machines and to end-user casinos.

        The Company also offers bonusing products to other developers of
specialty gaming machines. These developers can use the bonusing technology to
coordinate lights, sound and other special effects and to instruct a slot
machine to pay special bonuses. By adding bonusing capabilities to regular
gaming machines, entirely new games can be created which offer unique and
entertaining experiences for slot players. For example, the Company provides
electronic and other components to Anchor Gaming ("Anchor"), a developer of
specialty gaming machines, for their Wheel of GoldTM game. This game includes
features in which the slot player is periodically awarded the ability to spin a
multi-segmented wheel mounted above the slot machine. Each segment of the wheel
indicates a bonus jackpot. The bonusing system communicates the results of the
wheel spin to the slot machine, which pays the bonus to the player.

        The Company has also developed products to improve the sound
capabilities of gaming machines. These products have been included in IGT's
Wheel of FortuneTM specialty games and have been installed in gaming machines in
the Circus Circus casinos in Nevada.

        PROPRIETARY GAMES

        As part of its Strategic Alliance with IGT, the Company has begun
developing proprietary games that are to be placed in casinos and are operated
on a revenue-sharing basis. Two of the gaming industry's most successful
recently introduced games, Anchor's Wheel of Gold and IGT's Wheel of Fortune,
were introduced primarily under such revenue-sharing arrangements. Both of these
games include components developed and manufactured by the Company.

        In May 1997, the Company introduced Black Out PokerTM, the first
proprietary game that the Company developed under the Strategic Alliance. As of
August 31, 1997, this game has been installed in five casinos but has not yet
generated significant incremental revenue to indicate whether there will be a
strong demand for the game.

RESEARCH AND DEVELOPMENT

        The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 47 employees
involved in product engineering as of August 31, 1997. Research and development
expenses were $4.5 million, $2.3 million and $1.9 million in the years ended
June 30, 1997, 1996 and 1995, respectively.

CUSTOMERS

        The Company's initial sales of its systems were to casinos with fewer
than 250 gaming machines, as it sought to establish the viability of its
products. Large casinos with more than 250 gaming machines in a single location
represent the principal market for the Company's products. This market includes
most casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic City, New
Jersey, as well as a number of casinos on Indian land and riverboat and dockside
casinos in various other states. A number of casinos in Australia, South Africa
and Europe are also included in this market. Installations of this size
generally are large enough to support a 



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professional management staff capable of
using the analytical and promotional tools provided by the Company's products.

        Sales to IGT accounted for 28 percent of the Company's net revenues in
1997 and 2 percent in 1996. Sales to Anchor, primarily related to their Wheel of
Gold game, accounted for 28 percent of the Company's net revenues in 1997 and 43
percent in 1996. Aristocrat, in providing the system components and bonusing
applications for the Crown Casino in Melbourne, Australia, accounted for 12
percent of the Company's net revenues in 1997 and 20 percent in 1996. Player
tracking and slot accounting system sales to the Sundowner Hotel & Casino
accounted for 12 percent of the Company's net revenues in 1996. In 1995, player
tracking and slot accounting sales to the Rio Suite Hotel & Casino and the
Ho-Chunk Nation accounted for 44 percent and 17 percent of the Company's net
revenues, respectively.

        The Company's backlog of orders for its products were approximately $6.1
million, $6.5 million and $800,000 as of June 30, 1997, 1996 and 1995,
respectively. The Company does not believe that backlog is a meaningful
indication of 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 a few months of receipt of the order. The
Company does not have any ongoing long-term 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.



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REPRESENTATIVE CUSTOMERS

The following table presents representative customers for each of the Company's
main product categories.


<TABLE>
<CAPTION>
PRODUCT             NAME OF CUSTOMER AND LOCATION

<S>                 <C>
ABS                 Aristocrat Leisure Industries - Installed in the Crown Casino in
                    Melbourne, Australia
                    IGT - Reno, Nevada

Custom bonusing     Circus Circus - Las Vegas, Nevada
applications        Edgewater Hotel & Casino - Laughlin, Nevada
                    MGM Grand Hotel Inc. - Las Vegas, Nevada
                    Rio Suite Hotel & Casino - Las Vegas, Nevada (scheduled for
                    installation in October, 1997) Sahara Hotel & Casino - Las
                    Vegas, Nevada Stardust Resort & Casino - Las Vegas, Nevada
                    Sunset Station Hotel & Casino - Las Vegas, Nevada

Progressive         Caesar's Tahoe - Lake Tahoe, Nevada
jackpots            Golden Nugget Casino - Las Vegas, Nevada
                    Treasure Island Resort - Las Vegas, Nevada

Slot accounting &   Aristocrat Leisure Industries - Installed in the Crown Casino
player tracking     in Melbourne, Australia IGT - Reno, Nevada
components

Slot accounting &   Colorado Grande Casino - Cripple Creek, Colorado
player tracking     Rio Suite Hotel & Casino - Las Vegas, Nevada
systems             Sands Regency Hotel & Casino - Reno, Nevada
                    Spirit Lake Casino - Spirit Lake, South Dakota
                    Sundowner Hotel & Casino - Reno, Nevada
                    Tropicana Cruise Ship - Miami, Florida

Meters & displays   Anchor Gaming - Las Vegas, Nevada
                    Crown Casino - Melbourne, Australia
                    IGT - Reno, Nevada

Sound Systems       Circus Circus Enterprises - Las Vegas, Nevada
                    IGT - Reno, Nevada

Component parts     Anchor Gaming - Las Vegas, Nevada
for other game      Alliance Gaming - Las Vegas, Nevada
manufacturers       IGT - Reno, Nevada

</TABLE>

MARKETING

        The Company currently markets its products and provides service to
customers from its office in Las Vegas, Nevada and its headquarters in
Corvallis, Oregon. The Company expects to expand its sales, marketing and
customer service operations by opening offices in other key markets and by
gaining access to IGT's sales and service organizations as part of the Strategic
Alliance with IGT.



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PRODUCTION AND MANUFACTURING

        The Company's manufacturing operation consists primarily of the assembly
of electronic circuit boards and cables from components purchased from third
parties. The circuit boards are manufactured and assembled to the Company's
specifications by contract manufacturers. A key component of each product is
computer software which is copied onto an electronic chip. The copying of the
software onto the chip is performed by contract manufacturers. The development,
testing and maintenance of the software is conducted by Company engineers.

PATENTS

        The Company has applied for U.S. patents on certain features of its
product line, and may in the future apply for other U.S. patents and
corresponding foreign patents. The Company was issued its first patent, No.
5,655,961 for a "Method of Operating Networked Gaming Devices", in August 1997.
This patent protects the Company's concept of a "Bonus Pool" which 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.

        No assurance can be given that any patents that are applied for will be
issued or, if issued, will be valid or 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.

COMPETITION

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

        Mikohn Gaming Corporation ("Mikohn") is the only known competitor
offering a bonusing product similar to the Company's. Mikohn was founded by John
F. Acres in 1985. Mr. Acres disposed of his interest in 1988. Mikohn's bonusing
product is not widely distributed at this time. The Company believes that
Mikohn's initial bonusing product, which Mikohn introduced earlier this year and
installed in a single casino, may infringe the Company's recently issued patent
and certain of the Company's pending patents. Mikohn and its initial customer
have been notified of the possible patent infringement.

        Under the Strategic Alliance with IGT the Company has secured a market
for its slot accounting and player tracking components as a part of IGT's Smart
System and IGS product offering. IGT, as the largest manufacturer of gaming
machines in the world, has a competitive advantage in selling its slot
accounting and player tracking systems to purchasers of IGT gaming machines. IGT
has three principal competitors in the market for slot accounting and player
tracking systems: Bally; Casino Data Systems, Inc. ("CDS"); and Mikohn. Unlike
the IGS system, none of the competitors' products are currently offered as
"bonusing-ready" systems. Each of these three companies have financial and other
resources which are greater than those of the Company.

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

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 



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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 for use of the
products it has sold in Nevada, Colorado, Wisconsin, Mississippi, New Jersey,
Missouri and Connecticut, 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. In most
jurisdictions, a model of the gaming equipment which 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 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.

        CORPORATE REGULATION

               Nevada

        The manufacture, sale and distribution of gaming devices in Nevada are
subject to extensive state laws, regulations of the Nevada Gaming Commission
(the "Nevada Commission") and State Gaming Control Board (the "Control Board")
and various county and municipal ordinances. These laws, regulations and
ordinances primarily concern the responsibility, financial stability and
character of gaming equipment manufacturers, distributors and operators, as well
as persons financially interested or involved in gaming operations. The laws,
regulations and supervisory procedures of the Nevada Commission seek to (i)
prevent unsavory or unsuitable persons from having a direct or indirect
involvement with gaming at any time or in any capacity, (ii) establish and
maintain responsible accounting practices and procedures, (iii) maintain
effective control over the financial practices of licensees, including reliable
record keeping and requiring the filing of periodic reports with the Nevada
Commission, (iv) prevent cheating and fraudulent practices, and (v) provide a
source of state and local revenues through taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on the
Company's operations.

        A publicly traded corporation must be registered and found suitable to
hold an interest in a corporate subsidiary which holds a gaming license. On
December 21, 1995, the Nevada Commission registered the Company as a publicly
traded corporation (the "Registered Corporation"), found certain individuals
suitable to be associated with the Company as officers, shareholders and
controlling shareholders, and granted nonrestricted Manufacturer's and
Distributor's licenses to the Company's wholly-owned subsidiary, AGI
Distribution, Inc. ("AGID"), a Nevada corporation. The Nevada Commission also
granted AGID a nonrestricted Slot Route Operator's license. The Nevada
Commission also granted individual gaming licenses to the officers and sole
director of AGID. 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. No person may become a stockholder of, or receive any percentage of
profits from, AGID without first obtaining licenses and approvals from the
Nevada Commission.

        As a Nevada gaming licensee, AGID is subject to numerous restrictions.
Licenses must be renewed periodically and licensing authorities have broad
discretion with regard to such renewals. Licenses are not 



                                       9
<PAGE>   12

transferable. Substantially all material loans, leases, sales of securities and
similar financing transactions must be reported to or approved by the Nevada
Commission. Changes in legislation or in judicial or regulatory interpretations
could occur which could adversely affect the Company.

        Officers, directors and key employees of AGID and of the Company who are
actively engaged in the administration or supervision of gaming must be found
suitable. No proceeds from any public sale of the Company's securities may be
used for gaming operations in Nevada or to acquire a gaming property without the
prior approval of the Nevada Commission. The Company believes it has all
required licenses to carry on its business in Nevada. Officers, directors, and
certain key employees of AGID must file applications with the Nevada Commission
and may be required to be licensed or found suitable. In addition, anyone having
a material relationship or involvement with the Company may be required to be
found suitable or licensed. An application for licensure or finding of
suitability may be denied for any cause deemed reasonable by the Nevada
Commission. The Nevada Commission has the power to require the Company and AGID
to suspend or dismiss officers, directors or other key employees and to sever
relationships with other persons who refuse to file appropriate applications or
whom the authorities find unsuitable to act in such capacities. 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. If it were determined that gaming
laws were violated by a licensee, the gaming licenses it holds could be limited,
conditioned, suspended or revoked subject to compliance with certain statutory
and regulatory procedures. In addition, the Company and the persons involved
could be subject to substantial fines for each separate violation of the gaming
laws at the discretion of the Nevada Commission. In addition, a supervisor could
be appointed by the Nevada Commission to operate the Company's gaming property
and, under certain circumstances, earnings generated during the supervisor's
appointment could be forfeited to the State of Nevada. The limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of the gaming license would) materially and
adversely affect the Company's operations.

        The Nevada Commission may also require any beneficial holder of the
Company's voting securities, regardless of the number of shares owned, to file
an application, be investigated, and be found suitable at the cost of the
applicant. Any person who acquires 5 percent or more of the Company's voting
securities must report the acquisition to the Nevada Commission; any person who
becomes a beneficial owner of 10 percent or more of the Company's voting
securities must apply for a finding of suitability within 30 days after the
Chairman of the Nevada Board mails a written notice requiring such finding.
Institutional investors which acquire more than 10 percent, but not more than 15
percent, of the Company's voting securities may apply to the Nevada Commission
for a waiver of suitability requirements, provided the institutional investor
holds the voting securities for investment purposes only.

        The Nevada Commission has the power to investigate any debt or equity
security holder of the Company. The Clark County Liquor and Gaming Licensing
Board, which has jurisdiction over gaming in the Las Vegas area, may similarly
require a finding of suitability for a security holder. Any person who fails or
refuses to apply for a finding of suitability or a license within 30 days after
being ordered to do so by the Nevada Commission or Chairman of the Control 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 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, and possible loss of its approvals,
if, after it receives notice that a debt or equity holder is unsuitable, the
Company (i) pays that person any dividend or interest upon voting securities of
the Company or any distribution whatsoever, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) gives remuneration in any form to that person, for services
rendered or otherwise, (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities for cash at fair market
value or (v) makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar transaction. Clark
County authorities have taken the position that they have the authority to
approve all persons owning or controlling the stock of any corporation
controlling a gaming license.



                                       10
<PAGE>   13

        The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Commission at any time. If any securities
are held in trust by an agent or by a nominee, the recordholder may be required
to disclose the identity of the beneficial owner to the Nevada Commission. 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 at any time to require the Company's stock certificates to bear a legend
indicating that the securities are subject to the Nevada Gaming Control Act (the
"Nevada Act") and the regulations of the Nevada Commission.

        The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or retire or extend obligations incurred for such purposes. Changes in
control of the Company cannot occur without the prior investigation of the
Control Board and approval of the Nevada Commission. Entities seeking to acquire
control of the Company must satisfy the Control Board and Nevada Commission in a
variety of stringent standards prior to assuming control of the Company. 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 relating to the transaction.

        The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Nevada, and
corporations whose stock is publicly-traded 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 environment 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. Nevada's gaming laws and regulations also require prior
approval by the Nevada Commission if the Company were to adopt a plan of
recapitalization proposed by the Company's Board of Directors in opposition to a
tender offer made directly to its stockholders for the purpose of acquiring
control of the Company.

        Nevada licensees who are engaged in gaming outside Nevada are required
to comply with certain reporting requirements imposed by the Nevada Act. A
licensee is also subject to disciplinary action by the Nevada Commission if it
knowingly violates any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fails to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada gaming
operations, engages in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employs a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the grounds 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, 1997, the Company had 126 full-time employees of whom 47
were involved in engineering, 30 in production and quality control, 28 in sales,
marketing and customer support and 21 in administration and 



                                       11
<PAGE>   14

management. None of the Company's employees are represented by a labor union or
are 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

        This Form 10-K contains forward-looking statements regarding the
Company's plans and expectations as to: future performance, growth
opportunities, expansion, new products and services, competition, capital
expenditures, its Strategic Alliance with IGT and its withdrawal from the slot
accounting and player tracking systems segments of the business. 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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-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

        The Company is headquartered in a leased facility encompassing
approximately 39,000 square feet at 815 N.W. Ninth Street, Corvallis, Oregon,
97330. The leases commenced on various dates beginning in April 1994 and will
expire on various dates ending in July 1999. The base rent for the total
facility is approximately $25,000 per month, and includes property taxes,
building insurance and common area maintenance.

        The Company's sales, marketing and customer service office in Las Vegas,
Nevada is in a leased facility of approximately 8,500 square feet. The lease
commenced on September 1, 1995, and will expire on August 31, 2000. The base
rent is approximately $8,600 per month, plus $1,400 per month for property
taxes, building insurance and common area maintenance.

        The Company owns manufacturing and engineering equipment, located at its
facility in Corvallis, Oregon, 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

        The Company from time to time is involved in various legal proceedings
arising in the normal course of business. At August 31, 1997, the Company was
not a party to any material legal proceedings.

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, 1997.



                                       12
<PAGE>   15

EXECUTIVE OFFICERS OF REGISTRANT

        As of August 31, 1997, the executive officers of the Company were as set
forth below:

<TABLE>
<CAPTION>
                                                                      EXECUTIVE
         NAME                 AGE        POSITIONS AND OFFICES       OFFICER SINCE
         ----                 ---        ---------------------       -------------
         <S>                  <C>                                        <C> 
         John F. Acres        43      Chairman and Chief                 1985
                                      Executive Officer

         Joseph A. Huseonica  53      Chief Operating Officer,           1996
                                      President and Director

         Robert W. Brown      42      Executive Vice President,          1993
                                      Chief Financial Officer,
                                      Secretary and Treasurer
</TABLE>


        There are no family relationships among directors or executive officers
of the Company except for Mr. Acres, Chairman and Chief Executive Officer, and
Mrs. Acres, Director, who are married.

        John F. Acres is the founder of the Company and has been the Chief
Executive Officer and a director since its inception. He also served as its
President until January 1996 and as its Secretary until January 1997. Mr. Acres,
who has been involved in the gaming industry since 1972, has designed slot data
collection systems, player tracking systems, and equipment for progressive
jackpot systems that are in widespread use. 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 50,000 gaming machines throughout the world and was actively
marketed by IGT until 1997. In 1985, Mr. Acres co-founded Mikohn, Inc. He served
as Vice President and a director of Mikohn, Inc. until 1988.

        Joseph A. Huseonica joined the Company in January 1996 as President and
Chief Operating Officer. From July 1994 to December 1995, Mr. Huseonica served
as Chief Operating Officer for Centric Corporation, a Portland, Oregon marketing
services company. From August 1993 to July 1994, Mr. Huseonica was a consultant
to various companies. From October 1991 to August 1993, Mr. Huseonica was Vice
President, Marketing & Sales for Radisys Corporation, a manufacturer of embedded
computer systems based in Beaverton, Oregon. For more than 10 years prior to
1991, Mr. Huseonica held various senior management positions at Intel
Corporation, including General Manager of its OEM Platforms Operations.

        Robert W. Brown joined the Company in July 1993 as Chief Financial
Officer and Treasurer and became Executive Vice President and Secretary in
January 1997. From June 1991 through May 1993, Mr. Brown was the Chief Financial
Officer of Color & Design Exhibits, Inc., a manufacturer of interpretive and
trade show exhibits in Portland, Oregon. From September 1983 through May 1991,
Mr. Brown held financial management positions with Floating Point Systems, Inc.,
a Beaverton, Oregon manufacturer of mini-supercomputers, and served as its
Corporate Controller from November 1989 through May 1991. Prior to 1983, Mr.
Brown was employed by Arthur Andersen LLP for more than six years. Mr. Brown is
a Certified Public Accountant.



                                       13
<PAGE>   16

                                     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, 1997:
             First quarter...................     $  9.00       $14.13        $13.63
             Second quarter..................       10.50        20.63         11.00
             Third quarter...................        4.13        14.38          4.75
             Fourth quarter..................        4.88         9.38          8.75

         FISCAL YEAR ENDED JUNE 30, 1996:
             First quarter...................        7.00         9.50          7.75
             Second quarter..................        4.50         8.25          5.13
             Third quarter...................        3.50         5.63          4.63
             Fourth quarter..................        4.63        12.75          9.38
</TABLE>

        The Company estimates that there are over 5,000 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.



                                       14
<PAGE>   17


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 thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                      ----------------------------------------------------
                                        1997     1996        1995       1994        1993
                                      -------   -------    -------    --------    --------
                                              (In thousands, except per share data)
<S>                                   <C>       <C>        <C>        <C>         <C>    
STATEMENTS OF OPERATIONS DATA:
Net revenues .....................   $20,455   $ 6,942    $ 4,006    $ 2,852     $   492
Gross profits ....................    10,902     3,355      1,436        851         291
Income (loss) from operations ....     1,425    (1,665)    (2,489)    (2,542)*      (514)
Net income (loss) ................     1,798    (1,641)    (2,505)    (2,598)*      (536)
Net income (loss) per common share   $   .20   $ (0.22)   $ (0.35)   $ (0.39)*   $ (0.10)
Weighted average number of shares
of common stock and common stock
equivalents outstanding ..........     9,071     7,552      7,145      6,629       5,225
</TABLE>

*   During 1994, the Company recorded a non-recurring charge of $898,000 ($.14
    per share) for the expenses and settlement of patent infringement
    litigation.


<TABLE>
<CAPTION>
                                                         AS OF JUNE 30,
                                        --------------------------------------------------
                                         1997        1996       1995       1994      1993
                                        -------     ------     ------     ------    ------
                                                         (In thousands)
<S>                                     <C>         <C>        <C>        <C>       <C>   
BALANCE SHEET DATA:
Working capital (deficit)..........     $16,474     $2,552     $3,458     $3,574    $(762)
Total assets ......................      21,323      7,631      6,264      6,301      692
Current liabilities................       2,545      3,644      1,302      1,227    1,373
Long-term debt ....................          --         --         --         --       --
Redeemable convertible preferred          4,948         --         --         --       --
stock...
Stockholders' equity (deficit) ....      13,830      3,987      4,962      5,074     (681)

</TABLE>


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

OVERVIEW

        The Company was founded to provide unique slot machine promotion and
bonusing products for the gaming industry. These products are designed to
enhance casino profitability by providing entertainment and incentives to slot
machine players. In order to establish relationships with casinos based on
products the industry understood and utilized, the Company's initial focus was
on selling slot accounting and player tracking systems in a highly competitive
market. The Company was able to achieve some success in this business because of
its commitment to provide follow-on promotion and bonusing products. The Company
installed its first bonusing product in November 1994. In fiscal 1997, 1996 and
1995, bonusing products generated revenues of $19.0 million, $5.4 million and
$159,000, respectively.



                                       15
<PAGE>   18

        The Company's Strategic Alliance with IGT allows the Company to focus
its efforts on bonusing technology and the creation of proprietary games. The
Company believes these products have the greatest potential for increasing
profits. The Company withdrew from direct participation in the slot accounting
and player tracking business in fiscal 1997 and instead sells these products to
IGT for inclusion in IGT's Smart System and new IGS offerings. IGT has an
estimated installed base of over 100,000 games which could be upgraded to IGT's
IGS system utilizing parts supplied by the Company. The alliance with IGT is
intended to strengthen the position of both companies in the slot accounting and
player tracking market and provide broader distribution of the Company's
bonusing technology.

        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 60 percent
of annual revenues.

RESULTS OF OPERATIONS

        COMPARISON OF THE YEARS ENDED JUNE 30, 1997 AND 1996

        The Company's net revenues during the year ended June 30, 1997 were
$20.5 million, an increase of 197 percent over the $6.9 million of net revenues
in 1996. This increase in revenues was primarily the result of an $8.4 million
increase in shipments of bonusing, slot accounting and player tracking
components to IGT and other game manufacturers. Final deliveries of a slot
bonusing system and progressive jackpot displays for the Crown Casino in
Melbourne, Australia accounted for an additional $2.5 million of the increase.
Prior to the Company's withdrawal from direct participation in the slot
accounting and player tracking business, installations of these systems
generated an incremental $1.4 million of revenues. Increased sales of bonusing
applications accounted for the final $1.3 million of the increase over 1996.

        Component materials purchased primarily from computer and electronics
vendors comprised 72 percent of the cost of revenues in 1997 and 57 percent in
1996. Manufacturing, procurement and installation labor and expenses accounted
for the remaining cost of revenues. Changes in the components of the cost of
revenues are a result of changes in the mix of products sold.

        Gross profit as a percentage of net revenue was 53 percent for 1997,
compared to 48 percent for 1996. Gross margin increased 9 percentage points as a
result of the economies of absorbing certain fixed manufacturing costs over
larger sales volumes. This increase was partially offset by a 4 percentage point
decrease in gross margin incurred as a result of changes in the mix of products
sold.

        The Company's research and development expenses increased to $4.5
million in 1997, from $2.3 million in the prior year, primarily as a result of
hiring and supporting additional personnel. 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 its products, including the
development of additional promotions which utilize the Company's bonusing
technology.

        In order to support growth in revenue and continue to market and sell
its products, the Company hired additional personnel and increased the amount of
leased office space in 1997, resulting in a $2.3 million increase over 1996
selling, general and administrative operating expenses.

        Other income increased by $349,000 as a result of interest income
received on investments of cash and cash equivalents. An income tax provision
was not recorded in 1997 due to the utilization of net operating loss
carryforwards. The net income for the year ended June 30, 1997 was $1.8 million
($0.20 per share) compared to a net loss of $1.6 million ($0.22 per share) in
the prior year.



                                       16
<PAGE>   19

        COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND 1995.

        The Company's net revenues during the year ended June 30, 1996 were $6.9
million, an increase of 73 percent over the $4.0 million of net revenues in
1995. This increase resulted from an incremental $2.8 million of sales to
Anchor, primarily related to components used in their Wheel of Gold game.
Initial sales under an agreement with Aristocrat to provide bonusing capability
for the Crown Casino in Melbourne, Australia accounted for an additional $1.4
million of the increase. Net decreases in the sales of slot accounting and
player tracking systems totaled $1.1 million.

        Component materials purchased primarily from computer and electronics
vendors comprised 57 percent of the cost of revenues in 1996 and 74 percent in
1995. Manufacturing, procurement and installation labor and expenses accounted
for the remaining cost of revenues. Changes in the components of the cost of
revenues are a result of changes in the mix of products sold.

        Gross profit as a percentage of net revenue increased to 48 percent in
1996 from 36 percent in 1995. Gross margin increased 18 percentage points as a
result of higher-margin bonusing products accounting for a larger percentage of
sales in 1996. This increase was partially offset by a 6 percentage point
decrease in gross margin incurred as a result of incremental fixed manufacturing
costs incurred to support the continued growth of the Company.

        The Company's research and development expenses increased to $2.3
million in the year ended June 30, 1996, from $1.9 million in the year ended
June 30, 1995. A significant portion of revenue was directed toward research and
development in order to enhance and expand product capabilities and develop
additional promotions utilizing the Company's bonusing technology.

        In 1996, selling, general and administrative expenses increased to $2.7
million from $2.0 million in 1995. This increase resulted primarily from the
addition of personnel and the expansion of the sales and service office in Las
Vegas to support growth in revenue and to expand development of the Company's
products.

        The net loss for the year ended June 30, 1996 was $1.6 million ($0.22
per share) compared to a net loss of $2.5 million ($0.35 per share) in the prior
year. Although the Company had a net loss for the full year, during the three
months ended June 30, 1996, the Company had net income of $439,000 ($0.06 per
share), compared to a net loss of $698,000 ($0.10 per share) for the same period
in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's operations have historically used cash. 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. In the year
ended June 30, 1996, $1.2 million of cash was provided by operating activities
as the funding requirements of the Company's negative operating results ($1.6
million) were offset by favorable timing of vendor payments ($1.0 million) and
the receipt of significant customer deposits ($1.4 million) on projects to be
completed in 1997. In the year ended June 30, 1995, the Company's net loss
accounted for the largest component of net cash used by operating activities.
Beginning in 1998, the Company anticipates operations will begin to fund the
working capital requirements of the Company.

        The Company made capital expenditures of $1.8 million, $585,000 and
$453,000 in 1997, 1996 and 1995, respectively, primarily on computers and
equipment to support research and development efforts. As the Company expands
into operating or leasing both proprietary and system games, investments in
gaming machines and equipment may be significant. However, under the Strategic
Alliance with IGT, the base games may be acquired from IGT and paid for as
revenue is received from the end-user casino. Under this arrangement, the
Company is able to avoid the significant up-front cash outlays normally required
to enter this market.



                                       17
<PAGE>   20

         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 (as discussed in footnote 5 to the
Consolidated Financial Statements) 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.

        As of June 30, 1997, the Company had cash and cash equivalents of $9.3
million, compared to $2.5 million as of June 30, 1996. The Company does not have
any debt. The Company's cash and cash equivalents balances are expected to be
sufficient to fund the Company's operations for at least the next 12 months.

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:

        Customer Concentration; Strategic Alliance with IGT. The Company's
Strategic Alliance with IGT has increased the Company's dependence on IGT as a
customer and as a distributor of the Company's products. Failure by IGT to meet
the Company's expectation for sales or payment could have a material adverse
effect on the Company.

        Proprietary Games. The creation of proprietary games and the deployment
of those games into casinos on a revenue-sharing basis is a key part of the
Company's business plan and its Strategic Alliance with IGT. The Company may not
be able to develop successful proprietary 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. 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.
From time to time, the Company 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.



                                       18
<PAGE>   21

        Product Concentration; Competition; Risks of Technological Change. The
Company derives substantially all 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 changes 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 a
U.S. patent 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
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 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. The Company has recently experienced
significant growth in its business, which has placed, and if sustained will
continue to place, a substantial burden on its operational, administrative and
financial resources. The Company's ability to compete effectively and to manage
future growth would require the Company to 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.



                                       19
<PAGE>   22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                   <C>
Report of Independent Public Accountants.........................................     21

Consolidated Balance Sheets......................................................     22

Consolidated Statements of Operations............................................     23

Consolidated Statements of Stockholders' Equity..................................     24

Consolidated Statements of Cash Flows............................................     25

Notes to Consolidated Financial Statements.......................................     26

</TABLE>



                                       20
<PAGE>   23

                    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, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.



                                             ARTHUR ANDERSEN LLP

Portland, Oregon,
August 1, 1997



                                       21
<PAGE>   24

                            ACRES GAMING INCORPORATED

                           CONSOLIDATED BALANCE SHEETS

                          AS OF JUNE 30, 1997 AND 1996

<TABLE>
<CAPTION>
                                     ASSETS
                                                                  1997             1996
                                                                -------          -------
                                                                     (in thousands)

<S>                                                             <C>              <C>    
CURRENT ASSETS:
    Cash and cash equivalents                                   $ 9,318          $ 2,500
    Receivables, net of allowance of $322,000 and $0              3,880              910
    Inventories                                                   5,366            2,692
    Prepaid expenses                                                455               94
                                                                -------          -------
        Total current assets                                     19,019            6,196
                                                                -------          -------
PROPERTY AND EQUIPMENT:
    Furniture and fixtures                                          541              515
    Equipment                                                     2,804            1,348
    Leasehold improvements                                          526              506
    Accumulated depreciation                                     (2,075)          (1,329)
                                                                -------          -------
        Property and equipment, net                               1,796            1,040
                                                                -------          -------
OTHER ASSETS, NET                                                   508              395
                                                                -------          -------
                                                                $21,323          $ 7,631
                                                                =======          =======
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                            $ 1,339          $ 1,456
    Accrued expenses                                                723              440
    Customer deposits                                               483            1,748
                                                                -------          -------
        Total current liabilities                                 2,545            3,644
                                                                -------          -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK                            4,948            -

STOCKHOLDERS' EQUITY:
    Common Stock, $.01 par value, 50,000,000 shares
      authorized, 8,763,856 and 7,601,150 shares issued
      and outstanding at June 30, 1997 and 1996                      88               76
    Additional paid-in capital                                   19,321           11,224
    Accumulated deficit                                          (5,579)          (7,313)
                                                                -------          -------
        Total stockholders' equity                               13,830            3,987
                                                                -------          -------
                                                                $21,323          $ 7,631
                                                                =======          =======
</TABLE>

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



                                       22
<PAGE>   25

                            ACRES GAMING INCORPORATED

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                     1997           1996           1995
                                                   -------        -------         -------
                                                   (in thousands except per share data)
<S>                                                <C>            <C>             <C>    

NET REVENUES                                       $20,455        $ 6,942         $ 4,006

COST OF REVENUES                                     9,553          3,587           2,570
                                                    ------        -------         -------
GROSS PROFIT                                        10,902          3,355           1,436
                                                    ------        -------         -------
OPERATING EXPENSES:
    Research and development                         4,531          2,341           1,900
    Selling, general and administrative              4,946          2,679           2,025
                                                    ------        -------         -------
        Total operating expenses                     9,477          5,020           3,925
                                                    ------        -------         -------
INCOME (LOSS) FROM OPERATIONS                        1,425         (1,665)         (2,489)

OTHER INCOME (EXPENSE)                                 373             24             (16)
                                                    ------        -------         -------
NET INCOME (LOSS)                                   $1,798        $(1,641)        $(2,505)
                                                    ======        =======         =======
NET INCOME (LOSS) PER SHARE                           $.20         $(0.22)         $(0.35)
                                                    ======        =======         =======
SHARES USED IN PER SHARE COMPUTATION                 9,071          7,552           7,145
                                                    ======        =======         =======
</TABLE>

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



                                       23
<PAGE>   26

                            ACRES GAMING INCORPORATED

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                     ADDITIONAL            DEFERRED
                                 COMMON STOCK        PAID-IN  ACCUMULATED  CHARGE -
                                SHARES    AMOUNT     CAPITAL   DEFICIT     WARRANTS     TOTAL
                                ------    ------     -------   -------     --------     -----
                                                     (in thousands)
<S>                              <C>     <C>        <C>        <C>         <C>         <C>     
Balance as of June 30, 1994      7,068   $     71   $  8,170   $ (3,167)   $   --      $  5,074

  Issuance of common stock         427          4      2,349       --          --         2,353
  Net loss                        --         --         --       (2,505)       --        (2,505)
  Issuance of warrants            --         --           96       --           (96)       --
  Amortization of warrants        --         --         --         --            40          40
                                 -----   --------   --------    -------    --------    --------
Balance as of June 30, 1995      7,495         75     10,615     (5,672)        (56)      4,962

  Issuance of common stock         106          1        609       --          --           610
  Net loss                        --         --         --       (1,641)       --        (1,641)
  Amortization of warrants        --         --         --         --            56          56
                                 -----   --------   --------    -------    --------    --------
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
                                 =====   ========   ========   ========    ========    ========
</TABLE>

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



                                       24
<PAGE>   27

                            ACRES GAMING INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                          1997          1996           1995
                                                         -------       -------        -------
                                                                   (in thousands)
<S>                                                      <C>           <C>            <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                    $ 1,798       $(1,641)       $(2,505)
    Adjustments to reconcile net income (loss) to
      net cash from operating activities:
        Depreciation and amortization                        931           710            489
        Changes in assets and liabilities:
           Receivables                                    (2,970)           57           (697)
           Inventories                                    (2,674)         (297)          (409)
           Prepaid expenses                                 (361)          (21)           (73)
           Accounts payable and accrued expenses             166           987           (229)
           Customer deposits                              (1,265)        1,355            304
                                                         -------        ------         ------
               Net cash from operating activities         (4,375)        1,150         (3,120)
                                                         -------        ------         ------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                    (1,502)         (349)          (198)
    Capitalized software costs                                -            (82)          (148)
    Investment in intangible assets                         (298)         (154)          (107)
                                                         -------        ------         ------
               Net cash from investing activities         (1,800)         (585)          (453)
                                                         -------        ------         ------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of common stock             8,109           610          2,353
    Net proceeds from issuance of preferred stock          4,948            -              -
    Preferred stock dividends                                (64)           -              -
                                                         -------        ------         ------
               Net cash from financing activities         12,993           610          2,353
                                                         -------        ------         ------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                              6,818         1,175         (1,220)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                                                           2,500         1,325          2,545
                                                         -------        ------         ------
CASH AND CASH EQUIVALENTS AT END OF YEAR                 $ 9,318       $ 2,500        $ 1,325
                                                         =======        ======         ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for interest                                    -            $12            $22
                                                         =======        ======         ======
NONCASH FINANCING ACTIVITIES:
    Issuance of warrants                                      -             -             $96
                                                         =======        ======         ======
</TABLE>

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



                                       25
<PAGE>   28

                            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 tools which
game manufacturers and casinos can use to increase the playability and
entertainment value of their slot games while supporting more efficient and
profitable casino operations. These tools include a combination of custom
electronics, software and computers. The Company currently sells its products in
the United States and in Australia. Sales in Australia totaled $4.8 million and
$1.4 million, for the years ended June 30, 1997 and 1996, respectively. No sales
in Australia were recorded in the year ended June 30, 1995.

        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.

REVENUE RECOGNITION

        The Company sells certain of its products under contracts which
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.

MAJOR CUSTOMERS

        One customer accounted for 28 percent of the Company's net revenues in
1997. Another customer accounted for 28 percent and 43 percent of the Company's
net revenues in 1997 and 1996, respectively. A third customer provided 12
percent of the Company's net revenues in 1997 and 20 percent in 1996. Sales to
one customer amounted to 12 percent of the Company's net revenues in 1996. In
1995, sales to two other customers amounted to 44 percent and 17 percent,
respectively, of the Company's net revenues.

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.

PER SHARE COMPUTATION

        Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the period using the treasury 



                                       26
<PAGE>   29

stock method. Common stock equivalents include shares issuable upon exercise of
outstanding stock options and warrants and shares issuable upon conversion of
redeemable convertible preferred stock.

CASH AND CASH EQUIVALENTS

        Cash and cash 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,
1997 and 1996, 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,
                                                      -----------------------
                                                        1997           1996
                                                      -------         -------
                                                           (in thousands)
         <S>                                           <C>            <C>   
         Raw materials                                 $2,787         $1,464
         Work-in-progress                                 621            718
         Finished goods                                 1,958            510
                                                       ------         ------
         Total inventory                               $5,366         $2,692
                                                       ======         ======
</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.

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 first shipped. Capitalized software costs, net of accumulated
amortization, were $27,000 and $141,000 at June 30, 1997 and 1996, respectively,
and are included in other assets. Amortization, on a two-year straight-line
basis, begins when the products are first shipped. All other research and
development costs are expensed as 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
life of the patent. Gaming licenses and product approvals are amortized over
periods of 5 years and 2 years, respectively. Intangible assets, net of
accumulated amortization, were $397,000 and $254,000 at June 30, 1997 and 1996,
respectively, and are included in other assets.

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 amount of assets and liabilities, the



                                       27
<PAGE>   30

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.

RECENT PRONOUNCEMENTS

        In March 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") which modifies the computation and disclosures related to earnings
per share. Consistent with the provisions of the statement, the Company will
adopt SFAS 128 effective with the Company's fiscal quarter ending December 31,
1997. SFAS 128 would have had no effect on earnings per share reported for the
years ended June 30, 1996 or 1995. The pro-forma effect of the accounting change
on earnings per share reported for the year ended June 30, 1997 is as follows:


<TABLE>
<CAPTION>
                                                            PRO-FORMA EARNINGS
                                                            PER SHARE FOR THE
                                                          YEAR ENDED JUNE 30, 1997
                                                          ------------------------
                                                            BASIC       DILUTED
                                                            -----       -------
        <S>                                                 <C>          <C>
        Primary and fully diluted EPS as reported            $.20         $.20
        Effect of SFAS 128                                    .01          .00
                                                            -----        -----
        Pro-forma basic and diluted EPS                      $.21         $.20
                                                            =====        =====
</TABLE>

2.    INCOME TAXES:

        At June 30, 1997, the Company had cumulative net operating losses
totaling approximately $5 million which are available to offset future taxable
income through 2011. 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, 1997 and 1996. The sources of the differences that
give rise to the deferred income tax assets as of June 30, 1997 and 1996, along
with the income tax effects of each, are as follows:

<TABLE>
<CAPTION>
                                                         DEFERRED INCOME TAX ASSETS 
                                                               AT JUNE 30,
                                                         --------------------------
                                                            1997         1996
                                                          -------      -------
                                                              (in thousands)
        <S>                                               <C>          <C>    
        Operating loss carryforwards                      $ 1,907      $ 2,693
        Property and equipment                                144           73
        Accruals and reserves                                 261           38
        Intangible assets                                      20           24
                                                         --------      -------
                                                            2,332        2,828
        Less valuation allowance                           (2,332)      (2,828)
                                                         --------      -------
        Net deferred tax assets                          $      0      $     0
                                                         ========      =======
</TABLE>

        During 1997, the valuation allowance related to deferred tax assets
decreased by $496,000. In 1996, the valuation allowance related to deferred tax
assets increased by $738,000.

3.    COMMITMENTS AND CONTINGENCIES:

        The Company leases its office facilities under operating leases that
extend through August 2000. Future minimum lease payments under these
noncancelable operating leases as of June 30, 1997 are $429,000, $383,000,

                                       28
<PAGE>   31

$120,000 and $20,000 in 1998, 1999, 2000 and 2001, respectively. Total lease
expense was $255,000, $228,000 and $189,000 for the years ended June 30, 1997,
1996 and 1995, 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, 1997, $64,000 of
dividends earned from date of issuance through June 30, 1997 have been declared.

        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
$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. The Redeemable
Warrants expired on October 27, 1996. Prior to the expiration date,
substantially all of the warrants were exercised resulting in net proceeds to
the Company of approximately $6.2 million. The underwriter warrants were all
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 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.
Exercise prices of the warrants range from $4.75 to $9.00 per share. The
warrants expire between April 1998 and September 2000. Of these, warrants to
purchase 50,000 shares were valued at $96,000, recorded as paid-in capital and
amortized over the term of the related service agreement. Expense associated
with these warrants was $56,000 in 1996 and $40,000 in 1995.

        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 in 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 has
been recognized. Had compensation cost for the Plan been determined consistent

                                       29
<PAGE>   32

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,
                                           ------------------------------------
                                                   1997              1996
                                                  ------           --------
                                           (in thousands except per share data)
         <S>                     <C>              <C>              <C>     
         NET INCOME(LOSS):       As reported      $1,798           $(1,641)
                                 Pro forma           535            (1,921)

         EARNINGS (LOSS) PER     As reported        $.20             $(.22)
         SHARE:
                                 Pro forma           .06              (.25)
</TABLE>

In accordance with SFAS 123, the stock-based compensation methodology has not
been applied to option grants awarded before July 1, 1995. Accordingly, the
above pro forma compensation costs may not be representative of the costs
expected in future years.

        A total of 1,750,000 shares of the Company's Common Stock has been
reserved for issuance pursuant to awards granted under the Plan. The Company has
granted 1,330,575 options, net of cancellations, through June 30, 1997. Activity
under the Plan is summarized below:

<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED JUNE 30,
                                      --------------------------------------------------
                                                1997                      1996
                                      ------------------------    ----------------------
                                                     WEIGHTED                  WEIGHTED
                                                     AVERAGE                    AVERAGE
                                                     EXERCISE                  EXERCISE
                                        SHARES        PRICE        SHARES        PRICE
                                      ---------      ---------    ---------   ----------
         <S>                          <C>           <C>          <C>            <C>  
         Outstanding at beginning       756,375       $  4.23      391,625        $4.83
         of year
         Granted at exercise prices
           equal to market prices       352,450          9.53      532,400         4.48
         Granted at exercise prices
           exceeding market prices      230,500         10.47       30,000         6.50
         Exercised                      (77,625)         4.67      (91,500)        5.75
         Canceled                      (128,750)        11.92     (106,150)        7.00
                                      ---------                    --------   
         Outstanding at end of year   1,132,950          6.25      756,375         4.23
                                      =========                    ========   
         Exercisable at end of year     468,007          4.71      278,000         3.95
                                      =========                    ========   
         Weighted average fair
           value of options granted       $5.35                      $3.39
                                      =========                    ========   

</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 weighted average
assumptions used for grants awarded after June 30, 1995: risk-free interest rate
of 6.2 percent; expected lives of 5 years; and expected volatility of 97
percent. No expected dividends were assumed in the calculations.



                                       30
<PAGE>   33

        The following table summarizes the options to purchase Common Stock
outstanding at June 30, 1997:

<TABLE>
<CAPTION>
                                 WEIGHTED   WEIGHTED                    WEIGHTED
                   OPTIONS FOR   AVERAGE     AVERAGE    OPTIONS FOR   AVERAGE EXERCISE
   EXERCISE           SHARES    EXERCISE   CONTRACTUAL     SHARES     PRICE OF SHARES
    PRICES         OUTSTANDING    PRICE       LIFE       EXERCISABLE   EXERCISABLE
--------------     -----------  ---------  -----------  ------------  ----------------
                                                         
<S>     <C>           <C>       <C>         <C>            <C>           <C>  
$3.00 - $ 5.00        542,950   $  3.68     8.0 years      296,532       $3.60
$5.06 - $ 9.00        361,200      7.10     9.3 years      145,275        6.10
$9.12 - $16.88        228,800     11.01     9.4 years       26,200        9.55
--------------      ---------                              ------- 
$3.00 - $16.88      1,132,950      6.25     8.7 years      468,007        4.71
==============      =========                              =======  
</TABLE>


6.    EMPLOYEE BENEFIT PLAN:

        The Company has a profit sharing plan which 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.



                                       31
<PAGE>   34

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,
1997.

                                    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 which will be filed
pursuant to Regulation 14A within 120 days of June 30, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

        Information with respect to Executive Compensation is incorporated
herein by reference to the Company's Proxy Statement which will be filed
pursuant to Regulation 14A within 120 days of June 30, 1997.

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 which will be filed pursuant to Regulation 14A within 120 days of June
30, 1997.

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 which will be filed pursuant to Regulation 14A within 120 days of June
30, 1997.



                                       32
<PAGE>   35

                                     PART IV

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

        (a)    (1)    FINANCIAL STATEMENTS
                      See Item 8.

               (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 1997
Annual Report on Form 10-K, and have issued our report thereon dated August 1,
1997. 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
August 1, 1997


                                ACRES GAMING INC.
                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                 AMOUNTS
                                         BALANCES AT ADDITIONS   CHARGED
                                         BEGINNING    CHARGED   OFF, NET OF BALANCES AT
                                          OF YEAR    TO INCOME  COLLECTIONS END OF YEAR
                                         ---------   ---------  ----------- ------------
                                                       (in thousands)
       <S>                                   <C>        <C>          <C>      <C> 
       ALLOWANCE FOR UNCOLLECTIBLE
       ACCOUNTS
            1997                             $0         $317         $5       $322
            1996                             48           20        (68)         0
            1995                              0           64        (16)        48

       ALLOWANCE FOR OBSOLETE
       INVENTORY
            1997                            $16         $239       $(25)      $230
            1996                             16            0          0         16
            1995                             73            0        (57)        16

</TABLE>

               (3)    EXHIBITS
                      See Exhibit Index.

        (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.



                                       33
<PAGE>   36

                                    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 19, 1997                By:  /s/ John F. Acres
                                            -------------------
                                                 John F. Acres
                                                 Chief Executive Officer

        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.

<TABLE>
<S>                                    <C>        
Date:  September 19, 1997                /s/ John F. Acres
                                       -------------------
                                               John F. Acres
                                               Chief Executive Officer
                                               and Chairman of the Board
                                               (Principal Executive Officer)


Date:  September 19, 1997                /s/ Robert W. Brown
                                       ---------------------
                                             Robert W. Brown
                                             Executive Vice President, Chief
                                             Financial Officer, Secretary and
                                             Treasurer (Principal  Financial and
                                             Accounting Officer)


Date:  September 19, 1997                /s/ Jo Ann Acres
                                       ------------------
                                               Jo Ann Acres
                                               Director


Date:  September 19, 1997                /s/ Richard A. Carone
                                       -----------------------
                                               Richard A. Carone
                                               Director


Date:  September 19, 1997                /s/ Albert J. Crosson
                                       -----------------------
                                               Albert J. Crosson
                                               Director


Date:  September 19, 1997                /s/ Floyd W. Glisson
                                       ----------------------
                                               Floyd W. Glisson
                                               Director


Date:  September 19, 1997                /s/ Joseph A. Huseonica
                                       -------------------------
                                               Joseph A. Huseonica
                                               President and Director

</TABLE>



                                       34
<PAGE>   37

                                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   Lease dated June 27, 1995, between the Company and McCarran
               Center, LLC(2)

       +10.4   Employment Agreement dated January 2, 1996 between the
               Company and Joseph A. Huseonica(3)

       +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   Sublease between the Company and Hewlett Packard

      + 10.10  Employment Agreement Amendment dated January 15, 1997
               between the Company and Joseph A. Huseonica

        11.1   Statement of Computation of Earnings per Share

        21.1   Subsidiaries of the Registrant

        23.1   Consent of Arthur Andersen LLP, Independent Public
               Accountants

        27.1   Financial Data Schedule

</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-KSB for the year ended June 30, 1995, 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.