ACRES GAMING INC, 10-K, 1996-09-30

ACRES GAMING INC
10-K, 1996-09-30
COMPUTER PERIPHERAL EQUIPMENT, NEC

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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, 1996

(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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
--------------------------------------------------
815 NW NINTH STREET, CORVALLIS, OREGON 97330
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER INCLUDING:

(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

Redeemable Common Stock Purchase Warrants

Units (one share of Common Stock and one-half Redeemable Common Stock Purchase
Warrant)

(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.

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of August 31, 1996 was $50,719,000

The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share as of August 31, 1996 was 7,621,600 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 1996 Annual Meeting of Shareholders to be held
November 12, 1996.

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<PAGE>

TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Market. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Concept III . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Strategic Alliance With IGT . . . . . . . . . . . . . . . . . . 4
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Production and Manufacturing. . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Government Regulation . . . . . . . . . . . . . . . . . . . . . 8
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Forward-Looking Statements. . . . . . . . . . . . . . . . . . . 13

ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 14

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

PART II

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

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

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

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 20

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 34

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . 34

ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 34

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. . . . . . 34

SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL
The Company develops, manufactures and markets electronic game promotion,
slot accounting, and game monitoring systems to the casino gaming industry. Its
Concept III products are designed to enhance casino profitability by providing
entertainment and incentives to players of slot machines and collecting and
analyzing data for use by casino managers. The Concept III 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. A number of the primary manufacturers of slot machines
have made extensive changes to the software used in their machines to support
the Concept III technology.

The Company currently offers products in four major categories:

- Bonusing
- Progressive jackpots
- Slot accounting
- Player tracking

Bonusing and progressive jackpot systems, which provide players with
opportunities for additional play and special pay-outs, 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
to those players.

In August 1996, the Company executed a letter of intent to implement a
strategic alliance with International Game Technology ("IGT"). IGT is the
largest manufacturer of slot 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 3% convertible preferred stock, with a twelve-month option to purchase
an additional 519,481 shares at the same price. IGT will also have the right to
elect one member to the Company's board of directors. See "Strategic Alliance
with IGT."

In connection with the anticipated strategic alliance with IGT, the
Company expects to sell its Concept III bonusing and player tracking
components (which have been designed to interface with the Company's bonusing
components) for use in IGT Smart System-TM- player tracking/slot accounting
installations and expects to partially discontinue offering its slot
accounting and player tracking modules. See "Strategic Alliance with IGT."

THE MARKET

Casino gaming is found in more than 15 states in the United States. Iowa
and Illinois legalized limited gaming on riverboats in the late 1980s.
Subsequently, Mississippi, Missouri, Louisiana and Indiana have also legalized
riverboat or dockside casinos. Land-based gaming is permitted in Colorado,
South Dakota and Louisiana. The Indian Gaming Regulatory Act of 1988 has
resulted in a significant expansion of casino gaming on Indian lands. Casinos
currently are found on Indian lands in a number of states, including Arizona,
California, Connecticut, Minnesota, Oregon, Washington and Wisconsin. Gaming in
the traditional markets of Nevada and New Jersey has continued to grow even as
gaming has been introduced into additional jurisdictions.

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.

<PAGE>

The Company estimates that approximately 750,000 casino-style 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 promotion, automated slot accounting, and game
monitoring systems 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
slot machines.

CONCEPT III

The Concept III system was conceived to provide to the gaming industry 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 four Concept III products directly to casinos: bonusing, slot
accounting, player tracking, and progressive jackpot systems for gaming
machines. Concept III and its component products are a modular, integrated
system. The bonusing, progressive jackpot, slot accounting, and player tracking
modules can be purchased and installed individually or as components of an
integrated system. The Company intends that future products it may develop will
also be integrated into the Concept III system.

The Company also offers Concept III to OEM manufacturers of specialty slot
machines. An OEM manufacturer can use the ability of Concept III to coordinate
lights, sound and other special effects and its ability to cause a slot machine
to pay special bonuses. By adding these capabilities of Concept III to regular
slot machines, entirely new games can be created which offer unique and
entertaining experiences for slot players.

A Concept III installation in a casino includes electronic hardware
installed in the slot machines, personal computers that serve as controllers for
groups of slot machines, software to operate bonusing systems and progressive
jackpot systems and software to record and analyze data and generate reports to
casino management. Concept III employs personal computer technology, and is
designed to take advantage of future improvements in such technology. Under the
agreement with IGT, the Company expects to discontinue offering the software
which records and analyzes data and generates reports.

Up to 10,000 slot machines can be connected in a Concept III installation.
A single controller can serve up to 2,000 machines, and up to 5 controllers can
be included in a Concept III installation. The largest installation for which
the Company has received an order was approximately 2,500 slot machines. The
world's largest casino currently has approximately 4,000 slot machines.

The primary manufacturers of slot machines, including IGT and Bally Gaming
International, Inc. ("Bally"), have made extensive changes to the software used
in their machines to support the Concept III technology. The changes permit the
slot machines to accept instructions from the Concept III system, primarily in
connection with the bonusing system module. New software supporting the Concept
III system on IGT's S+ series and Players Edge Plus series of machines and
Bally's 5500 Pro Series of machines, as well as the Concept III system itself,
has been approved by the Nevada Gaming Control Board. See "Government
Regulation."

The initial installation of the Concept III slot accounting module was at
the Casino Royale casino in Las Vegas, Nevada, in January 1993. The player
tracking module was initially installed during July 1994 at casinos operated by
the Ho-Chunk Nation (formerly named the Wisconsin Winnebago Nation). The
Treasure Island Resort in Las Vegas installed the progressive jackpot system for
slot machines for casino-wide use. In November 1994, the initial installation
of the bonusing system module was installed at the Casino Royale to operate a
Double Jackpot Time promotion. After review of a field trial period, the
bonusing system was released for general installation in Nevada in April, 1995.

<PAGE>

Aristocrat Leisure Industries of Australia ("Aristocrat") is the leading
manufacturer of slot machines in Australia and the second largest in the world.
In February 1996, the Company entered into a sales agreement with Aristocrat
under which the Company is providing its Concept III system for a new casino
under development by Crown Ltd. in Melbourne, Australia, which is scheduled to
open in early 1997.

BONUSING SYSTEM

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 slot machines during the double jackpot periods, they have
required extensive administrative effort to manage. Concept III, with its
ability to deliver instructions to the slot machine, enables the casino to
automate the payment of and accounting for double jackpot and other bonus
programs. In addition, the Concept III 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. 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 is using such special effects to simulate clouds,
lightning, thunder and wind, which, combined with a double and five-time
jackpot bonus application, create a promotion called Hurricane Zone.

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 and there has been no assurance that the money
given to potential customers will be played in the casino's slot machines.
Using the capabilities of Concept III, this type of promotion can be automated
and, instead of giving money directly to the customer, the Concept III system
can match each coin played in the slot machine ("Match Play") or provide free
play ("Reel Money") by adding a free coin under parameters controlled by the
casino. The capabilities of Concept III also allow implementation of the
Personal Progressive promotion, where each qualifying player can build up a
progressive jackpot which only that player is eligible to win.

Installation of the Match Play and Personal Progressive promotions was
completed in November 1995 on 50 slot machines at the Treasure Island Casino in
Las Vegas. The first installation of the Hurricane Zone promotion was completed
on 34 machines at the Edgewater Hotel & Casino in Laughlin, Nevada, in May 1996.
The first installation of Reel Money was completed at the Sundowne Hotel &
Casino in Reno, Nevada, in June 1996.

PROGRESSIVE JACKPOTS FOR SLOT MACHINES

A progressive jackpot system links a number of slot 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. Other progressive jackpot systems
require a controller to be installed at the same location as the machines that
are linked to the jackpot. In contrast, a Concept III 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 Concept III enables the casino manager to
design, alter and readily implement new progressive jackpot promotions which may
be created from time to time.

SLOT ACCOUNTING

The slot accounting module 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, and recognizes players who use player
identification cards.

<PAGE>

PLAYER TRACKING

Player tracking systems collect performance data about individual players
or groups of players. The player tracking module of Concept III builds upon the
casino accounting module to gather and record information about individual
players, much like a "frequent flyer" program. Each customer who elects to
enroll is given a plastic card that uniquely identifies the player. The player
inserts the card into a slot on any game he or she chooses to play, 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.

OTHER PRODUCTS

The bonusing capabilities of the Concept III system can be combined with
products produced by other manufacturers. For example, the Company provides
electronic and certain other components to a company which develops and operates
specialty games. The components provided by the Company comprise a special
bonusing system where the slot player periodically spins a wheel mounted above
the slot machine. The Concept III bonusing system communicates the results of
the wheel spin to the slot machine, which pays the bonus to the player.

RESEARCH AND DEVELOPMENT

The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 44 employees
involved in product engineering as of August 31, 1996. Research and development
expenses were $2,341,000, $1,900,000 and $1,352,000 in the years ended June 30,
1996, 1995 and 1994, respectively.

STRATEGIC ALLIANCE WITH IGT

In August 1996, the Company executed a letter of intent to implement a
strategic alliance with IGT. IGT is the largest manufacturer of slot 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 3% convertible preferred stock,
with a 12-month option to purchase an additional 519,481 shares at the same
price. IGT will also have the right to elect one member to the Company's Board
of Directors.

The Company and IGT have not yet executed definitive documents and it is
possible that no final agreement will be reached. Before the Company can issue
preferred stock to IGT, the Company's shareholders must approve an amendment to
the Articles of Incorporation to authorize Preferred Stock. The Company expects
to submit the proposal to shareholders at its Annual Meeting of Shareholders to
be held on November 12, 1996.

If the strategic alliance is fully implemented, the Company anticipates
that:

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

2) the Company will sell its Concept III Bonusing Technology and player
tracking components for use in IGT Smart System-TM- player tracking/slot
accounting installations and the Company will eventually withdraw from part
of the player tracking/slot accounting business;

3) IGT will incorporate the Company's displays and other game enhancement
tools into its slot machines; and;

4) the Company will develop promotions for use on IGT's Wide Area Network
that supports "Megabucks," "QuarterMania" and other progressive jackpot
promotions.

The Company believes that the strategic alliance with IGT provides it
significant benefits in the slot system market by providing access to IGT's
larger sales and service organizations, and the potential to provide its

<PAGE>

Concept III bonusing technology to a large installed base. The agreement also
allows the Company to focus its resources on development of Bonusing Technology
by reducing the resources required to maintain and develop slot accounting and
player tracking applications.

CUSTOMERS

The Company's initial sales of Concept III systems were to casinos with
fewer than 250 slot machines, as it sought to establish the viability of its
products. Large casinos with more than 250 slot machines in a single location
represent the principal market for Concept III 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, riverboat and dockside
casinos in the States of Illinois, Iowa and Mississippi, and some casinos in
Colorado. A number of casinos in Australia, South Africa and Europe are also
included in this market. The Company currently focuses its marketing efforts on
management groups with at least 800 slot machines in one or more locations.
Installations of this size generally are large enough to support a professional
management staff capable of using the analytical and promotional tools provided
by Concept III.

Anchor Gaming, a developer of proprietary slot machines which uses Concept
III components in its Wheel of Gold game, accounted for 43% of the Company's
net revenues in 1996. Two other customers, Aristocrat Leisure Industries and
Sundowner Hotel & Casino, accounted for 20% and 12% of its net revenues in 1996,
respectively. Rio Suite Hotel & Casino and the Ho-Chunk Nation accounted for
44% and 17% of the Company's net revenues in 1995, respectively. In 1994 Ho-
Chunk Nation accounted for 48% and Gold Shore Casino accounted for 20% of the
Company's net revenues.

The Company's backlog of orders for its products were approximately
$6,500,000 and $800,000 as of June 30, 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, the Company does not have any
ongoing, long-term contracts and products are often delivered within a few
months of receipt of order. 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.

<PAGE>

The Company has installed or has obtained contracts for Concept III
installations in the following casinos:

CASINO MODULES DATE OF INSTALLATION SIZE OF INSTALLATION
- ------ ------- -------------------- --------------------
<S> <C> <C> <C>
Casino Royale Slot accounting January 1992 700 slot machines
Las Vegas, NV Concept III Bonusing September, 1994

Black Diamond Casino Slot accounting August 1992 61 slot machines
Cripple Creek, CO

Bronco Billy's Casino Slot accounting August 1992 221 slot machines
Cripple Creek, CO

Bronco Billy's Casino Slot accounting January 1993 183 slot machines
Black Hawk, CO

Curacao Caribbean Casino Slot accounting May 1993 150 slot machines
Curacao, Netherlands

Princess Beach Casino Slot accounting May 1993 214 slot machines
Curacao, Netherlands

Sky Ute Casino Slot accounting August 1993 103 slot machines
Ignacio, CO

Majestic Pines Casino Slot accounting November 1993 300 slot machines
(Ho-Chunk Nation) Player tracking September 1994
Black River Falls, WI

Rainbow Casino Slot accounting November 1993 600 slot machines
(Ho-Chunk Nation) Player tracking June 1994
Nekoosa, WI

Ho-Chunk Casino Slot accounting November 1993 1,600 slot machines
(Ho-Chunk Nation) Player tracking June 1994
Dells, WI

Rio Suite Hotel & Casino Slot accounting September 1994 2,500 slot machines
Las Vegas, NV Player tracking

Rio Suite Hotel & Casino Slot accounting November 1996 600 slot machines
Las Vegas, NV Player tracking

Treasure Island Resort Progressive jackpots October 1993 250 slot machines
Las Vegas, NV for slot machines
Concept III bonusing October 1995 50 slot machines

Gold Shore Riverboat & Casino Slot accounting June 1994 1,100 slot machines
Biloxi, MS Player tracking June 1994

Golden Nugget Casino Progressive jackpots June 1994 250 slot machines
Las Vegas, NV for slot machines

Tropicana Cruise Ship Slot Accounting December, 1994 150 slot machines
Miami, Florida Player Tracking September, 1995
Concept III bonusing September, 1995

Colorado Grande Casino Slot Accounting July, 1995 200 slot machines
Cripple Creek, CO Player Tracking July, 1995

</TABLE>

<PAGE>

Concept III bonusing April, 1996

Sundowner Hotel & Casino Slot Accounting June, 1996 620 slot machines
Reno, Nevada Player Tracking June, 1996

Virginian Hotel & Casino Slot Accounting August, 1996 460 slot machines
Reno, Nevada Player Tracking August, 1996

Spirit Lake Casino Slot Accounting August, 1996 450 slot machines
Spirit Lake, South Dakota Player Tracking August, 1996

Sands Regency Hotel & Casino Slot Accounting August, 1996 700 slot machines
Reno, Nevada Player Tracking August, 1996

Edgewater Hotel & Casino Concept III bonusing May, 1996 34 slot machines
Laughlin, Nevada

Bally's Saloon & Gambling Hall Concept III bonusing May, 1996 50 slot machines
Tunica, Mississippi

Crown Ltd. Concept III bonusing Early 1997 2,500 slot machines
Melbourne, Australia

</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 to include offices in other key markets and, upon
closing of the transaction with IGT, through IGT's sales and service
organizations.

PRODUCTION AND MANUFACTURING

The Company's manufacturing operations consists primarily of the assembly
of electronic circuit boards and cables from components purchased from third
parties. The circuit boards are manufactured to the Company's specifications
and assembled by contract manufacturers. A key component of each product is
computer software which is copied onto an electronic memory 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 in Corvallis, Oregon.

COMPETITION

The Company currently has four principal competitors in the market for slot
accounting and player tracking systems. The two largest competitors are IGT and
Bally Systems, a division of Bally Gaming International, Inc. Electronic Data
Technology ("EDT") was founded by John F. Acres, the Company's principal
stockholder, in 1981 and was acquired by IGT in 1983. The player tracking
system currently sold by IGT is based on the design developed by Mr. Acres while
employed by EDT.

The Bally Systems products are based on mainframe or minicomputer
technology, rather than personal computer technology. Both of these competitors
have greater financial, technical and marketing resources than the Company. In
addition, IGT is the largest manufacturer of gaming machines in the world, which
gives it a competitive advantage in selling its product to purchasers of IGT
gaming machines. The Company expects to sell its Concept III player tracking
components for use in IGT Smart System player tracking and slot accounting
installations.

<PAGE>

The Company also competes with Casino Data Systems, Inc., which offers
collection and player tracking products based on personal computer technology.
Casino Data Systems, Inc. does not currently offer bonusing systems, but its
slot accounting and player tracking systems have been well received. In
addition, Casino Data Systems, Inc. has greater financial resources than the
Company. Mikohn Gaming Corporation also offers a data collection and player
tracking product.

The market for progressive jackpot systems for slot machines owned by
casinos is served primarily by two companies other than the Company. Mikohn
Gaming Corporation has the largest share of the market. Mikohn Gaming
Corporation was founded by John F. Acres in 1985. Mr. Acres disposed of his
interest in Mikohn Gaming Corporation in 1988. Casino Data Systems, Inc. also
manufactures and sells progressive jackpot systems.

The Company believes that its products compete principally on the basis
of functionality, price and service. The Company believes the bonusing
technology of its Concept III system is unique and is not aware of any other
companies offering similar products.

GOVERNMENT REGULATION

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

The Company has complied with the approval process for use of the products
it has sold in Nevada, Colorado, Wisconsin, Mississippi, New Jersey 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. The Company is under a
continuing duty to file written amendments to its license applications whenever
any material or significant change of facts or circumstances has occurred with
respect to any matter set forth in its original application or any renewal. On
a periodic basis, the Company is required to file an application for renewal of
its licenses, permits, or certificates in most states in which it has received
such an authorization to conduct its business. Notwithstanding the renewal
process, a change in any item that is a condition of the original license or any
renewal must be approved by the applicable gaming authority, and no material
change in ownership of the Company will be effective until such time as the
proposed change has been approved by all gaming regulatory authorities having
jurisdiction over the Company's operations. In such case, the proposed new
owner may be required to submit an application together with evidence that such
new owner is qualified to receive such a license, certificate or permit. In
addition, the Company's current licenses and permits require the Company to
cooperate with the applicable gaming authorities in any inquiry or investigation
and to provide any supplementary information requested by such gaming
authorities.

The gaming laws and regulations of most jurisdictions provide for the
continuing compliance with the related laws and regulations of such
jurisdictions and allow for the suspension, refusal to renew or revocation of a
license, certificate or permit. In particular, the New Jersey Casino Control
Act ("the New Jersey Act") provides for suspension, refusal to renew or
revocation of a license for: a violation of any provision of the New Jersey
Act; conduct which would disqualify the Company, or any person required to be
qualified, if such person were applying for an original license; failure to
comply with all applicable federal, state, and local statutes, ordinances, and
regulations; or a material departure from any representation made in the
application for licensure.

Further, 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

<PAGE>

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 Concept III for use in any other
jurisdiction in which a sale arises. Failure of the Company to obtain approval
for the use of Concept III by a gaming licensee in a jurisdiction will prevent
the use of Concept III at such licensee's location and also will prevent any
other gaming licensee within that jurisdiction from using Concept III products
until the appropriate approvals have been obtained or requirements complied
with.

Until May 1995, the Company had not been required to obtain a manufacturer
or distributor license to sell any of its products in Nevada. In May 1995, the
regulatory authorities in Nevada determined that, because of the ability of the
Concept III bonusing system to deliver instructions which cause slot machines to
pay coins out of their hoppers (the "Pay Command"), the Company is required to
obtain licensing before any promotions using the Pay Command will be approved.
At the same time, the Nevada authorities determined that the implementation of
Match Play and Personal Progressive promotions were approvable as associated
equipment. On December 21, 1995, the Nevada Gaming Commission ("Nevada
Commission") registered the Company as a publicly traded corporation,
("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. ("AGI"), a Nevada corporation .
The Nevada Commission also granted AGI a nonrestricted Slot Route Operator's
license, provided however, that said license shall not issue until AGI's
fulfillment of certain conditions within a one-year time period. The Nevada
Commission also granted individual gaming licenses to the officers and sole
director of AGI. In granting the aforementioned registration, findings of
suitability and licenses, the Nevada Commission also imposed certain reporting
and investigative criteria on the Company to help insure that the Nevada
Commission remains fully informed regarding the Company's activities in Nevada
and other jurisdictions where the Company is licensed to engage, or doing
business in, the gaming industry.

The regulatory authorities in any jurisdiction in which the Company is
subject to licensing may: (a) impose certain corporate structure requirements on
the Company, including requiring that the Company form a wholly-owned subsidiary
to apply for licensing to manufacture and distribute the Company's products in
the particular jurisdiction; (b) require the officers, directors, key employees
or affiliates of the Company and/or any of the Company's subsidiaries to be
licensed or found suitable; (c) require some or all of the holders of any debt
or equity security of the Company to be licensed or be found suitable, or to
divest their holdings of the Company's securities; or (d) subject the Company,
any subsidiary, or the officers, directors, key employees, affiliates, or
holders of any debt or equity security of the Company or any subsidiary to any
other restriction that is deemed reasonable by the regulatory authority.
Generally, regulatory authorities may deny applications for licenses or findings
of suitability for any cause they deem reasonable. In the event a regulatory
authority were to find an officer, director, key employee or affiliate of the
Company or any subsidiary, or any other person, including a stockholder,
unsuitable to act in such capacity or to continue to have a relationship with
the Company, the Company would be required to terminate all relationships with
such person or entity. The regulatory authorities also may have authority to
disapprove a change in a licensed position, including a material change in
ownership, which change must be reported to the regulatory authorities in
question.

If a license or finding of suitability is required by a regulatory
authority and the Company fails to seek or does not receive the necessary
license or finding, the Company may be prohibited from selling its product for
use in the respective jurisdiction. Licensing requirements and regulations vary
from jurisdiction to jurisdiction, and the licensing process can be lengthy and
expensive. There can be no assurance that the Company will not be subject to
licensing or suitability requirements in one or more jurisdictions, or that the
Company will receive the necessary licenses or approvals.

<PAGE>

NEVADA GAMING REGULATION

The holders of any form of gaming license in Nevada are subject to: (i) the
Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, "Nevada Act"); and (ii) various local regulation. The Company's
gaming operations are subject to the licensing and regulatory control of the
Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), the
Clark County Liquor and Gaming Licensing Board and any other local jurisdiction
within which the Company does business in Nevada. The Nevada Commission, the
Nevada Board and the local gaming regulatory authorities are collectively
referred to as the "Nevada Gaming Authorities."

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

As noted above, on December 21, 1995, AGI was licensed by the Nevada
Commission to manufacture and distribute gaming devices. AGI also anticipates
operating as a slot route operator. The gaming license requires the periodic
payment of fees and taxes and is not transferable. On the same date the Company
was also granted Registered Corporation status, and as such, it is required
periodically to 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, officer or director of, or receive
any percentage of profits from AGI without first obtaining licenses and
approvals from the Nevada Gaming Authorities.

The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or AGI in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee or Registered Corporation. Officers,
directors and certain key employees of AGI must file applications with the
Nevada Gaming Authorities and may be required to be licensed or found suitable
by the Nevada Gaming Authorities. Officers, directors, shareholders and key
employees of the Company who are actively and directly involved in gaming
activities of AGI are required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. The application process for
a finding of suitability or licensure is, for all intents and purposes,
identical, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a finding of
suitability or licensure, the Nevada Gaming Authorities have jurisdiction to
disapprove a change in a corporate position.

If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or AGI, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company or AGI to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.

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

<PAGE>

If it were determined that the Nevada Act was violated by the Company or
AGI, its officers, directors and/or employees, the gaming licenses it holds,
including the individual gaming licenses or findings of suitability issued to
their officers, directors, shareholders, controlling shareholders and/or key
employees could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, the
Company, AGI, and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission
to operate AGI's gaming business in Nevada and, under certain circumstances,
earnings generated during the supervisor's appointment (except for the
reasonable rental value of AGI's business properties) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of any gaming license
or the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the gaming operations of the Company or AGI.

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

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

Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject
to disciplinary action if, after it receives notice that a person is unsuitable
to be a stockholder or to have any other relationship with the Company or AGI,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to

<PAGE>

exercise, directly or indirectly, any voting right conferred through securities
held by that person, (iii) pays remuneration in any form to that person for
services rendered or otherwise, or (iv) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his voting securities for cash at
fair market value. Additionally, at least one local gaming regulatory
authority, the Clark County Liquor and Gaming Licensing Board, has taken the
position that it has the authority to approve all persons owning or controlling
the stock of any corporation controlling a Slot Route Operator's license, in
this case the Company.

The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation (the Company) to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.

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

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

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

The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of those 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. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.

<PAGE>

License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license also pay certain fees and taxes to the
State of Nevada.

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

PATENTS

The Company has applied for U.S. patents on certain features of its
Concept III product line, and may in the future apply for other U.S. patents and
corresponding foreign patents. 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.

EMPLOYEES

At August 31, 1996, the Company had 93 full-time employees of whom 44 were
involved in engineering, 18 in production and quality control, 18 in sales,
marketing, technical service and customer service, and 13 in administration and
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
plan 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. The following factors are among those that
could cause actual results to differ materially from the forward-looking
statements: business and economic conditions generally and in the gaming
industry; alterations in the Company's strategic alliance with IGT; timing,
receipt, installation and regulatory approval of any one order; technological
change; new products; potential obsolecence; competition; government regulation;
potential restrictions on sales; and availability of additional capital. 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 factors and other factors referred to
from time to time in the Company's press releases, periodic reports or
communications with shareholders.

<PAGE>

ITEM 2. PROPERTIES

The Company is headquartered in a leased facility at 815 N.W. Ninth Street,
Corvallis, Oregon, 97330. The lease commenced on April 15, 1994, and will
expire on April 15, 1999. The Company expects to lease additional space
contiguous to its headquarters, expanding its facility from approximately 22,000
square feet to approximately 27,500 square feet. The base rent for the
expanded facility will be approximately $14,100 per month, and will increase to
approximately $16,100 on May 1, 1997, 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 expires on August 31, 2000. The base rent
is $8,105 per month, plus $1,220 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, used 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, 1996, the Company was
not a party to any 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, 1996.

EXECUTIVE OFFICERS OF REGISTRANT

As of August 31, 1996, the executive officers of the Company were as set
forth below.

Name Age Positions and Offices Executive Officer Since
- ---- --- --------------------- -----------------------
<S> <C> <C> <C>
John F. Acres 42 Chief Executive Officer, 1985
Director and Secretary

Joseph A. Huseonica 52 President and Chief Operating Officer 1996

Robert W. Brown 41 Chief Financial Officer and Treasurer 1993

</TABLE>

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

JOHN F. ACRES is the founder of the Company and has been the Chief
Executive Officer, Secretary and a director since its inception. He also served
as its President until January, 1996. 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 slot
machines throughout the world and is still actively marketed by IGT. In 1985,
Mr. Acres co-founded Mikohn, Inc.. He served as Vice President and a director
of Mikohn, Inc. until 1988.

<PAGE>

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. 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.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock trades on the Nasdaq Small-Cap Market under the
symbol "AGAM." The following table sets forth, for the periods indicated, the
range of high and low bid prices for the Company's common stock as reported by
the Nasdaq Small-Cap Market. The following quotations represent prices between
dealers, do not include retail mark-ups, mark-downs or commissions, and do not
necessarily represent actual transactions.

BID
----------------
LOW HIGH
----- ------
FISCAL YEAR ENDED JUNE 30, 1995:
First quarter. . . . . . . . . . $3.50 $ 6.38
Second quarter . . . . . . . . . $4.25 $ 6.63
Third quarter. . . . . . . . . . $4.75 $ 7.00
Fourth quarter . . . . . . . . . $5.75 $ 7.63

FISCAL YEAR ENDED JUNE 30, 1996:
First quarter. . . . . . . . . . $7.00 $ 9.00
Second quarter . . . . . . . . . $4.50 $ 8.00
Third quarter. . . . . . . . . . $3.50 $ 5.63
Fourth quarter . . . . . . . . . $4.63 $12.75

At August 31, 1996, there were approximately 230 record holders of the
Company's common stock. The Company estimates that there are over 1,000
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.

<PAGE>

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.

YEARS ENDED JUNE 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . $101 $492 $2,852 $4,006 $6,942
Gross profits. . . . . . . . . . . . . . . 46 291 851 1,436 3,355
Loss from operations . . . . . . . . . . . (184) (514) (1,644) (2,489 (1,665)
Net Loss . . . . . . . . . . . . . . . . . (201) (536) (2,598) (2,505) (1,641)
Net loss per common share. . . . . . . . . $(0.05) $(0.10) $(0.39) $(0.35) $(0.22)
Weighted average number of shares of
common stock and common stock
equivalents outstanding. . . . . . . . . . . 4,429 5,225 6,629 7,145 7,552

YEARS ENDED JUNE 30,
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>

BALANCE SHEET DATA:
Working capital (deficit). . . . . . . . . $(145) $(762) $3,574 $3,458 $2,552
Total assets . . . . . . . . . . . . . . . 99 692 6,301 6,264 7,631
Current liabilities. . . . . . . . . . . . 244 1,373 1,227 1,302 3,644
Long-term debt . . . . . . . . . . . . . . -- -- -- -- --
Stockholders' equity (deficit) . . . . . . (145) (681) 5,074 4,962 $3,987

</TABLE>

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

OVERVIEW

The Company was founded to pursue new concepts in slot machine game
promotion and bonusing for the casino industry. Although there was and is
significant competition in the slot accounting and player tracking business, the
Company's initial focus was the sale of these systems, in order to establish
relationships with casinos with products the industry understood and was then
using. The Company was able to achieve some market success in this business
because of its commitment to provide follow-on promotion and bonusing products
designed to enhance casino profitability by providing entertainment and
incentives to slot machine players. The Company installed the first Concept III
bonus product in November 1994. In fiscal 1996 and 1995, it derived revenues of
$5,394,000 and $159,000 based on bonusing products.

The Company's strategic alliance with IGT will allow the Company to focus
its efforts on bonusing technology and the creation of proprietary games. The
Company anticipates that it will withdraw from direct participation in the slot
accounting and player tracking business in fiscal 1997 and will instead sell
these products to IGT for inclusion in IGT's Smart System.

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

<PAGE>

any one order, availability of additional capital, competition and technological
change. Historically, three or fewer customers have accounted for more than 60%
of annual revenues.

RESULTS OF OPERATIONS

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

Company's net revenues during the year ended June 30,
1996, were $6,942,000, an increase of 73% over the $4,006,000 of net revenues in
1995. The increase in revenues resulted primarily from sales to Anchor Gaming
of components used in the Wheel of Gold game, sales under an agreement with
Aristocrat Leisure Industries to provide Concept III bonusing capability for a
casino under development by Crown Ltd. in Melbourne, Australia, and the sale of
a bonusing, slot accounting and player tracking system to the Sundowner Hotel
and Casino in Reno, Nevada.

Gross profit as a percentage of net revenue increased to 48%
in 1996 from 36% in 1995. Gross profit increased primarily as a result of
Concept III bonusing products comprising a larger percentage of sales in 1996.
The Company realizes larger margins for bonusing products.

Operating expenses increased to $5,020,000 in the year
ended June 30, 1996 from $3,925,000 in the year ended June 30, 1995, an increase
of 28%. The increase in operating expenses resulted primarily from the addition
of personnel and expansion of the sales and service office in Las Vegas. The
expansion was undertaken in order to support growth in revenue and to expand
development of Concept III products.

The Company's research and development expenses
increased to $2,341,000 in the year ended June 30, 1996, from $1,900,000 in the
year ended June 30, 1995. The Company expects to spend a significant portion of
its revenue on research and development in order to enhance and expand the
capabilities of its Concept III system, including the development of additional
promotions which utilize the system's bonusing capabilities. The Company
believes that enhancement and expansion of its Concept III system will lead to
increased revenues from sales of its products.

The net loss for the year ended June 30, 1996, was $1,641,000
($0.22 per share) compared to $2,505,000 ($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.

COMPARISON OF THE YEARS ENDED JUNE 30, 1995 AND 1994.

The Company's net revenues during the year ended June 30,
1995, were $4,006,000, an increase of 40% over the $2,852,000 of net revenues in
1994. The increase in revenues resulted primarily from sales of a slot
accounting and player tracking system to the Rio Suite Hotel and Casino in Las
Vegas, Nevada, and of player tracking systems to casinos operated by the Ho-
Chunk Nation in Wisconsin.

Gross profit as a percentage of net revenue increased to 36%
in 1995 from 30% in 1994. Gross profit in 1994 was adversely affected by the
initial sales of the player tracking module. The costs to manufacture and
install these initial orders was higher than on subsequent installations. In
addition, certain optional features which are separately priced on later orders
were installed at no additional cost to the customer in order for the Company to
be able to demonstrate such features to prospective customers.

In order to support growth in revenue and to expand
development of its Concept III products, the Company hired additional personnel,
made capital expenditures for computer and other equipment, leased additional
space to serve as its headquarters and opened a sales and service office in Las
Vegas during the

<PAGE>

year ended June 30, 1994. As a result, operating expenses increased to
$3,925,000 in 1995 from $2,495,000 in the year ended June 30, 1994.

The net loss for the year ended June 30, 1995 was $2,505,000 compared to
$2,598,000 in the prior year. A charge of $898,000 was recorded during the
year ended June 30, 1994 for the expenses and settlement of patent
infringement litigation. See Note 5 "Patent Infringement Litigation" in
"Notes to Consolidated Financial Statements."

COMPARISONS OF THE YEARS ENDED JUNE 30, 1994 AND 1993

The Company's net revenues during the year ended June 30, 1994, were
$2,852,000, an increase of 480% over the $492,000 of net revenues during the
prior year. The first significant orders for the Company's Concept III slot
accounting and player tracking system were received during the three months
ended June 30, 1993. Delivery of those orders for slot accounting and player
tracking systems to the Gold Shore Casino in Mississippi and for slot
accounting systems to casinos operated by the Ho-Chunk Nation in Wisconsin
during the year ended June 30, 1994, was the principal reason for the
increase in revenues.

Gross profit as a percentage of net revenues decreased to 30% in 1994
from 59% in 1993. The decrease resulted from costs to manufacture and
install initial orders of the player tracking system.

In order to support revenue growth and develop its Concept III products,
the Company hired additional personnel, made capital expenditures for
computer and other equipment, leased additional space to serve as its
headquarters and opened a sales and service office in Las Vegas. As a
result, operating expenses increased to $2,495,000 in the year ended June 30,
1994 from $805,000 in the year ended June 30, 1993.

A charge of $898,000 was recorded during fiscal 1994 for the expenses and
settlement of patent infringement litigation (See Note 5, "Patent
Infringement Litigation" in "Notes to Consolidated Financial Statements").
Including the charge for the litigation settlement, the net loss was
$2,598,000 ($0.39 per share) in 1994, compared to $536,000 ($0.10 per share)
in 1993. At its current stage of operation, 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.

LIQUIDITY AND CAPITAL RESOURCES.

At June 30, 1996, the Company had a balance of cash and cash equivalents of
$2,500,000, compared to a balance of $1,325,000 as of June 30, 1995. The
Company has no debt. During the year ended June 30, 1996, net cash generated by
operating activities was $1,150,000 and proceeds from issuance of common stock
for stock option and warrant exercises were $610,000. Cash used for capital
expenditures and other investing activities was $585,000. The major components
of the net cash generated by operating activities were the net loss of
$1,641,000, offset by depreciation of $540,000, and increases of $1,355,000 in
customer deposits and of $987,000 in accounts payable and accrued expenses.

The 833,600 redeemable warrants which were outstanding as of June 30, 1996,
from the Company's initial public offering have an exercise price of $7.50 per
share and expire in October, 1996. If exercised in full, such redeemable
warrants would provide gross proceeds to the Company of approximately
$6,252,000. Any proceeds from the exercise of the warrants will be used to help
fund the Company's anticipated growth and product development efforts. See Note
6 of "Notes to Consolidated Financial Statements."

In August, 1996, the Company entered into a letter of intent to form a
strategic alliance with IGT under which the Company will initially issue
approximately 519,000 shares of preferred stock for gross proceeds of
$5,000,000. IGT will also have the option, through August 8, 1997, to purchase
up to an additional 519,000 shares of preferred stock at the same price. IGT
will also have the right to elect one member to the Company's

<PAGE>

Board of Directors. Closing of the initial preferred stock sale is subject to
approval of the issuance of preferred stock by the Company's shareholders,
receipt of approval by gaming and other regulatory agencies and completion of
definitive agreements with IGT.

The Company's sources of liquidity include its cash balances and cash
generated by operations, including payment terms which generally include
deposits with the receipt of customer orders. The proceeds from the exercise of
the redeemable warrants and the issuance of preferred stock to IGT referred to
above will provide additional cash. These sources of liquidity are expected to
be sufficient to fund the Company's operations for at least the next 12 months.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. The Company has adopted the
provisions of this Statement, which did not have a material effect on the
financial statements.

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which establishes a fair value based method of accounting
for stock-based compensation plans and requires additional disclosures for those
companies that elect not to adopt the new method of accounting. The Company
will continue to account for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The disclosures required by
Statement No. 123 will be effective for the Company's fiscal year ending June
30, 1997.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----

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

<PAGE>

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, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Acres Gaming Incorporated and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.

Portland, Oregon,
August 9, 1996

<PAGE>

ACRES GAMING INCORPORATED & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 1996 AND 1995

ASSETS

1996 1995
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,500,000 $ 1,325,000
Receivables 910,000 967,000
Inventories 2,692,000 2,395,000
Prepaid expenses 94,000 73,000
----------- -----------
Total current assets 6,196,000 4,760,000
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 515,000 508,000
Equipment 1,348,000 1,014,000
Leasehold improvements 506,000 498,000
Accumulated depreciation (1,329,000) (789,000)
----------- -----------
Total property and equipment 1,040,000 1,231,000

OTHER ASSETS, NET 395,000 273,000
----------- -----------
$ 7,631,000 $ 6,264,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 1,456,000 $ 427,000
Accrued expenses 440,000 482,000
Customer deposits 1,748,000 393,000
----------- -----------
Total current liabilities 3,644,000 1,302,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000
shares authorized, 7,601,150 and 7,494,500
shares issued and outstanding at
June 30, 1996 and 1995 76,000 75,000
Additional paid-in capital 11,224,000 10,615,000
Accumulated deficit (7,313,000) (5,672,000)
Less- Deferred charge-warrants - (56,000)
----------- -----------
Total stockholders' equity 3,987,000 4,962,000
----------- -----------
$ 7,631,000 $ 6,264,000
----------- -----------
----------- -----------

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

22
<PAGE>

ACRES GAMING INCORPORATED & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

1996 1995 1994
----------- ----------- -----------

NET REVENUES $ 6,942,000 $ 4,006,000 $ 2,852,000

COST OF REVENUES 3,587,000 2,570,000 2,001,000
----------- ----------- -----------
GROSS PROFIT 3,355,000 1,436,000 851,000
----------- ----------- -----------

OPERATING EXPENSES:
Research and development 2,341,000 1,900,000 1,352,000
Selling, general and administrative 2,679,000 2,025,000 1,143,000
----------- ----------- -----------
Total operating expenses 5,020,000 3,925,000 2,495,000
----------- ----------- -----------

LOSS FROM OPERATIONS (1,665,000) (2,489,000) (1,644,000)

LITIGATION SETTLEMENT - - (898,000)

OTHER INCOME (EXPENSE) 24,000 (16,000) (56,000)
----------- ----------- -----------
NET LOSS $(1,641,000) $(2,505,000) $(2,598,000)
----------- ----------- -----------
----------- ----------- -----------

NET LOSS PER SHARE $ (0.22) $ (0.35) $ (0.39)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 7,552,000 7,145,000 6,629,000
----------- ----------- -----------
----------- ----------- -----------

The accompanying notes are an integral part of these consolidated statements.
23
<PAGE>

ACRES GAMING INCORPORATED & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

Common Stock Additional Deferred
------------------ Paid-In Accumulated Charge-
Shares Amount Capital Deficit Warrants Total
--------- -------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
June 30, 1993 4,852,000 $ 49,000 $ 704,000 $(1,434,000) $ - $ (681,000)
Issuance of
common
stock 2,215,750 22,000 8,331,000 - - 8,353,000
Reclassifica-
tion of
cumulative
S corpora-
tion losses - - (865,000) 865,000 - -
Net loss - - - (2,598,000) - (2,598,000)
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1994 7,067,750 71,000 8,170,000 (3,167,000) - 5,074,000
Issuance of
common
stock 426,750 4,000 2,349,000 - - 2,353,000
Net loss - - - (2,505,000) - (2,505,000)
Issuance of
warrants - - 96,000 - (96,000) -
Amortization
of warrants - - - - 40,000 40,000
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1995 7,494,500 75,000 10,615,000 (5,672,000) (56,000) 4,962,000
Issuance of
common
stock 106,650 1,000 609,000 - - 610,000
Net loss - - - (1,641,000) - (1,641,000)
Amortization
of warrants - - - - 56,000 56,000
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1996 7,601,150 $ 76,000 $11,224,000 $(7,313,000) $ - $ 3,987,000
--------- -------- ----------- ----------- -------- -----------
--------- -------- ----------- ----------- -------- -----------

</TABLE>

The accompanying notes are an integral part of these consolidated statements.
24
<PAGE>

ACRES GAMING INCORPORATED & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,641,000) $(2,505,000) $(2,598,000)
Adjustments to reconcile net loss to net
cash from operating activities-
Depreciation 540,000 449,000 161,000
Amortization of warrants 56,000 40,000 -
Amortization of capitalized software
costs 89,000 - -
Amortization of other long-term
assets 25,000 - -
Changes in assets and liabilities:
Receivables 57,000 (697,000) (171,000)
Inventories (297,000) (409,000) (1,935,000)
Prepaid expenses (21,000) (73,000) (18,000)
Accounts payable and accrued
expenses 987,000 (229,000) 1,051,000
Customer deposits 1,355,000 304,000 (1,160,000)
----------- ----------- -----------
Net cash from operating activities 1,150,000 (3,120,000) (4,670,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (349,000) (198,000) (1,562,000)
Capitalized software costs (82,000) (148,000) -
Investment in intangible assets (154,000) (107,000) -
----------- ----------- -----------
Net cash from investing activities (585,000) (453,000) (1,562,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock 610,000 2,353,000 8,353,000
Payments under notes payable to bank - - (37,000)
----------- ----------- -----------
Net cash from financing activities 610,000 2,353,000 8,316,000
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,175,000 (1,220,000) 2,084,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 1,325,000 2,545,000 461,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,500,000 $ 1,325,000 $ 2,545,000
----------- ----------- -----------
----------- ----------- -----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 12,000 $ 22,000 $ 3,000
----------- ----------- -----------
----------- ----------- -----------
NONCASH FINANCING ACTIVITIES:
Issuance of warrants $ - $ 96,000 $ -
----------- ----------- -----------
----------- ----------- -----------

</TABLE>

The accompanying notes are an integral part of these consolidated statements.
25
<PAGE>

ACRES GAMING INCORPORATED & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:

COMPANY OPERATIONS

The consolidated financial statements include the accounts of Acres Gaming
Incorporated and its wholly-owned subsidiary, AGI Distribution, Inc. (the
Company). 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 presently sells its products in
the United States and in Australia. Sales to Australia totaled $1,416,000, or
20% of net revenues, for the year ended June 30, 1996.

During September 1993, JFA Enterprises, Inc. (JFA) merged two companies under
common ownership into JFA in exchange for newly issued shares of JFA common
stock. JFA subsequently changed its name to Acres Gaming Incorporated. The
transaction was accounted for similar to a pooling of interests and,
accordingly, the Company's financial statements include the accounts of the
merged companies for all periods presented. In connection with this merger, the
Company executed a 6-for-1 stock split. This stock split has been retroactively
reflected for the period ended June 30, 1994.

In November, 1993, the Company issued 1,667,500 units (consisting of 1,667,500
shares of common stock and 833,750 warrants) in an initial public offering
resulting in net proceeds of $7,153,000. In June, 1995, the Company issued
400,000 shares of common stock to a group of private investors for net proceeds
of $2,255,000. The proceeds of these transactions are being used to expand and
enhance the Company's Concept III product line, expand sales and support
activities, fund capital expenditures for computer and other equipment, and
provide working capital. 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.

PRINCIPLES OF CONSOLIDATION

All intercompany accounts and transactions have been eliminated.

REVENUE RECOGNITION

The Company sells its products under contracts which generally provide that the
price be paid in installments as progress is made toward completion and that
final payment be made after the completion of the contract. 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. During 1996, three
customers accounted for 43%, 20% and 12% of net revenues. During 1995, two
other customers accounted for 44% and 17% of net revenues. During 1994, two
customers accounted for 48% and 20% of net revenues.

26
<PAGE>

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 $141,000 at June 30, 1996 and $148,000 at June 30, 1995, and
are included in other assets. Amortization, generally on a two-year straight-
line basis, begins when the products are first shipped. All other research and
development costs are expensed as incurred.

INCOME TAXES

Certain of the companies involved in the merger discussed in Note 1 had
previously elected to be taxed as S corporations. As an S corporation, a
company generally is not responsible for income taxes. Instead, the
stockholders are taxed on the Company's taxable income at the stockholders'
individual federal and state income tax rates. These companies have incurred
losses since inception.

At the time of the merger described in Note 1, the S corporation status of the
companies discussed above was terminated and, accordingly, the Company has been
subject to federal and state income taxes from the effective date of the merger.
The Company recognizes deferred taxes for cumulative temporary differences
between financial reporting and tax reporting. Such deferred taxes are based on
the cumulative temporary differences at the date of the merger. If the
termination of the S corporation status had occurred at June 30, 1993, deferred
taxes would not have been significant. Upon termination of the S corporation
status, cumulative losses of approximately $865,000 attributable to the entities
which had elected S corporation status were reclassified to additional paid-in
capital from accumulated deficit.

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

NET LOSS PER SHARE

Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period.

CASH AND CASH EQUIVALENTS

The Company considers investments with an initial maturity of three months or
less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of receivables. At June 30, 1996
and 1995, 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.

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 four or five
years. Leasehold improvements are amortized over the lease term. Expenditures
for maintenance and repairs are charged to operations when incurred.
27
<PAGE>

INTANGIBLE ASSETS

Intangible assets consist of costs associated with the establishment of patents,
trademarks, gaming licenses, and gaming product approvals in various
jurisdictions. Amortization started in 1996 and is calculated using the
straight-line method over a period of 2 to 15 years. Intangible assets, net of
accumulated amortization, were $254,000 at June 30, 1996 and $125,000 at
June 30, 1995 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RECENT PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to be Disposed of," which requires the Company to review for impairment
of long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In certain situations, an
impairment loss would be recognized. The Company has adopted the provisions of
this Statement, which did not have a material effect on the financial
statements.

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies that elect not to adopt the new method of accounting. The Company
will continue to account for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The disclosures required by
Statement No. 123 will be effective for the Company's fiscal year ending June
30, 1997.

2. INVENTORIES:

Inventories consist of the following:

1996 1995
---------- ----------
Raw Materials $1,464,000 $1,930,000
Work-in-progress 718,000 292,000
Finished Goods 510,000 173,000
---------- ----------
$2,692,000 $2,395,000
---------- ----------
---------- ----------

3. INCOME TAXES:

At June 30, 1996, the Company had cumulative net operating losses totaling
approximately $7,000,000 which are available to offset future taxable income
through 2011. The Company has provided a valuation allowance for the entire
amount of the benefit related to these net operating loss carryforwards as its
realizability is uncertain at this time. Deferred tax liabilities were
insignificant as of June 30, 1996.
28
<PAGE>

4. COMMITMENTS AND CONTINGENCIES:

The Company leases its office facilities under operating leases that extend
through March, 2001. Future minimum lease payments under these noncancelable
operating leases as of June 30, 1996 are $239,000 in 1997, $254,000 in 1998,
$227,000 in 1999, $97,000 in 2000, and $13,000 in 2001. Total lease expense for
the years ended June 30, 1996, 1995 and 1994 was $228,000, $189,000 and $86,000,
respectively.

5. PATENT INFRINGEMENT LITIGATION:

The Company and a customer were named as defendants in a lawsuit filed in August
1993, which alleged patent infringement and sought to enjoin the Company from
selling progressive jackpot table games. In April 1994, the Company was found
to have infringed on certain patents and the patents were held to be valid. A
charge of $898,000 was recorded in the statement of operations for the
settlement reached after conclusion of the trial, as well as all expenses
related to the trial and the settlement agreement. The Company had sold only
four of the table games and had not considered them a part of its primary
business plan.

6. STOCKHOLDERS' EQUITY:

In November 1993, the Company completed its initial public offering and issued
1,667,500 units, consisting of 1,667,500 shares of common stock and 833,750
Redeemable Warrants. The net proceeds of the offering were $7,153,000. The
Redeemable Warrants, which expire October 27, 1996, allow the holder to purchase
one share of common stock at $7.50 per share. In connection with the offering,
the Company granted the underwriter warrants to purchase 145,000 shares of the
Company's units at $6 per share. The warrants expire in November 1998.

In June 1995, the Company issued 400,000 shares of common stock to a group of
private investors for net proceeds of $2,255,000. 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 exchange for services, the Company issued warrants in 1995 to purchase
195,000 shares of common stock to two companies and two individuals. 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 and 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. A total of 1,000,000 shares of the Company's
common stock has been reserved for issuance pursuant to awards granted under the
Plan. Options to purchase 278,000 shares of common stock were exercisable at
June 30, 1996.
29
<PAGE>

Activity under the Plan is summarized below:

Aggregate
Number Amount Price
of Shares Per Share (in Thousands)
--------- ----------- --------------

Options outstanding at June 30, 1993 - $ - $ -

Granted 310,000 3.00-10.00 1,501

Exercised (250) 3.00 (1)
-------- ----------- -------
Options outstanding at June 30, 1994 309,750 3.00-10.00 1,500

Granted 165,500 4.16-6.50 909

Exercised (26,750) 3.00-5.50 (98)

Lapsed (56,875) 3.00-10.00 (421)
-------- ----------- -------
Options outstanding at June 30, 1995 391,625 3.00-10.00 1,890

Granted 562,400 3.50-10.00 2,582

Exercised (91,500) 3.00-6.50 (526)

Lapsed (106,150) 4.16-10.00 (743)
-------- ----------- -------
Options outstanding at June 30, 1996 756,375 $3.00-10.00 $ 3,203
-------- ----------- -------
-------- ----------- -------

7. 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.

8. SUBSEQUENT EVENT:

In August 1996, the Company executed a letter of intent to implement a strategic
alliance with International Game Technology (IGT). IGT is the largest
manufacturer of slot 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
3% convertible preferred stock, with a twelve-month option to purchase an
additional 519,481 preferred shares at the same price. Under the strategic
alliance, the Company and IGT will be allied in four product areas: 1) The
Company will create specialty games, using IGT equipment as the foundation, to
be installed under leasing and/or revenue sharing agreements in casinos; 2) the
Company will sell its Concept III promotions and player tracking components for
use in IGT Smart System-TM- player tracking/slot accounting installations; 3)
IGT will be able to incorporate into its slot machines the Company's displays
and other game enhancement tools, and; 4) the Company will develop promotions
for use on IGT's Wide Area Network that supports "Megabucks," "QuarterMania" and
other progressive jackpot promotions.

IGT will have the right to elect one member of the Company's Board of Directors.
Closing of the investment transaction is subject to the approval of the new
class of preferred stock by the Company's shareholders, execution of definitive
agreements, and approval of gaming and other regulatory authorities.
30
<PAGE>

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 two-year period ended June 30, 1996.

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, 1996.

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, 1996.

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, 1996.

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, 1996.

PART IV

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

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

(2) FINANCIAL STATEMENT SCHEDULES
None.

(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.

<PAGE>

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, in the
city of Corvallis, State of Oregon, on September 26, 1996.

ACRES GAMING INCORPORATED

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 on September 26, 1996..

/s/ John F. Acres
----------------------------------------
John F. Acres
Chief Executive Officer
and Director
(Principal Executive Officer
and Sole Director)

/s/ Robert W. Brown
----------------------------------------
Robert W. Brown
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)

<PAGE>

INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------

* 3.1 Articles of Incorporation of Acres Gaming Incorporated,
as amended

3.2 Bylaws of Acres Gaming Incorporated, as amended

* 4.1 Warrant Agreement, including form of Redeemable Warrant

* 4.2 Underwriting Agreement, including form of Underwriter's
Unit Purchase Warrant

+ 10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive
Plan

** 10.2 Lease dated January 4, 1994, between the Company and Avery
Investments

*** 10.3 Lease dated June 27, 1995, between the Company and
McCarran Center, LLC

+ 10.4 Employment Agreement dated January 2, 1996 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

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

+Management contract or compensatory plan or arrangement.

*Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-69110-S), which was declared
effective October 27, 1993, pursuant to Rule 12b-32.

**Incorporated by reference to the same numbered Exhibit to the Company's Annual
Report on Form 10-KSB, for the year ended June 30, 1994.

***Incorporated by reference to the same numbered Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1995.

<PAGE>

BY-LAWS

ARTICLE I - OFFICES

The principal office of the Corporation shall be located at 701 EAST
BRIDGER AVE., SUITE 801, LAS VEGAS, NEVADA, and it may be changed from time
to time by the Board of Directors. The Corporation may also maintain offices
at such other places within or without the United States as the Board of
Directors may, from time to time, determine.

ARTICLE II - MEETING OF STOCKHOLDERS

SECTION 1 - ANNUAL MEETINGS:

The annual meeting of the stockholders of the Corporation shall be held
at such time as may be determined by the Board of Directors, for the
purposes of electing directors and transacting such other business as may
properly come before the meeting.

SECTION 2 - SPECIAL MEETINGS:

Special meetings of the stockholders may be called at any time by the
Board of Directors or by the President, and shall be called by the President
or the Secretary at the written request of the holders of twenty-five percent
(25%) of the shares then outstanding and entitled to vote thereat, or as
otherwise required by law.

SECTION 3 - PLACE OF MEETINGS:

All meetings of stockholders shall be held at the principal office of
the Corporation, or at such other places as shall be designated in the
notices or waivers of notice of such meetings.

Page (1) of By-Laws

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SECTION 4 - NOTICE OF MEETINGS:

(a) Except as otherwise provided by statute, written notice of each
meeting of stockholders, whether annual or special, stating the time when and
place where it is to be held, shall be served either personally or by mail,
not less than ten or more than sixty (60) days before the meeting, upon each
stockholder of record entitled to vote at such meeting, and to any other
stockholder to whom the giving of notice may be required by law. Notice of a
special meeting shall also state the purpose or purposes for which the
meeting is called, and shall indicate that it is being issued by, or at the
direction of, the person or persons calling the meeting. If, at any meeting,
action is proposed to be taken that would, if taken, entitle stockholders to
receive payment for their shares pursuant to statute, the notice of such
meeting shall include a statement of that purpose and to that effect. If
mailed, such notice shall be directed to each such stockholder at his
address, as it appears on the records of the stockholders of the Corporation,
unless he shall have previously filed with the Secretary of the Corporation a
written request that notices intended for him be mailed to some other address,
in which case, it shall be mailed to the address designated in such request.

(b) Notice of any meeting need not be given to any person who may become
a stockholder of record after the mailing of such notice and prior to the
meeting, or to any stockholder who attends such meeting, in person or by
proxy, or to any stockholder who, in person or by proxy, submits a signed
waiver of notice either before or after such meeting. Notice of any adjourned
meeting of stockholders need not be given, unless otherwise required by
statute.

SECTION 5 - QUORUM:

(a) Except as otherwise provided herein, or by statute, or in the
Certificate of Incorporation (such certificate and any amendments thereof
being hereinafter collectively referred to as the "Certificate of
Incorporation"), at all meetings of stockholders of the Corporation, the
presence at the commencement of such meetings in person or by proxy of
stockholders holding of record 51% of the total number of shares of the
Corporation then issued and outstanding and entitled to vote, shall be
necessary and sufficient to constitute a quorum for the transaction of any
business. The withdrawal of any stockholder after the commencement of a
meeting shall have no effect on the existence of a quorum, after a quorum has
been established at such meeting.

(b) Despite the absence of a quorum at any annual or special meeting of
stockholders, the stockholders, by a majority of the votes cast by the
holders of shares entitled to vote thereat, may adjourn the meeting. At any
such adjourned meeting at which a quorum is present, any business may be
transacted at the meeting as originally called if a quorum had been present.

Page (2) of By-Laws

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SECTION 6 - VOTING

(a) Except as otherwise provided by statute or by the Certificate of
Incorporation, any corporate action, other than the election of directors, to
be taken by vote of the stockholders, shall be authorized by a majority of
votes cast at a meeting of stockholders by the holders of shares entitled to
vote thereat.

(b) Except as otherwise provided by statute or by the Certificate of
Incorporation, at each meeting of stockholders, each holder or record of
stock of the Corporation entitled to vote thereat, shall be entitled to one
vote for each share of stock registered in his name on the books of the
Corporation.

(c) Each stockholder entitled to vote or to express consent or dissent
without a meeting, may do so by proxy; provided, however, that the instrument
authorizing such proxy to act shall have been executed in writing by the
stockholder himself, or by his attorney-in-fact thereunto duly authorized in
writing. No proxy shall be valid after the expiration of eleven (11) months
from the date of its execution, unless the person executing it shall have
specified therein the length of time it is to continue in force. Such
instrument shall be exhibited to the Secretary at the meeting and shall be
filed with the minutes of the meeting.

(d) Any action, except election of directors, which may be taken by a
vote of stockholders at a meeting, may be taken without a meeting if
authorized by a written consent of shareholders holding at least a majority
of the voting power; provided that if a greater proportion of voting power is
required by such action at such meeting, then such greater proportion of
written consents shall be required.

ARTICLE III - BOARD OF DIRECTORS

SECTION 1 - NUMBER, ELECTION AND TERM OF OFFICE:

(a) The number of the directors of the Corporation shall be not less than
1 not more than 9, unless and until otherwise determined by vote of a
majority of the entire Board of Directors. The number of Directors shall not
be less than three (3), unless all of the outstanding shares of stock are
owned beneficially and of record by less than three (3) stockholders, in which
event the number of directors shall not be less than the number of stockholders
or the minimum permitted by statute.

Page (3) of By-Laws

<PAGE>

(b) Except as may otherwise be provided herein or in the Certificate of
Incorporation by way of cumulative voting rights the members of the Board of
Directors of the Corporation, who need not be stockholders, shall be elected
by a majority of the votes cast at a meeting of stockholders, by the holders
of shares of stock present in person or by proxy, entitled to vote in the
election.

(c) Each director shall hold office until the annual meeting of the
stockholders next succeeding his election, and until his successor is elected
and qualified, or until his prior death, resignation, or removal.

SECTION 2 - DUTIES AND POWERS:

The Board of Directors shall be responsible for the control and
management of the affairs, property and interests of the Corporation and may
exercise all powers of the Corporation, except as are in the Certificate of
Incorporation or by statute expressly conferred upon or reserved to the
stockholders.

SECTION 3 - ANNUAL AND REGULAR MEETINGS; NOTICE:

(a) A regular annual meeting of the Board of Directors shall be held
immediately following the annual meeting of the stockholders, at the place of
such annual meeting of stockholders.

(b) The Board of Directors, from time to time, may provide by resolution
for the holding of other regular meetings of the Board of Directors, and may
fix the time and place thereof.

(c) Notice of any regular meeting of the Board of Directors shall not be
required to be given and, if given, need not specify the purpose of the
meeting; provided, however, that in case the Board of Directors shall fix or
change the time or place of any regular meeting, notice of such action shall
be given to each director who shall not have been present at the meeting at
which such change was made within the time limited, and in the manner set
forth in Paragraph (b) Section 4 of this Article III, with respect to special
meetings, unless such notice shall be waived in the manner set forth in
Paragraph (c) of such Section 4.

SECTION 4 - SPECIAL MEETING; NOTICE:

(a) Special meetings of the Board of Directors shall be held whenever
called by the President or by one of the directors, at such time and place as
may be specified in the respective notices or waivers of notice thereof.

Page (4) of By-Laws

<PAGE>

(b) Except as otherwise required by statute, notice of special meetings
shall be mailed directly to each director, addressed to him at his residence
or usual place of business, at least four (4) days before the day on which
the meeting is to be held, or shall be sent to him at such place by telegram,
radio or cable, or shall be delivered to him personally or given to him
orally, not later than the day before the day on which the meeting is to be
held. A notice, or waiver of notice except as required by Section 8 or this
Article III, need not specify the purpose of the meeting.

(c) Notice of any special meeting shall not be required to be given to
any director who shall attend such meeting without protesting prior thereto
or at its commencement, the lack of notice to him or who submits a signed
waiver of notice, whether before or after the meeting. Notice of any
adjourned meeting shall not be required to be given.

SECTION 5 - CHAIRMAN:

At all meetings of the Board of Directors, the Chairman of the Board, if
any and if present, shall preside. If there shall be no Chairman, or he
shall be absent, then the Vice Chairman shall preside, and in his absence, a
Chairman chosen by the directors shall preside.

SECTION 6 - QUORUM AND ADJOURNMENTS:

(a) At all meetings of the Board of Directors, the presence of a
majority of the entire Board shall be necessary and sufficient to constitute
a quorum for the transaction of business, except as otherwise provided by
law, by the Certificate of Incorporation, or by these By-Laws.

(b) A majority of the directors, present at the time and place of any
regular or special meeting, although less than a quorum, may adjourn the same
from time to time without notice, until a quorum shall be present.

SECTION 7 - MANNER OF ACTING:

(a) At all meetings of the Board of Directors, each director present
shall have one vote, irrespective of the number of shares of stock, if any,
which he may hold.

(b) Except as otherwise provided by statute, by the Certificate of
Incorporation, or by these By-Laws, the action of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors.

(c) Unless otherwise required by amendment to the Articles of
Incorporation or statute, any action required or permitted to be taken at any
meeting of the Board of Directors or any Committee thereof may be taken
without a meeting if a written consent thereto is signed by all the members
of the Board of Committee. Such written consent shall be filed with the
minutes of the proceedings of the Board or Committee.

Page (5) of By-Laws

<PAGE>

(d) Unless otherwise prohibited by Amendments to the Articles of
Incorporation or statute, members of the Board of Directors or of any
Committee of the Board of Directors may participate in a meeting of such
Board or Committee by means of a conference telephone network or a similar
communications method by which all persons participating in the meeting can
hear each other. Such participation is constituted presence of all of the
participating persons at such meeting, and each person participating in the
meeting shall sign the minutes thereof, which may be signed in counterparts.

SECTION 8 - VACANCIES:

Any vacancy in the Board of Directors, occurring by reason of an
increase in the number of directors, or by reason of the death, resignation,
disqualification, removal (unless vacancy created by the removal of a
director by the stockholders shall be filled by the stockholders at the meeting
at which the removal was effected) or inability to act of any director, or
otherwise, shall be filled for the unexpired portion of the term by a
majority vote of the remaining directors, though less than a quorum, at any
regular meeting or special meeting of the Board of Directors called for that
purpose.

SECTION 9 - RESIGNATION:

Any director may resign at any time by giving written notice to the
Board of Directors, the President or the Secretary of the Corporation.
Unless otherwise specified in such written notice such resignation shall take
effect upon receipt thereof by the Board of Directors or such officer, and
the acceptance of such resignation shall not be necessary to make it
effective.

SECTION 10 - REMOVAL:

Any director may be removed with or without cause at any time by the
affirmative vote of stockholders holding of record in the aggregate at least
a majority of the outstanding shares of stock of the Corporation at a special
meeting of the stockholders called for that purpose, and may be removed for
cause by action of the Board.

SECTION 11 - SALARY:

No stated salary shall be paid to directors, as such, for their
services, but by resolution of the Board of Directors a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular
or special meeting of the Board; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.

Page (6) of By-Laws

<PAGE>

SECTION 12 - CONTRACTS:

(a) No contract or other transaction between this Corporation and any
other corporation shall be impaired, affected or invalidated, nor shall any
director be liable in any way by reason of the fact that any one or more of
the directors of this Corporation is or are interested in, or is a director
or officer, or are directors or officers of such other corporation, provided
that such facts are disclosed or made known to the Board of Directors, prior
to their authorizing such transaction.

(b) Any director, personally and individually, may be a party to or may
be interested in any contract or transaction of this Corporation, and no
director shall be liable in any way by reason of such interest, provided that
the fact of such interest be disclosed or made known to the Board of
Directors prior to their authorization of such contract or transaction, and
provided that the Board of Directors shall authorize, approve or ratify such
contract or transaction by the vote (not counting the vote any such
Director) of a majority of a quorum, notwithstanding the presence of any such
director at the meeting at which such action is taken. Such director or
directors may be counted in determining the presence of a quorum at such
meeting. This Section shall not be construed to impair or invalidate or in
any way affect any contract or other transaction which would otherwise be
valid under the law (common, statutory or otherwise) applicable thereto.

SECTION 13 - COMMITTEES:

The Board of Directors, by resolution adopted by a majority of the
entire Board, may from time to time designate from among its members an
executive committee and such other committees, and alternate members thereof,
as they may deem desirable, with such powers and authority (to the extent
permitted by law) as may be provided in such resolution. Each such committee
shall serve at the pleasure of the Board.

ARTICLE IV - OFFICERS

SECTION 1 - NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE:

(a) The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, or a President and Secretary-Treasurer, and such
other officers, including a Chairman of the Board of Directors, and one or
more Vice Presidents, as the Board of Directors may from time to time deem
advisable. Any officer other than the Chairman or Vice Chairman of the Board
of Directors may be, but is not required to be a director of the Corporation.
Any two or more offices may be held by the same person.

Page (7) of By-Laws

<PAGE>

(b) The officers of the Corporation shall be elected by the Board of
Directors at the regular annual meeting of the Board following the annual
meeting of stockholders.

(c) Each officer shall hold office until the annual meeting of the
Board of Directors next succeeding his election, and until his successor
shall have been elected and qualified or until his death, resignation or
removal.

SECTION 2 - RESIGNATION:

Any officer may resign at any time by giving written notice of such
resignation to the Board of Directors, or to the President or the Secretary
of the Corporation. Unless otherwise specified in such written notice, such
resignation shall take effect upon receipt thereof by the Board of Directors
or by such officer, and the acceptance of such resignation shall not be
necessary to make it effective.

SECTION 3 - REMOVAL:

Any officer may be removed, either with or without cause, and a
successor elected by a majority vote of the Board of Directors at any time.

SECTION 4 - VACANCIES:

A vacancy in any office by reason of death, resignation, inability to
act, disqualification, or any other cause, may at any time be filled for the
unexpired portion of the term by a majority vote of the Board of Directors.

SECTION 5 - DUTIES OF OFFICERS:

Officers of the Corporation shall, unless otherwise provided by the
Board of Directors, each have such powers and duties as generally pertain to
their respective offices as well as such powers and duties as may be set
forth in these by-laws, or may from time to time be specifically conferred or
imposed by the Board of Directors. The President shall be the chief
executive officer of the Corporation.

SECTION 6 - SURETIES AND BONDS:

In case the Board of Directors shall so require any officer, employee,
or agent of the Corporation shall execute to the Corporation a bond in such
sum, and with such surety or sureties as the Board of Directors may direct,
conditioned upon the faithful performance of his duties to the Corporation,
including responsibility for negligence for the accounting for all property,
funds or securities of the corporation which may come into his hands.

Page (8) of By-Laws

<PAGE>

SECTION 7 - SHARES OF STOCK OF OTHER CORPORATIONS:
Whenever the Corporation is the holder of shares of stock of any other
corporation, any right or power of the Corporation as such stockholder
(including the attendance, acting and voting at stockholder's meetings and
execution of waivers, consents proxies or other instruments) may be exercised
on behalf of the Corporation by the President, any Vice President or
such other person as the Board of Directors may authorized.

ARTICLE V - SHARES OF STOCK

SECTION 1 - CERTIFICATE OF STOCK:
(a) The certificates representing shares of the Corporation's stock
shall be in such form as shall be adopted by the Board of Directors, and
shall be numbered and registered in the order issued. They shall bear the
holder's name and the number of shares of stock and shall be signed by (i)
the Chairman of the Board or the President or a Vice President, and (ii) the
Secretary or Treasurer, or any Assistant Secretary or Assistant Treasurer,
and shall bear the corporate seal.

(b) No certificate representing shares of stock shall be issued until
the full amount of consideration therefor has been paid, except as otherwise
permitted by law.

(c) To the extent permitted by law, the Board of Directors may
authorize the issuance of certificates for fractions of a share of stock
which shall entitle the holder to exercise voting rights, receive dividends
and participate in liquidating distributions, in proportion to the fractional
holdings; or it may authorize the payment in cash of the fair value of
fractions of a share of stock as of the time when those entitled to receive
such fractions are determined; or it may authorize the issuance, subject to
such conditions as may be permitted by law, of scrip in registered or bearer
form over the signature of an officer or agent of the Corporation,
exchangeable as therein provided for full shares of stock, but such scrip
shall not entitle the holder to any rights of a stockholder, except as
therein provided.

SECTION 2 - LOST OR DESTROYED CERTIFICATES:
The holder of any certificate representing shares of stock of the
Corporation shall immediately notify the Corporation of any loss or
destruction of the certificate representing the same. The Corporation may issue
a new certificate in the place of any certificate theretofore issued by it,
alleged to have been lost or destroyed. On production of

Page (9) of By-Laws

<PAGE>

such evidence of loss or destruction as the Board of Directors in its
discretion may require, the Board of Directors may, in its discretion, require
the owner of the lost or destroyed certificate, or his legal representatives,
to give the corporation a bond in such sum as the Board may direct, and with
such surety or sureties as may be satisfactory to the Board, to indemnify the
Corporation against any claims, loss, liability or damage it may suffer on
account of the issuance of the new certificate. A new certificate may be
issued without requiring any such evidence or bond when, in the judgment of
the Board of Directors, it is proper to do so.

SECTION 3 - TRANSFER OF SHARES:
(a) Transfer of shares of stock of the Corporation shall be made on the
stock ledger of the Corporation only by the holder of record thereof, in
person or by his duly authorized attorney, upon surrender for cancellation of
the certificate or certificates representing such shares of stock with an
assignment or power of transfer endorsed thereon or delivered therewith, duly
executed, with such proof of the authenticity of the signature and of
authority to transfer and of payment of taxes as the Corporation or its
agents may require.

(b) The Corporation shall be entitled to treat the holder of record of
any share or shares of stock as the absolute owner thereof for all purposes
and, accordingly, shall not be bound to recognize any legal, equitable or
other claim to, or interest in, such share or shares of stock on the part of
any other person, whether or not it shall have express or other notice
thereof, except as otherwise expressly provided by law.

SECTION 4 - RECORD DATE:
In lieu of closing the stock ledger of the Corporation, the Board of
Directors may fix, in advance, a date not exceeding sixty (60) days, nor less
than ten (10) days, as the record date for the determination of stockholders
entitled to receive notice of, or to vote at, any meeting of stockholders, or
to consent to any proposal without a meeting, or for the purpose of
determining stockholders entitled to receive payment of any dividends or
allotment of any rights, or for the purpose of any other action. If no record
date is fixed, the record date for the determination of stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given, or,
if no notice is given, the day preceding the day on which the meeting is
held; the record date for determining stockholders for any other purpose shall
be at the close of business on

Page (10) of By-Laws

<PAGE>

the day on which the resolution of the directors relating thereto is
adopted. When a determination of stockholders of record entitled to notice of
or to vote at any meeting of stockholders has been made as provided for
herein, such determination shall apply to any adjournment thereof, unless
the directors fix a new record date for the adjourned meeting.

ARTICLE VI - DIVIDENDS

Subject to applicable law, dividends may be declared and paid out of any
funds available therefor, as often, in such amounts, and at such time or
times as the Board of Directors may determine.

ARTICLE VII - FISCAL YEAR

The fiscal year of the Corporation shall be 1-1 to 12-31 and may be
changed by the Board of Directors from time to time subject to applicable law.

ARTICLE VIII - CORPORATE SEAL

The corporate seal shall be in such form as shall be approved from time
to time by the Board of Directors.

ARTICLE IX - INDEMNITY

(a) Any person made a party to any action, suit or proceeding, by
reason of the fact that he, his testator or interstate representative is or was
a director, officer or employee or the Corporation, or of any Corporation in
which he served as such at the request of the Corporation, shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees, actually and necessarily incurred by him in connection with
the defense of such action, suit or proceedings, or in connection with any
appeal therein, except in relation to matters as to which it shall be adjudged
in such action, suit or proceeding, or in connection with any appeal therein
that such officer, director or

Page (11) of By-Laws

<PAGE>

employee is liable for gross negligence or misconduct in the performance of
his duties.

(b) The foregoing right of indemnification shall not be deemed
exclusive of any other rights to which any officer or director or employee
may be entitled apart from the provisions of this section.

(c) The amount of indemnity to which any officer or any director may be
entitled shall be fixed by the Board of Directors, except that in any case
where there is no disinterested majority of the Board available, the amount
shall be fixed by arbitration pursuant to the then existing rules of the
American Arbitration Association.

ARTICLE X - AMENDMENTS

SECTION 1 - BY STOCKHOLDERS:
All by-laws of the Corporation shall be subject to alteration or
repeal, and new by-laws may be made, by the affirmative vote of the
stockholders holding of record in the aggregate at least a majority of the
outstanding shares of stock entitled to vote in the election of directors at
any annual or special meeting of stockholders, provided that the notice or
waiver of notice of such meeting shall have summarized or set forth in full
therein, the proposed amendment.

SECTION 2 - BY DIRECTORS:
The Board of Directors shall have the power to make, adopt, alter, amend
and repeal, from time to time, by-laws of the Corporation; provided, however,
that the stockholders entitled to vote with respect thereto as in this
Article X above-provided may alter, amend or repeal by-laws made by the Board
of Directors, except that the Board of Directors shall have no power to
change the quorum for meetings of stockholders or of the Board of Directors
or to change any provisions of the by-laws with respect to the removal of
directors of the filling of vacancies in the Board resulting from the removal
by the stockholders. In any by-law regulating an impending election of
directors is adopted, amended, or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of stockholders for the
election of directors, the by-laws so adopted, amended or repealed, together
with a concise statement of the changes made.

Page (12) of By-Laws

<PAGE>
ACRES GAMING INCORPORATED

1993 STOCK OPTION AND INCENTIVE PLAN

The purpose of the Acres Gaming Incorporated 1993 Stock Option and
Incentive Plan (the "Plan") is to promote the growth and profitability of
Acres Gaming Incorporated (the "Company") and its Affiliates by providing its
key employees and consultants with an incentive to achieve long-term
corporate objectives, to attract and retain persons of outstanding
competence, and to provide such persons with an equity interest in the
Company.

1. STOCK SUBJECT TO PLAN. An aggregate of 1,000,000 shares (the
"Shares") of the Common Stock, par value $.01 per share ("Common Stock") of
the Company may be subject to awards granted under the Plan. Such Shares may
be authorized but unissued Common Stock or authorized and issued Common Stock
that has been or may be acquired by teh Company. Shares that are subject to
an award which expires or is terminated unexercised, or which are reacquired
by the Company upon the forfeiture of restricted Shares, shall again be
available for issuance under the Plan.

2. ADMINISTRATION.

A. COMMITTEE. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"). The Committee shall be comprised of the
entire Board or, if the Board so determines, of two or more members of
the Board.

B. POWERS AND DUTIES. The Committee shall have the
authority to make rules and regulations governing the administration of
the Plan; to select the eligible employees and consultants to whom
awards shall be granted; to determine the type, amount, size, and terms
of awards; to determine the time when awards shall be granted; to
determine whether any restrictions shall be placed on Shares purchased
pursuant to any option or issued pursuant to any award; and to make all
other determinations necessary or advisable for the administration of
the Plan. The Committee's determinations need not be uniform, and may be
made by it selectively among persons who are eligible to receive awards
under the Plan, whether or not such persons are similarly situated. All
interpretations, decisions, or determinations made by the Committee
pursuant to the Plan shall be final and conclusive.

3. ELIGIBILITY. Any employee of or consultant to the Company or of
any of its Affiliates shall be eligible to receive awards under the Plan. A
person who has been granted an award under this Plan, or under any
predecessor plan, may be granted additional awards if the Committee shall so
determine. Except to the extent otherwise provided in the agreement
evidencing an award, the granting of an award under this Plan shall not
affect any outstanding award previously granted under this Plan or under any
other plan of the Company or any Affiliate. For purposes of the Plan, the
term "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as those terms are defined in Sections 424(e)
and 424(f) of the Internal Revenue Code of 1986, as amended.

<PAGE>

4. AWARDS. The Committee may make awards to eligible persons in the
form of stock options which are intended to qualify as "Incentive Stock
Options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or stock options which are not intended to so qualify
("Nonqualified Options"), or awards of restricted stock, or any combination
thereof.

5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase Shares at a specified price
during a specified period. Options shall be subject to such terms and
conditions as the Committee shall from time to time approve; PROVIDED, that
each option shall be subject to the following requirements:

A. TYPE OF OPTION. Each option shall be identified in the
agreement pursuant to which it is granted as an Incentive Stock Option
or as a Nonqualified Option, as the case may be.

B. TERM. No option shall be exercisable more than 121 months
after the date on which it is granted.

C. PAYMENT. The purchase price of Shares subject to an option
shall be payable in full at the time the option is exercised. Payment
may be made in cash, in shares of Common Stock having an aggregate fair
market value on the date of exercise which is not less than the option
price, or by a combination of cash and such shares, as the Committee may
determine, and subject to such terms and conditions as the Committee
deems appropriate.

D. PURCHASE PRICE OF NONQUALIFIED OPTIONS. The purchase price
of Shares that are subject to Nonqualified Options shall also be
determined by the Committee at the time such Options are granted, but in
no event shall such purchase price be less than 85% of the fair market
value of such shares on the date of the grant.

E. OPTIONS NOT TRANSFERABLE. Options shall not be transferable
except to the extent permitted by the agreement evidencing such option;
PROVIDED, that in no event shall any option be transferable by the
optionee, other than by will or the laws of descent and distribution.
Options shall be exercisable during an optionee's lifetime only by such
optionee. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, it may be
exercised, to the extent permitted by such agreement, by the personal
representative of the optionee's estate or by any person who acquired
the right to exercise such option by bequest, inheritance, or otherwise
by reason of the optionee's death.

F. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock
Option, it shall be subject to the following additional requirements:

i. Incentive Stock Options may be granted only to persons
who are employees of the Company or of an Affiliate,

ii. The purchase price of Shares that are subject to an
Incentive Stock Option shall not be less than 100% of the fair
market value of such Shares at the time the option is granted, as
determined in good faith by the Committee.

iii. The aggregate fair market value (determined at the time
the option is granted) of the Shares with respect to which
Incentive Stock Options are

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<PAGE>

exercisable by the Optionee for the first time during any calendar
year, under this Plan or any other plan of the Company or any
Affiliate, shall not exceed $100,000.

iv. An Incentive Stock Option shall not be exercisable more
than ten years after the date on which it is granted.

v. The purchase price of Shares that are subject to an
Incentive Stock Option granted to an employee who, at the time such
option is granted, owns 10% or more of the total combined voting
power of all classes of stock of the Company or of any Affiliate
shall not be less than 110% of the fair market value of such Shares
on the date such option is granted, and such option may not be
exercisable more than five years after the date on which it is
granted. For the purposes of this subparagraph, the rules of
Section 424(d) of the Code shall apply in determining the stock
ownership of any employee.

Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.

6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the
Plan shall entitle the holder to receive Shares, subject to forfeiture if
specified conditions are not satisfied at the end of a specified period.
Restricted stock awards shall be subject to such terms and conditions as the
Committee shall from time to time approve; PROVIDED, that each award shall be
subject to the following requirements:

A. RESTRICTED PERIOD. The Committee shall establish a period
(the "Restricted Period") at any time an award is granted during which
the holder will not be permitted to sell, transfer, pledge, encumber, or
assign the Shares subject to the award. The Committee may provide for
the lapse of restrictions in installments, or upon the occurrence of
certain events, where deemed appropriate. Any attempt by a holder to
dispose of restricted Shares in a manner contrary to the applicable
restrictions shall be void, and of no force and effect.

B. RIGHTS DURING THE RESTRICTED PERIOD. Except to the extent
otherwise provided in this paragraph 6 or under the terms of any restricted
stock agreement, during the Restricted Period, the holder of restricted Shares
shall have all of the rights of a stockholder in the Company with respect to
such Shares, including the right to vote the Shares and to receive dividends
and other distributions with respect to the Shares; PROVIDED, that all stock
dividends, stock rights, and stock issued upon split-ups or reclassifications
of Shares shall be subject to the same restrictions as the Shares with respect
to which such stock dividends, rights, or additional stock are issued, and may
be held in custody as provided below in this paragraph 6 until the restrictions
thereon shall have lapsed.

C. FORFEITURES. Except to the extent otherwise provided in the
restricted stock agreement, all Shares then subject to any restriction
shall be forfeited to the

-3-
<PAGE>

Company without further obligation of the Company to the holder thereof,
and all rights of the holder with respect to such Shares shall
terminate, if the holder shall cease to be an employee of or consultant
to the Company and its Affiliates, or if any condition established by
the Committee for the release of any restriction shall not have
occurred, prior to the expiration of the Restricted Period.

D. CUSTODY. The Committee may provide that the certificates
evidencing restricted Shares shall be held in custody by a bank or other
institution, or by the Company or any Affiliate, until the restrictions
thereon have lapsed, and may require that the holder of any restricted
Shares shall have delivered to the Company one or more stock powers,
endorsed in blank, relating to the restricted Shares as a condition of
receiving the award.

E. CERTIFICATES. A recipient of a restricted stock award shall
be issued a certificate or certificates evidencing the Shares subject to
such award. Such certificates shall be registered in the name of the
recipients, and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award, which legend shall
be in substantially the following form:

"The transferability of this certificate and the shares
represented hereby are subject to the terms and
conditions (including forfeiture) of the Acres Gaming
Incorporated 1993 Stock Option and Incentive Plan and an
Agreement entered into between the registered owner and
Acres Gaming Incorporated. Copies of such Plan and
Agreement are on file in the offices of Acres Gaming
Incorporated.

F. GIFTS, ETC. Notwithstanding any other provision of this
paragraph 6, the Committee may permit a gift of restricted stock to the
holder's spouse, child, stepchild, grandchild, or legal dependent, or to
a trust whose sole beneficiary or beneficiaries shall be the holder
and/or any one of such persons: PROVIDED, that the donee shall have
entered into an agreement with the Company pursuant to which it agrees
that the restricted stock shall be subject to the same restrictions in
the hands of such donee as it was in the hands of the donor.

7. AGREEMENTS. Each option or award granted pursuant to the Plan
shall be evidenced by an agreement setting forth the terms and conditions
upon which it is granted. Multiple options or awards may be evidenced by a
single agreement. Subject to the limitations set forth in the Plan, the
Committee may, with the consent of the person to whom an award has been
granted, amend any such agreement to modify the terms or conditions governing
the award evidenced thereby.

8. ADJUSTMENTS. In the event of any changes in the outstanding
Shares of Common Stock by reason of any stock dividend or split,
recapitalization, reclassification, combination, or exchange of Shares or
other similar corporate change, then if the Committee shall determine, in its
sole discretion, that such change necessarily or equitably requires an
adjustment in the number of shares subject to an award, in the option price
or value of an award, or in the maximum number of Shares subject to this
Plan, such adjustments shall be made by the

-4-
<PAGE>

Committee and shall be conclusive and binding for all purposes of this Plan.
No adjustment shall be made in connection with the issuance by the Company of
any warrants, rights, or options to acquire additional Common Stock or of
securities convertible into Common Stock.

9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to
the provisions of the agreement evidencing any award, if the Company shall
become a party to any corporate merger, consolidation, major acquisition of
property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable
with respect to outstanding awards and in the number of Shares subject to
this Plan, which shall be binding for all purposes of this Plan, including,
but not limited to, the substitution of new awards for any awards then
outstanding, the assumption of any such awards, and the termination of such
awards.

10. EXPENSES OF PLAN. The expenses of administering this Plan shall be
borne by the Company and its Affiliates.

11. RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board of Directors shall be fully justified in relying or acting in
good faith upon any report made by the independent public accountants of the
Company and its Affiliates and upon any other information furnished in
connection with this Plan by any person or persons other than himself. In no
event shall any person who is or shall have been a member of the Committee or
of the Board of Directors be liable for any determination made or other
action taken or omitted in reliance upon any such report or information, or
for any action taken or omitted, including the furnishing of information, in
good faith.

12. RIGHTS AS STOCKHOLDER. Except to the extent otherwise specifically
provided hereon, no recipient of any award shall have any rights as a
stockholder with respect to Shares sold or issued pursuant to the Plan until
certificates for such Shares have been issued to such person.

13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan
shall be subject to the requirement that if, in the opinion of the Committee:

a. the listing, registration, or qualification of any Shares
related thereto upon any securities exchange or under any state or
federal law;

b. the consent or approval of any regulatory body; or

c. an agreement by the recipient with respect to the disposition
of any such Shares;

is necessary or desirable as a condition of the issuance or sale of such
Shares, such award shall not be consummated unless and until such listing,
registration, qualification, consent, approval, or agreement is effected or
obtained in form satisfactory to the Committee.

14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement
entered into hereunder, shall confer upon any person the right to continue to
serve as an employee of or

-5-

<PAGE>

consultant to the Company or an Affiliate, or affect the right of the Company
or Affiliate to terminate such person's service at any time, with or without
cause.

15. WITHHOLDING. If the Company proposes or is required to issue
Shares pursuant to the Plan, it may require the recipient to remit to it, or
may withhold from such award or from the recipient's other compensation, an
amount, in the form of cash or Shares, sufficient to satisfy any applicable
federal, state, or local tax withholding requirements prior to the delivery
of any certificates for such Shares.

16. AMENDMENTS. The Board of Directors of the Company may at any time,
and from time to time, amend the Plan in any respect, except that no
amendment that would:

a. materially increase the benefits accruing to participants under
the Plan;

b. increase the number of Shares available for issuance or sale
pursuant to the Plan (other than as permitted by paragraphs 8 and 9); or

c. materially modify the requirements as to eligibility for
participation in the Plan;

shall be made without the affirmative vote of stockholders holding at least a
majority of the voting stock of the Company represented in person or by proxy
at a duly held stockholders' meeting.

17. STOCKHOLDER APPROVAL. Any award granted under the Plan prior to
the date on which the Plan is approved by stockholders holding at least a
majority of the voting stock of the Company represented in person or by proxy
at a duly held stockholders' meeting shall be contingent upon such approval.

18. DURATION. No options or rights shall be granted under the Plan
after the earlier of: (a) the date on which the Plan is terminated by the
Board of Directors of the Company; or (b) July 20, 2003.

-6-

<PAGE>

EMPLOYMENT AGREEMENT

This Employment Agreement, herein referred to as "Agreement", is entered
into as of January 2, 1996 by and between Joseph A. Huseonica of 1976
Palisades Terrace Drive, Lake Oswego, OR, herein referred to as Employee, and
Acres Gaming, Inc., a Nevada corporation whose principal place of business is
located at 815 NW 9th Street, Corvallis Oregon, herein referred to as
Employer.

RECITALS:

WHEREAS Employer is engaged in the development, manufacture, and
marketing of electronic casino, accounting, game monitoring and game
promotion systems; and

WHEREAS Employee is willing to be employed by Employer and Employer is
willing to employ Employee on the terms, conditions and agreements
hereinafter set forth.

For the reasons set forth above, and in consideration of the mutual
promises and agreements hereinafter set forth, Employer and Employee hereby
agrees as follows:

SECTION ONE
EMPLOYMENT

Employer hereby employs, engages and hires Employee as its President and
Chief Operating Officer and Employee, hereby accepts and agrees to such
hiring, engagement and employment subject to the advice, direction,
regulations and supervision of Employer. Employee shall, subject to
Employer's instructions and guidelines, perform such management,
administrative and operational duties on behalf of Employer, as are
customarily performed by one holding a comparable position as a chief
operating officer in other businesses or enterprises as that engaged in by
Employer.

Employee shall also render such other and related services and duties as
may be assigned to Employee from time to time by Employer's Board of
Directors. Employer's Board of Directors shall have the absolute right to
determine not only what specific duties shall be performed by the Employee
but also the means and the manner by which those duties shall be performed.
Employee agrees to fully and faithfully observe and comply with all of the
rules, regulations, policies and procedures which may, from time to time, be
issued by the Employer's Board of Directors; provided, however that in the
event of an irreconcilable conflict between any such rule, regulation, policy
or procedure and any term or provision of this Agreement, the terms and
provisions of this Agreement shall govern.

<PAGE>

SECTION TWO
BEST EFFORTS OF EMPLOYEE

Employee agrees that he will, at all times, faithfully, industriously,
and to the best of his ability, experience and talents, perform all of the
duties that may be required of and from him pursuant to the express and
implied terms hereof, to the full and complete satisfaction of Employer's
Board of Directors. Such duties shall be rendered in Benton County, Oregon
and Clark County, Nevada, and at such other place or places as Employer's
Board of Directors shall in good faith require or as the interests, needs,
business or opportunities of the Employer shall require. Employee shall
conduct himself at all times so as not to detract from, or reflect adversely
upon, the reputation of the Employer. Employee shall also, at all times
during and after the term of this Agreement, neither criticize nor negatively
comment upon the Employer or the Employer's business.

SECTION THREE
TERMS OF EMPLOYMENT

The term of this Agreement shall be for an initial period of three
years, commencing on January 2, 1996, and terminating on December 31, 1998,
subject, however, to prior termination as hereinafter provided. This
Agreement and the employment provided for hereunder shall automatically
renewed for successive two (2) year terms, unless and until either party
gives the other at least ninety (90) days written notice before the end of
the then-current term of his intent not to renew.

SECTION FOUR
COMPENSATION OF EMPLOYEE

Employer shall pay Employee, and Employee shall accept from Employer, in
full payment for all of the Employee's services hereunder, an annual base
salary of one hundred and seventy-five thousand dollars ($175,000). Such
salary shall be payable at the same intervals as the other hourly and
salaried employees of the Employer are paid and shall be subject to customary
withholding taxes and other employment taxes as required by law. Employee
acknowledges and agrees that he is an "exempt" employee under federal
employment laws and that to the extent he is required to devote more than
forty (40) hours per week or eight (8) hours per day to the performance of
his duties hereunder, additional "overtime" compensation shall not be paid by
the Employer and Employee shall have no right to same. Any increase or
decrease in the annual salary specified herein must be approved in writing by
Employer's Board of Directors and Employee.

In addition to the aforementioned base salary, the Employer shall pay
the Employee a performance bonus targeted at fifty thousand dollars ($50,000)
per year, payable semi-annually in twenty-five thousand dollar ($25,000)
increments. The payment of the bonus shall be based on the Employee's
successful completion of certain objectives to be defined and mutually agreed
to in writing by the Employee and the Board of Directors.

<PAGE>

SECTION FIVE
FACILITIES AND EXPENSES/ADDITIONAL BENEFITS

(a) FACILITIES AND EXPENSES. The Employee shall be provided with an
office, secretarial and technical help, and such other facilities and
services as may be suitable to his position and adequate for the performance
of his duties. The Employee is encouraged and expected, from time to time,
to incur reasonable expenses for promoting the business of the Employer,
including expenses for civic club membership and participation,
entertainment, travel, and similar items. The cost of such activities, shall
be at the expense of the Employer unless, because of unusual circumstances,
the Board of Directors of the Employer shall determine that such activities
of the Employee should not be authorized as an expense of the Employer.

(b) ADDITIONAL BENEFITS. The Employee shall have the right to receive
and participate in any additional "fringe benefits", which may from time to
time be made available by the Board of Directors to the Employer's executive
officers, including, but not limited to, health and accident insurance,
disability insurance or other insurance programs for the Employer's executive
officers and their families and any pension or profit-sharing plans and stock
option plans.

SECTION SIX
VACATION/SICK LEAVE

(a) VACATION. Employee shall accrue paid vacation days during each
full month of employment at the rate of one and onequarter (1.25) days for
each month worked. In addition, the Employee shall be entitled to such paid
holidays as Employer may approve. Upon the termination of this Agreement and
Employee's employment hereunder, Employee shall receive payment for any
vacation days earned during the year of termination which had not been used
by the Employee; provided, however, that unused days of vacation may not be
carried over and accumulated from one year to another.

(b) SICK. The Employee shall be entitled to ninety (90) calendar
day(s) of paid sick leave because of sickness or accident (not otherwise
resulting in the Employee's becoming "permanently disabled" as that term is
defined in Section Twelve below) without any adjustment in his salary. Upon
request of Employer, Employee will provide written doctor certification to
substantiate sick leave days used. Unused sick leave may neither be carried
over from one year to another nor used for additional vacation.

SECTION SEVEN
OTHER EMPLOYMENT

Employee shall devote his full and undivided time, attention, knowledge
and skills solely to the Employer's business-during such hours as may be
designated by Employer from time to time during the term of this Agreement.

<PAGE>

SECTION EIGHT
RECOMMENDATIONS FOR IMPROVING OPERATIONS

Employee shall make available to Employer all information, suggestions,
and recommendations which Employee may have that may benefit Employer in the
conduct of its business.

SECTION NINE
TRADE SECRETS/COVENANT NOT TO COMPETE

(a) Employee acknowledges that the business of Employer is a unique and
unusual business consisting of the development, manufacture, and marketing of
electronic casino, accounting, game monitoring and game promotion systems;
that the information which Employer has developed and will develop in its
business is not readily accessible to the public or its competitors and the
disclosure thereof would be harmful to Employer, and that the Employee in the
performance of his duties will have available to him all of Employer's
confidential information and if any such information is disclosed, such
disclosure would be extremely harmful to Employer and give an advantage to
its competitors.

Employee acknowledges that Employee will come into contact with and have
access to confidential matters and confidential information and "know-how"
pertaining to Employer's methods of operation, future products, formulations,
product research, product tests, marketing and development in its business.

Employee acknowledges that the formulas, documents and other information
disclosing the confidential information are not under lock and key during
regular business hours because of extensive use by Employer and its
employees, including the Employee, and that because of such access, Employer
is relying upon the Employee's good faith in the use and handling of such
documents to insure that they are not used improperly or to the disadvantage
of Employer.

Employee shall not, during the term of this Agreement or at any time
thereafter, divulge, furnish or make accessible to anyone (other than in the
regular course of Employer's business) any knowledge or information with
respect to any confidential information concerning the business, methods of
operation, products and other aspects of the business of Employer as now or
hereafter conducted.

All inventions, work products notebooks, ideas and other matters created
by Employee in the performance of his duties hereunder, whether or not the
same are capable of being patented or copyrighted, shall be the exclusive
property of Employer, and Employee shall have no rights of any nature
thereto. Employee agrees to execute whatever documents Employer may
reasonably require to confirm the foregoing.

(b) Employee may not, during the term hereof, be engaged or interested
in any manner, directly or indirectly, as a partner, owner, officer,
director, stockholder, advisor,

<PAGE>

employee, agent or in any other capacity, in any other activity, business or
entity which, in whole or in part, is competitive with or substantially
similar to Employer's business. Furthermore, for a period of one (1) year
from the date of the termination of this Agreement, Employee may not be
engaged or interested in any manner, directly or indirectly, as a partner,
owner, officer, director, stockholder, advisor, employee, agent or in any
other capacity, in any business, firm, corporation, association, partnership
or other entity, which, in whole or in part, is competitive with or
substantially similar to Employer's business in any state in which the
Employer's sale of merchandise or services, or both, generated at least ten
percent (10%) of the Employer's gross revenue for the twelve month period
ending at the end of the month immediately preceding the date of such
termination. For example, if this agreement were terminated as of the date
hereof, the territorial scope of the one year non-competition covenant would,
be as follows: Nevada, Colorado, and Wisconsin. In the event the provisions
of this section 9(b) should be deemed to exceed the time or geographic
limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time or geographic limitation permitted by applicable
law.

(c) Employee will not employ or associate in a business relationship
with (i) any other employee of Employer, or (ii) any person who shall have
been an employee of Employer within the six (6) month period prior to the
date of expiration or termination of this Agreement or who shall have been in
the employ of Employer six (6) months after the date of the expiration or
termination of this agreement.

SECTION TEN

EMPLOYEE'S OBLIGATION AFTER TERMINATION OF THIS AGREEMENT

All of the Employee's obligations and liabilities under Sections Two,
Nine (a), and Fourteen through Twenty-Seven of this Agreement shall survive
the expiration or termination of this Agreement and shall remain in full
force and effect even after the termination of Employee's employment.

SECTION ELEVEN

INJUNCTIVE RELIEF

Employer shall be entitled to injunctive and/or other equitable relief
to prevent or remedy a breach of any of the provisions of this Agreement
(including any of the provisions of Section Nine hereof) and to secure their
enforcement, in addition to all other remedies or damages as may be available
to Employer at law or in equity; all of which shall be deemed to be
cumulative as provided in Section Twenty-Four below.

SECTION TWELVE

TERMINATION

(a) The Employer, at any time, may terminate this Agreement, WITHOUT
CAUSE, upon One Hundred Eighty (180) days' written notice to the Employee, and
the Employer shall only be obligated to continue to pay the Employee the base
salary compensation due him and a

<PAGE>

pro-rated portion of any bonuses in effect under this Agreement up to the
date of termination together with such amount as may be due under Section Six
hereof.

(b) The Employee, at any time, may terminate this Agreement WITHOUT
CAUSE, upon Sixty (60) days' written notice to the Employer, and Employer
shall be obligated only to continue to pay the Employee the compensation due
him under this Agreement up to the date of termination together with such
amount as may be due under Section Six hereof.

(c) Employer shall have the right to immediately and without notice
terminate this Agreement and Employee's employment hereunder in the event of
any fraud, embezzlement, dishonesty or other illegal act by Employee which
adversely effects Employer or in the event Employee is deemed unsuitable by
any governmental licensing authority having jurisdiction over the Employer
and shall be entitled to such further remedies and damages as may be
available at law or in equity.

(d) In the event of a breach or evasion by either party of any of the
terms of this Agreement, which has not been cured within thirty (30) days
after written notice specifying such breach or evasion has been given by the
non-breaching party, the non-breaching party thereupon may immediately and
without further notice, terminate this Agreement and shall be entitled to
such further remedies or damages as may be available at law or in equity.

(e) If the event of the Employee's death during the term of this
Agreement, this Agreement shall terminate immediately and without notice, and
the Employee's estate shall be entitled to receive only the compensation due
the Employee under this Agreement up to the date of termination together with
such amount as may be due under Section Six hereof.

(f) This Agreement shall also terminate after 90 days notification to
the Employee by the Employer, unless otherwise agreed by the Employer's Board
of Directors, in the event the Employee shall become permanently disabled
(i.e. shall have been continuously unable or unwilling to perform his
material duties hereunder for at least seventy-five percent (75%) of the time
during any consecutive six (6) month period, because of ill health, physical
or mental disability or for any cause beyond his control).

SECTION THIRTEEN

(THIS SECTION NOT USED.)

SECTION FOURTEEN

HOLD HARMLESS

(a) Employee shall indemnify, defend and hold Employer harmless from and
against any and all claims, damages, losses, liabilities, actions, expenses
and other obligations and responsibilities of whatsoever kind or nature,
including, without limitation, all legal fees and costs, arising out of or
connected with, directly or indirectly, (i) Employee's breach or evasion of

<PAGE>

any of his obligations under this Agreement or (ii) Employee's negligence or
willful misconduct in the performance of any of his Employee minimum duties
and responsibilities hereunder.

(b) Employer shall indemnify, defend and hold Employee harmless from and
against any and all claims, damages, losses, liabilities, actions, expenses
and other obligations and responsibilities of whatsoever kind or nature,
including, without limitation, all legal fees and costs, arising out of or
connected with, directly or indirectly, Employer's breach or evasion of any
of its obligations under this Agreement.

SECTION FIFTEEN

ENTIRE AGREEMENT

This Agreement contains the complete agreement concerning the employment
arrangement between the parties and shall as of the effective date hereof,
supersede all other prior agreements between the parties. Neither party has
relied on any prior representations in entering into this Agreement.

SECTION SIXTEEN

MODIFICATION OF CONTRACT

No cancellation, waiver, alteration or modification of this Agreement or
of any covenant, condition, or limitation herein contained shall be valid
unless in writing and duly executed by the party to be charged therewith, and
no evidence of any cancellation, waiver, alteration or modification shall be
offered or received in evidence in any proceeding, arbitration, or litigation
between the parties hereto arising out of or affecting this Agreement, or the
rights or obligations of the parties hereunder, unless such cancellation,
waiver, alteration or modification is in writing, duly executed as aforesaid.
The parties further agree that the provisions of this Section may not be
waived except as herein set forth and that any oral or implied agreement
which conflicts with any of the foregoing shall be void, unenforceable and of
no force and effect.

SECTION SEVENTEEN

SEVERABILITY OF TERMS

If any term or provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
terms, covenants, conditions and provisions of this Agreement shall
nevertheless remain in full force and effect, provided that the invalidity,
illegality or unenforceability of such term or provision does not materially
impair either (i) the parties' ability to consummate, or (ii) the economic
substance of, the transaction contemplated hereby. If the invalidity,
illegality or unenforceability of any term or other provision materially
impairs either (i) the parties' ability to consummate the transaction in
the manner contemplated hereby, or (ii) the economic substance of the
transaction and the parties hereto shall, if at all possible, amend this
Agreement so as to effect the original intention of the parties to the
fullest extent.

<PAGE>

SECTION EIGHTEEN

ASSIGNMENT

The parties agree that the services covered by this Agreement are
strictly personal and that this Agreement is not assignable or transferable
by Employee or Employer either voluntarily or by operation of law without the
prior written consent of the other party.

SECTION NINETEEN

NOTICES

All notices, requests, approvals, demands or other communication of any
kind which any party may be required or may desire to serve on the other in
connection with this Agreement shall be in writing and shall be deemed to
have been duly and sufficiently given if:

(a) personally delivered with proof of delivery thereof (any notice so
delivered shall be deemed to have been received at the time so delivered),

(b) sent by Federal Express (or other similar overnight courier)
designating early morning delivery (any notice so delivered shall be
deemed to have been received on the next Business Day following receipt by
the courier),

(c) sent by United States registered or certified mail, return receipt
requested, postage prepaid, at a post office regularly maintained by the
United States Postal Service (any notice so sent shall be deemed to have
been received two (2) Business Days after mailing in the United States),
or,

(d) sent by telecopier or facsimile machine which automatically
generates a transmission report that states the date and time of the
transmission, the length of the document transmitted and the telephone
number of the recipient's telecopier of facsimile machine (with a copy
thereof sent in accordance with subparagraphs (a),(b),(c) above) (any
notice so delivered shall be deemed to have been received (i) on the date
of transmission, if so transmitted before 5:30 p.m. (local time of the
recipient) on a Business Day, or (ii) on the next Business Day, if so
transmitted on or after 5:30 p.m. (local time of the recipient) on a
Business Day or if transmitted on a day other than a Business Day),
addressed to the parties at their respective addresses designated below.

All notices shall be addressed to the parties at the addresses as set
forth below. Either party may, by notice given pursuant to this Section,
change the person or persons and/or address or addresses, or designate an
additional person or persons or an additional address or addresses, for its
notices, but notice of a change of address shall only be effective upon
receipt.

<PAGE>

If to Employer:

Acres Gaming, Inc
815 N.W. 9th Street
Corvallis, OR 97330

If to Employee:
Joseph A. Huseonica
1976 Palisades Terrace Drive
Lake Oswego, OR 97034

SECTION TWENTY
--------------
JURISDICTION/ATTORNEY'S FEES

If legal action is initiated relative to this Agreement or the rights or
obligations of any party hereunders, the parties hereto stipulate and agree
that such action must seek only the remedies available to the parties
hereunder and must be initiated, maintained and continued in Clark County,
Nevada. The nonprevailing parties in such action shall pay reasonable
attorneys' fees to the prevailing parties, with the amounts to be determined
by the court, or the arbitrators, in said action.

SECTION TWENTY-ONE
------------------
BINDING EFFECT

This Agreement shall be binding upon and inure to the benefit of
Employee and Employer and their respective heirs, executors, administrators,
successors and permitted assigns (if any).

SECTION TWENTY-TWO
------------------
CAPTIONS

Captions of the Sections of this Agreement are for convenience of
reference only, and the words contained therein shall in no way be held to
explain, modify, amplify, or aid in the interpretation, construction or
meaning of the provisions of this Agreement.

SECTION TWENTY-THREE
--------------------
WAIVER OF BREACH

No waiver of any breach of any of the terms Of provisions of this
Agreement shall be, or be construed to be, a waiver of any preceding or
succeeding breach of the same or any other provision hereof.

<PAGE>

SECTION TWENTY-FOUR
-------------------
CUMULATIVE RIGHTS

No failure on the part of the Employer to exercise, and no delay in
exercising, any right, power, privilege or remedy granted herein shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right power or privilege preclude any other or further exercise thereof
or the exercise of any other right. The rights and remedies provided herein
are cumulative and not exclusive of any other rights or remedies which
Employer shall otherwise have at law or equity.

SECTION TWENTY-FIVE
-------------------
CHOICE OF LAW

It is the intention of the parties hereto that this Agreement and the
performance hereunder and all suits and special proceedings hereunder be
governed by and construed in accordance with and pursuant to the laws of the
State of Nevada and that in any action, special proceeding or other
proceeding that may be brought arising our of, in connection with, or by
reason of this Agreement, the laws of the State of Nevada shall be a
applicable and shall govern to the exclusion of the law of any other forum,
without regard to the jurisdiction in which any action or special proceeding
may be instituted.

SECTION TWENTY-SIX
------------------
GENDER, NUMBER, DISCRETION

Masculine, feminine and neuter pronouns shall be substituted freely for
each other, and the plural and singular forms of pronouns shall be
substituted freely for each other in any provision of this Agreement in which
the context appropriately requires such substitution. All article, sections,
paragraph and exhibit references used in this Agreement are to this Agreement
unless otherwise specified. Any reference herein to time of day refers to
local time in Las Vegas, Nevada. Unless the context of this Agreement clearly
requires otherwise, (i) the words "includes" or "including" shall mean
"including without limitation," and (ii) the words "hereof", "herein",
"hereunder", and similar terms in this Agreement shall refer to this
Agreement as a whole and not any particular section or article in which such
words appear. Currency amounts referenced herein are in United States Dollars.
Reference in this Agreement to the "discretion" of a party means the party's
sole and absolute discretion and shall not be subject to any external
standards, including but not limited to, any standard of custom, "good faith"
or reasonableness.

SECTION TWENTY-SEVEN
--------------------
ARBITRATION

All claims, disputes and questions whatsoever except those requiring an
equitable remedy (e.g. an injunction against a breach of any restrictive
covenant in Section Nine hereof), which shall arise either during the term of
this Agreement or afterward between the parties hereto or their respective
representatives, relating to this Agreement, or the construction or
application

<PAGE>

hereof, or any other matter in any way relating to the rights, duties, and
liabilities of either party hereunder, shall be referred to a board of
arbitration as follows: Each party shall select one arbitrator, within ten
(10) calendar days of its receipt of a written demand therefor, and these
two arbitrators so chosen shall within ten (10) calendar days of their
appointment, appoint a third arbitrator, and said arbitrators shall, by
majority decision within sixty (60) calendar days thereafter, determine the
matter in dispute. Said arbitrators shall be bound by the terms of this
Agreement and such arbitration shall, be conducted in accordance with the
Uniform Arbitration Act as has been adopted in Chapter 38 of the Nevada
Revised Statutes and as may be amended from time to time. Such determination
shall be final and binding upon the parties. Judgment may be entered upon
such determination and may be specifically enforced in accordance with
applicable law in any court having jurisdiction thereof. The expenses of the
arbitration shall be borne equally by the parties to the arbitration,
provided that each party shall pay for and bear the cost of its own experts,
witness and counsels fees and provided further that any award shall include a
prevailing party's costs, including a reasonable counsel's fee.

THE UNDERSIGNED EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THE FOREGOING
AGREEMENT AND FULLY UNDERSTANDS THE MEANING AND CONSEQUENCES OF EACH AND
EVERY TERM CONTAINED HEREIN. THE UNDERSIGNED EMPLOYEE FURTHER ACKNOWLEDGES
THAT, TO THE EXTENT DEEMED APPROPRIATE, HE HAS EMPLOYED AND CONSULTED WITH
HIS OWN COUNSEL CONCERNING THIS AGREEMENT AND HAVING CONSIDERED SUCH LEGAL
ADVICE, HE HAS EXECUTED IT AS HIS FREE AND VOLUNTARY ACT AND DEED.

IN WITNESS WHEREOF, the parties have executed this Agreement at
Corvallis, Oregon, as of the date above written.

"EMPLOYEE" "EMPLOYER"
Acres Gaming, Inc., a Nevada Corporation

/s/ JOSEPH A. HUSEONICA By: JOHN F. ACRES
- ----------------------------- ------------------------------
Joseph A. Huseonica John F. Acres
Its: Director

<PAGE>

Exhibit 11.1

ACRES GAMING INCORPORATED

COMPUTATION OF EARNINGS PER SHARE

For the Year Ended June 30
--------------------------

1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>

Net Loss ($1,641,000) ($2,505,000) (2,598,000)
------------ ------------- ------------

Weighted Average Number of Common Shares Outstanding 7,552,000 7,145,000 6,629,000

Effect of Common Stock Equivalents * * *
------------ ------------ ------------

Weighted Average Number of Common Shares Outstanding 7,552,000 7,145,000 6,629,000
------------ ------------- -----------
------------ ------------- -----------

Net Loss Per Share ($0.22) ($0.35) ($0.39)
---------- ---------- ----------
---------- ---------- ----------

</TABLE>
*Effect of common stock equivalents is anti-dilutive and therefore not
included.

<PAGE>

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

Name State of Incorporation
- ---- ----------------------

AGI Distribution, Inc. Nevada

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statements (Form S-8, No. 33-75570 and Form S-3, No. 333-2258). It
should be noted that we have not audited any financial statements of the Company
subsequent to June 30, 1996, or performed any audit procedures subsequent to the
date of our report.

ARTHUR ANDERSEN LLP

Portland, Oregon
September 26, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,500,000
<SECURITIES> 0
<RECEIVABLES> 910,000
<ALLOWANCES> 0
<INVENTORY> 2,692,000
<CURRENT-ASSETS> 6,196,000
<PP&E> 2,369,000
<DEPRECIATION> (1,329,000)
<TOTAL-ASSETS> 7,631,000
<CURRENT-LIABILITIES> 3,644,000
<BONDS> 0
0
0
<COMMON> 11,300,000
<OTHER-SE> (7,313,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,631,000
<SALES> 6,942,000
<TOTAL-REVENUES> 6,942,000
<CGS> 3,587,000
<TOTAL-COSTS> 5,020,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (24,000)
<INCOME-PRETAX> (1,641,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,641,000)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)

</TABLE>