##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


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FORM 10-K


[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2002

(Commission File No.) 0-22498

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


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



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7115 Amigo, Suite 150, Las Vegas, Nevada 89119(Address of principal executive offices)


Registrants telephone number, including area code:

(702) 263-7588

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of class)

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

Yes [X] No [   ]

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which
the common equity was sold, or the average bid and asked prices of such common
equity, as of August 31, 2002 was $49,410,487. For purposes of this
computation, all executive officers and directors of the Registrant have been
deemed affiliates. This shall not be deemed an admission that such persons are
affiliates.

The number of shares outstanding of the Registrants Common Stock, par value
$.01 per share, as of August 31, 2002 was 9,378,326 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Companys Proxy Statement to be filed in
connection with the Companys 2002 Annual Meeting of Stockholders to be held
December 11, 2002.





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TABLE OF CONTENTS



|                  |                                                                                                         |                              |  |  |  |  |  | 
|----------------- | ------------------------------------------------------------------------------------------------------- | ---------------------------- |  |  |  |  |  | 
|PART I           
|                  | ITEM 1. BUSINESS                                                                                       
|                  |                                                                                                         | General                     
|                  |                                                                                                         | The Market                  
|                  |                                                                                                         | Products                    
|                  |                                                                                                         | Research and Development    
|                  |                                                                                                         | Customers                   
|                  |                                                                                                         | Marketing                   
|                  |                                                                                                         | Production and Manufacturing
|                  |                                                                                                         | Patents                     
|                  |                                                                                                         | Competition                 
|                  |                                                                                                         | Government Regulation       
|                  |                                                                                                         | Employees                   
|                  | ITEM 2. PROPERTIES                                                                                     
|                  | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|                  | EXECUTIVE OFFICERS OF REGISTRANT                                                                       
|PART II          
|                  | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                       
|                  | ITEM 6. SELECTED FINANCIAL DATA                                                                        
|                  | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                  | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                  | FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS                                                   
|                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|                  | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III         
|                  | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                  | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                  | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                  | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                  | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV          
|                  | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K                                        
|SIGNATURES       
|CERTIFICATIONS   
|INDEX TO EXHIBITS
|EXHIBIT 21.1     
|EXHIBIT 23.1     
|EXHIBIT 99.1     
|EXHIBIT 99.2     



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##### Table of Contents



TABLE OF CONTENTSPART I

|         |  |                                                                                                        |                              |      |    |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------ | ---------------------------- | ---- | -- | -- | 
|         |  |                                                                                                        |                              | PAGE
|         |  |                                                                                                        |                              |     
|ITEM 1.  |  | BUSINESS                                                                                               |                              |      | 1  |   
|         |  |                                                                                                        | General                      |      |    | 1  | 
|         |  |                                                                                                        | The Market                   |      |    | 1  | 
|         |  |                                                                                                        | Products                     |      |    | 2  | 
|         |  |                                                                                                        | Research and Development     |      |    | 4  | 
|         |  |                                                                                                        | Customers                    |      |    | 4  | 
|         |  |                                                                                                        | Marketing                    |      |    | 5  | 
|         |  |                                                                                                        | Production and Manufacturing |      |    | 5  | 
|         |  |                                                                                                        | Patents                      |      |    | 5  | 
|         |  |                                                                                                        | Competition                  |      |    | 6  | 
|         |  |                                                                                                        | Government Regulation        |      |    | 7  | 
|         |  |                                                                                                        | Employees                    |      |    | 10 | 
|ITEM 2.  |  | PROPERTIES                                                                                             |                              |      | 10 |   
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                                      |                              |      | 11 |   
|ITEM 4.  |  | SUBMISSION OF
        MATTERS TO A VOTE OF SECURITY HOLDERS                                            |                              |      | 12 |   
|         |  | EXECUTIVE OFFICERS
        OF REGISTRANT                                                               |                              |      | 12 |   
|        
|PART II 
|        
|ITEM 5.  |  | MARKET FOR COMMON
        EQUITY AND RELATED STOCKHOLDER MATTERS                                       |                              |      | 13 |   
|ITEM 6.  |  | SELECTED FINANCIAL
        DATA                                                                        |                              |      | 18 |   
|ITEM 7.  |  | MANAGEMENTS
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |                              |      | 19 |   
|ITEM 7A  |  | QUANTITATIVE AND
        QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |                              |      | 24 |   
|         |  | FACTORS THAT MAY
        AFFECT FUTURE RESULTS                                                         |                              |      | 24 |   
|ITEM 8.  |  | FINANCIAL STATEMENTS
        AND SUPPLEMENTARY DATA                                                    |                              |      | 27 |   
|ITEM 9.  |  | CHANGES IN AND
        DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |                              |      | 44 |   
|        
|PART III
|        
|ITEM 10. |  | DIRECTORS AND
        EXECUTIVE OFFICERS OF THE REGISTRANT                                             |                              |      | 45 |   
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                                 |                              |      | 45 |   
|ITEM 12. |  | SECURITY OWNERSHIP
        OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |                              |      | 45 |   
|ITEM 13. |  | CERTAIN RELATIONSHIPS
        AND RELATED TRANSACTIONS                                                 |                              |      | 45 |   
|ITEM 14. |  | CONTROLS AND PROCEDURES                                                                                |                              |      | 45 |   
|        
|PART IV 
|        
|ITEM 15. |  | EXHIBITS, FINANCIAL
        STATEMENTS AND REPORTS ON FORM 8-K                                         |                              |      | 45 |   
|         |  | SIGNATURES                                                                                             |                              |      | 46 |   
|         |  | CERTIFICATIONS                                                                                         |                              |      | 48 |   





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PART I

This Annual Report on Form 10-K contains forward-looking statements.
These statements relate to future events or our future financial performance.
In some cases, you can identify forward-looking statements by terminology such
as may, will, should, expect, plan, intend, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the Factors That May
Affect Our Operating Results below. These factors may cause our actual
results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this annual report to conform such
statements to actual results or to changes in our expectations.




ITEM 1. BUSINESS




General

In this report the terms Acres, Company, we, us, and our refer
to Acres Gaming Incorporated. The Company develops, manufactures and markets
electronic equipment and software for the casino gaming industry. Many of the
Companys products are based on its proprietary Acres Bonusing Technology and
are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible some bonus and incentive programs that have not previously
been offered.

Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the
Company also offers slot monitoring, patron management, cage, credit and table
games management, visual analysis and cashless wagering modules that may be
purchased and installed individually or as components of an integrated system.
The Company sells its products primarily in the United States, Australia and
South Africa.




The Market

In recent years, legalized gaming has significantly expanded in the United
States. As part of this expansion, casino-style gaming has become an
increasingly important component of the leisure time industry. The expansion
resulted from the introduction of riverboat-style gaming in the Midwestern
United States, the legalization of Native American casino gaming in California
in March 2000, the growth of Native American casino gaming in other states and
growth in the established Nevada market.

Casino gaming has also grown rapidly worldwide, including in Australia,
Canada, Europe and Africa, as well as in parts of Asia, the former Soviet Union
and South America. The Company estimates that approximately 600,000
casino-style gaming machines are currently in use in the United States and that
the total number in use throughout the world is significantly greater.

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

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Products

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



| | 1) |  | Casino-wide, fully integrated applications offered as the
Acres Advantage, Acres Bonusing and Acres Cashless; and                                                                                                                                                                                           
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | Bonus Games comprised of single or a linked group of
traditional slot machines that activate a secondary bonus game
when certain milestones are reached on the traditional games. Bonus
Games are developed as a topbox that can be attached to a new or
used slot machine manufactured by another company.

Acres Advantage

An Acres Advantage installation in a casino includes electronic hardware
installed in the gaming machines, microprocessor-based controllers for groups
of gaming machines and computers and software that gather data and generate
reports for casino management. The Acres Advantage is based on a Microsoft®
Windows platform and has capacity to serve the worlds largest casinos.

Various components of the Acres Advantage system are installed in casinos
located in North America, Australia and South Africa, including installations
in casinos operated by Mandalay Resort Group, MGM MIRAGE, and Station Casinos
Inc., as well as installations in other casinos. Most of the systems installed
in North America are in casinos located in the states of Nevada and California.

Hardware components and software included in the Acres Advantage, have
been approved by the Nevada Gaming Control Board and regulatory authorities for
several other states, two states in Australia and two provinces in South
Africa. (See Government Regulation).

The Companys hardware has been and continues to be used in conjunction
with other vendors slot accounting and player tracking software or with a
casinos internally developed player tracking software. The Companys standard
hardware can be, and often is, installed by the customer or other vendors.

The Acres Advantage system currently includes in-machine hardware
components, including the new NexGen display, network components and software
modules comprising slot monitoring, patron management, cage, credit and table
games management, graphic mapping reporting and mobile data access.

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

Patron Management. This module gathers and records information about
individual players, much like an airlines frequent flyer program. Each
customer who elects to enroll in the casinos players club is given a plastic
card that uniquely identifies the player. The player inserts the card into an
electronic card reader on the gaming machine, and the system automatically
records the players level of play. Casino management can use this information
to provide special incentives and rewards to individual players or groups of
players in order to increase player loyalty. Acres Advantage is designed to
further enhance player loyalty by requiring the use of a players club card to
qualify for certain bonuses.

Cage, Credit and Table Games Management. This product allows a casino to
track and manage the cash, chips and credit vouchers for table games and the
cashiers cage. It also provides automated mechanisms for

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enabling players to obtain credit through online or in-house credit
facilities and can use a touch screen mechanism for inputting players table
games activity into the patron management module.

Graphic Mapping Reporting. This software product provides a visual
rendition, projected as a graphic map of the casino floor, of machine events
currently occurring at the gaming machines or of historical data contained in
the Acres Advantage databases. The presentation allows casino management to
view the statistics of the casino operations in graph form and allows for quick
recognition of the play and service activity occurring at each gaming machine
on the casino floor.

Mobile Data Access. This module presents real-time streaming data such
as customer headcount, metered net win and casino staffing levels in easy to
read line graphs on handheld PCs or desktop workstations. Using this product
and wireless communication technology, casino management can monitor their slot
floor operations from remote locations. Additionally, Mobile Data Access
allows casino customer service floor personnel to improve customer service and
patron marketing activities by immediately accessing patron information and
slot machine activity using handheld PCs.

Acres Bonusing

Customers may purchase and implement bonuses individually or collectively.
The following are examples of bonuses and promotions that comprise Acres
Bonusing:

Xtra Credit®. This feature is used to award special incentive bonuses to
players club members. With just a few keystrokes, casino personnel can
establish Xtra Credit bonuses to provide incentives for players club members
or to celebrate the players special events such as birthdays or anniversaries
at the casino. Xtra Credit bonus awards can dramatically reduce the casinos
existing cash voucher mailing and redemption costs and provide a wide variety
of marketing opportunities for the casino to retain customers. Xtra Credit may
also be used by other bonus applications as an award mechanism to allow the
players to redeem their points earned or bonus awards won for free games on the
gaming machines. An award given to the player is posted to the players Xtra
Credit account rather than the gaming machines credit meter. The amount of
the award is shown on the Acres display on the gaming machine. The amount is
reduced as the player uses the award to make a wager. Gaming machines that use
Xtra Credit can create a substantial tax advantage for a casino over more
traditional cash-based promotions in both Nevada and Mississippi, because the
gaming regulators in those states have ruled that amounts wagered by the player
through the use of Xtra Credits are excluded from taxable drop.

PointPlay®. This feature allows casino players to redeem the players
club points they earned while playing slot machines directly at the gaming
machine. The points can be redeemed for game credits or Xtra Credits.

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

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

Lucky Coin®. These progressive jackpot bonuses are granted to the player
inserting the nth coin where the frequency of n and the funding parameters
of the bonus are established by the casino. Awards can be created that vary
between small jackpots every few minutes and life-changing jackpots every few
weeks. These bonuses can be applied to any number of gaming machines (from one
machine to every machine in the casino) and any one gaming machine may be tied
to multiple bonuses.

Acres Cashless

Acres Cashless encompasses various ticketing solutions and Coinless
Transit®, a form of electronic funds transfer. These features reduce the
casinos floor staffing expenses by reducing the number of cash replenishments,
or machine fills that are required when slot players cash out their winnings.
Players also receive greater convenience by eliminating delays caused when
machines run out of coins when paying jackpots.

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Ticket-in, Ticket-out. The Company offers a fully integrated ticketing
solution whereby tickets printed by the slot machine can be used to transfer
funds to other slot machines or to redemptions stations where the tickets can
be redeemed for cash. Alternatively, Acres Cashless products can interface to
competitors ticket products, whereby the ticket data gathered by the
competitors system is automatically populated into the Acres slot monitoring
product to facilitate daily reconciliation of slot floor activity.

Coinless Transit. This product allows casino patrons to use their
players club card to transfer funds from one gaming machine to another or to a
redemption kiosk where the funds can be redeemed for cash.

Bonus Games

The Company develops proprietary bonus games that it sells outright or, in
certain cases, operates on a revenue-sharing basis. To date, revenue from
these games has not been material.

The Company entered into a joint development agreement with Bally Gaming,
Inc. (Bally) in August 2001, to design, manufacture, market and distribute
topbox bonus games for use in connection with the operation of one of Ballys
standard slot machines. The Company and Bally have developed three topbox
bonus games under this agreement and have received regulatory approval in
Nevada and in several jurisdictions that require approval by Gaming
Laboratories International, with approvals pending in several additional
jurisdictions.




Research and Development

The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 50
full-time employees involved in research and development as of August 31, 2002.
Research and development expenses were $5.7 million, $4.7 million and $5.1
million in the years ended June 30, 2002, 2001 and 2000, respectively.




Customers

Casinos with more than 500 gaming machines represent the principal market
for Acres Advantage. Casinos of this size are generally large enough to
support a professional staff capable of using the analytical and promotional
tools provided by Acres Advantage. This market includes many casinos in Las
Vegas, Reno and Laughlin, Nevada, and Atlantic City, New Jersey, as well as a
number of Native American and riverboat casinos in various other states and a
number of casinos in Australia, Canada, and South Africa.

Historically, in any
fiscal year, greater than 50% of The Companys net revenues have been
derived from sales to three or fewer customers. The following table sets forth
net revenues for each of the Companys
major customers as a percentage of total net revenues for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.

|                                          |  |                                   |      |      |  |      |      |  |  |  |      | 
|----------------------------------------- |  | --------------------------------- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                          |  | 2002                              |      | 2001 |  | 2000
|                                          |  |                                   |      |      |  |     
|                                          |  | (as a percentage of net revenues)
|Crown Casino                              |  |                                   | 0.8  |      |  |      | 0.2  |  |  |  | 37.0 | 
|IGT for properties operated by MGM MIRAGE |  |                                   | 20.5 |      |  |      | 20.0 |  |  |  | 2.8  | 
|Mandalay Resort Group                     |  |                                   | 2.4  |      |  |      | 6.6  |  |  |  | 23.1 | 
|MGM MIRAGE                                |  |                                   | 21.0 |      |  |      | 1.1  |  |  |  | 1.8  | 
|Paragon Casino Resort                     |  |                                   | 12.3 |      |  |      |     |  |  |  |     | 
|Star City                                 |  |                                   | 0.9  |      |  |      | 0.9  |  |  |  | 19.1 | 
|Station Casinos Inc.                      |  |                                   | 4.0  |      |  |      | 37.8 |  |  |  | 0.4  | 
|Tsogo Sun Holdings                        |  |                                   | 6.7  |      |  |      | 7.1  |  |  |  | 10.1 | 

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The Company's
revenues from sales to customers in the United States totaled
$23.0 million, $40.5 million and $5.8 million for the
years ended June 30, 2002, 2001 and 2000, respectively. The
Company's revenues from sales to customers outside the United States
totaled $3.4 million, $3.5 million and $11.2 million
for the years ended June 30, 2002, 2001 and 2000, respectively.
(See note 1 to the consolidated financial statements.) The
following table sets forth net revenues for the United States and
outside the United States as a percentage of total net revenues for
the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.

|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | 2002                     |       | 2001 |  | 2000
|                         |  |                          |       |      |  |     
|                         |  | (as a % of net revenues)
|Revenues  Australia     |  |                          | 6.1   |      |  |      | 0.9   |  |  |  | 56.0  | 
|Revenues  South Africa  |  |                          | 6.7   |      |  |      | 7.1   |  |  |  | 9.9   | 
|Revenues  United States |  |                          | 87.2  |      |  |      | 92.0  |  |  |  | 34.1  | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|Total                    |  |                          | 100.0 |      |  |      | 100.0 |  |  |  | 100.0 | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 

(See note 1 to the consolidated financial statements.)

The Companys backlog of orders for its products were approximately $20.0
million, $21.1 million and $6.7 million as of June 30, 2002, 2001 and 2000,
respectively. Backlog, however, may not be a meaningful indication of future
sales. Sales to the Companys customers are made pursuant to purchase orders
or sales agreements for specific system installations and products are often
delivered within a few months of receipt of the order. The Company does not
have any ongoing long-term sales contracts. The Companys revenues and results
of operations may be materially affected, in the near term, by the receipt,
loss or delivery over an extended period of time of any one order.




Marketing

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




Production and Manufacturing

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




Patents

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

|                                              |  |                                          |  |                                                                                                                                                                                                                                                        |  |  |  | 
|--------------------------------------------- |  | ---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|Patent Number                                 |  | Issue Date                               |  | Brief Summary/Examples of Patented
        Features                                                                                                                                                                                                    |  |  |  | 
|                                              |  |                                          |  |                                                                                                                                                                                                                                                        |  |  |  | 
|6,375,569                                     |  | 4/23/02                                  |  | Operation of gaming machines
        in a linked bonus prize winning mode                                                                                                                                                                             
|                                              |  |                                          |  |                                                                                                                                                                                                                                                       
|6,375,567                                     |  | 4/23/02                                  |  | Method and apparatus for implementing
        in video a secondary game responsive to player interaction with a primary
        game                                                                                                                  
|                                              |  |                                          |  |                                                                                                                                                                                                                                                       
|6,364,768                                     |  | 4/2/02                                   |  | Networked gaming devices that
        end a bonus and concurrently initiate another bonus                                                                                                                                                             
|                                              |  |                                          |  |                                                                                                                                                                                                                                                       
|6,358,149                                     |  | 3/19/02                                  |  | Dynamic threshold for pool-based
        bonus promotions in electronic
        gaming systems                                                                                                                                                        
|                                              |  |                                          |  |                                                                                                                                                                                                                                                       
|6,257,981
        5,741,183
        5,702,304 |  | 7/10/01
        4/21/98
        12/30/97 |  | Method and apparatus for operating
        networked gaming devices connected over a high-speed network whereby the
        gaming device reconfigures its payout schedule responsive to commands
        to provide a variety of promotional bonuses.

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|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|--------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Patent Number                                                                     |  | Issue Date                                                                 |  | Brief Summary/Examples of Patented
        Features                                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|6,254,483                                                                         |  | 7/3/01                                                                     |  | Method for controlling the
        cost of playing a gaming device via commands to change game speed, payback
        percentage or game appearance issued in response to changes in variables
        such as rate of play, player status and the time of the day, week or month.                                                                                                                             
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,431,983
        6,371,852
        6,312,333
        6,244,958                   |  | 8/13/02
        4/16/02
        11/6/01
        6/12/01                    |  | Method for providing non-cashable
        credits to a gaming device over a networked computer system.                                                                                                                                                                                                                                                                                                         
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,231,445                                                                         |  | 5/15/01                                                                    |  | Method of awarding bonuses
        over a network of gaming devices whereby reel combinations are matched
        against a predetermined winning combination and a bonus is
        paid for any matches. Additionally, the bonus amount won may be decremented
        over the bonus period such that a bonus won at the beginning of the period
        is greater than one won at the end of the period.
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,162,122                                                                         |  | 12/19/00                                                                   |  | Method and apparatus covering
        backlit bezels for card readers used in gaming systems.                                                                                                                                                                                                                                                                                                                  
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,043,615
        5,854,542                                                       |  | 3/28/00
        12/29/98                                                   |  | Method and apparatus for signaling
        promotional operation of a gaming device by flashing and dimming existing
        fluorescent lamps.                                                                                                                                                                                                                                                                
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,008,784                                                                         |  | 12/28/99                                                                   |  | Electronic display with a curved
        face.                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|5,876,284                                                                         |  | 3/2/99                                                                     |  | Method and apparatus for implementing
        a multiple jackpot time bonus.                                                                                                                                                                                                                                                                                                                                   
|                                                                                  |  |                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6,319,125
        5,836,817
        5,820,459
        5,752,882
        5,655,961 |  | 11/20/01
        11/17/98
        10/13/98
        5/19/98
        8/12/97 |  | Method and apparatus covering
        a variety of networked bonusing systems.                                                                                                                                                                                                                                                                                                                                 

The Company has also been issued 16 foreign patents, related to method and
apparatus covering a variety of networked bonusing systems.

Patents that are applied for may not be issued, and if issued, may not
provide any significant competitive advantage to the Company. In addition, the
Company has a variety of other intellectual property that it treats as trade
secrets. The Company takes reasonable steps to protect its intellectual
property but it is possible that others may make unauthorized use of such
intellectual property and the Company may or may not be able to prevent such
use. (See Legal Proceedings).




Competition

The Company primarily competes in the market for casino systems. The
Companys primary competitors in this market include IGT, Alliance Gaming and
Aristocrat. Most, if not all of these competitors have financial and other
resources that are greater than those of the Company, and most of them have the
advantage of being able to sell their system products to their existing gaming
machine customers. Most of these competitors offer products that directly
compete with the functionality of each of the Companys products. The Company
has several additional competitors, some of which have financial and other
resources that are greater than those of the Company, that sell products that
compete with portions of the Companys casino systems.

The Companys bonus game product line competes with the products of major
gaming machine manufacturers and resellers including Aristocrat, Alliance
Gaming, IGT, Konami and Williams Gaming Inc. Most, if not all of these
competitors have financial and other resources that are greater than those of
the Company. IGT has a dominant position in the gaming machine market.
Several smaller competitors, some of which have financial and other resources
that are greater than those of the Company, also offer games that compete with
the Companys bonus game product line.

The Company believes that its products compete principally on the basis of
functionality, price and service. The Company believes that its proprietary,
patented Acres Bonusing Technology provides a competitive advantage and that
none of its competitors have the number of bonusing products available from the
Company.

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Government Regulation

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

Regulation of Products

In most jurisdictions, a model of the gaming equipment that the Company
seeks to place in operation must be submitted for testing by an approved
testing laboratory prior to use in any gaming operation. To obtain such
approval, the Company must submit, at its expense, each model of its equipment
to the specified laboratory for testing, examination and analysis. Upon
completion of the testing, the laboratory submits a report of its findings and
conclusions to the applicable gaming authority, together with any
recommendations for modifications to the equipment or the addition of equipment
or devices to such gaming equipment.

The Company is authorized to sell its products in Arizona, California,
Colorado, Illinois, Indiana, Louisiana, Michigan, Mississippi, Missouri,
Nevada, New Jersey, New Mexico, North Dakota; Gauteng Province, South Africa
and Victoria, New South Wales and Northern Territory, Australia. Not all of
the Companys products have been approved for sale in each jurisdiction. The
Company would seek approval of its products for use in any other jurisdiction
in which a sale might occur.

Corporate Regulation

Nevada

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

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

The Company is registered as a publicly traded corporation (Registered
Corporation) with the Nevada Commission, which has granted manufacturers and
distributors licenses to the Company and to its wholly owned subsidiary, AGI
Distribution, Inc. (AGID). AGID is also licensed by the Nevada Commission as
the operator of a slot machine route (Slot Route License). As a Registered
Corporation, the Company is required to periodically submit detailed financial
and operating reports to the Nevada Commission and furnish other information
that the Nevada Commission may require.

The Companys and AGIDs manufacturers, distributors and Slot Route
Licenses require the periodic payment of fees and taxes and are not
transferable. No person may become a stockholder of, or receive any percentage
of profits from, AGID without first obtaining licenses and approvals from the
Nevada Gaming Authorities, and no person may acquire control of the Companys
voting securities without such prior approvals. The Company and AGID have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required in order to engage in gaming
activities in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or

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

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

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

If it was determined that the Nevada Act was violated by the Company or
AGID, the gaming registrations, licenses and approvals they hold could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, AGID, the Company and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of any gaming license could (and
revocation of any gaming license would) materially adversely affect AGID and
the Company.

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

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

Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner.

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

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

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

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

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

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

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

No assurances can be given that such required licenses, permits,
certificates or approvals will be given or renewed in the future. Failure by
the Company to obtain, or the loss or suspension of, any necessary licenses,
approvals or suitability findings, may prevent the Company from selling or
distributing its products in Nevada.

Other Jurisdictions

Other jurisdictions in which the Companys products are sold or used
require various licenses, permits and approvals in connection with such sale or
use, typically involving restrictions similar in most respects to those of
Nevada. The Company has complied with the approval process for use of the
products it has sold in these other jurisdictions, including the receipt of
manufacturer and distributor licenses, permits or certificates in each such
state. Not all of the Companys products have been approved for sale in all
jurisdictions.

No assurances can be given that such required licenses, permits,
certificates or approvals will be given or renewed in the future. Failure by
the Company to obtain, or the loss or suspension of, any necessary licenses,
approvals or suitability findings, may prevent the Company from selling or
distributing its products in such jurisdictions.




Employees

At August 31, 2002, the Company had 122 full-time employees of whom 50
were involved in research and development, 34 in customer service and support,
11 in material control, 8 in sales and marketing and 19 in administration and
management. None of the Companys employees is represented by a labor union or
covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and believes that its employee relations are good.




ITEM 2. PROPERTIES

The Companys headquarters and principal operations are located at 7115
Amigo Street, Suite 150, Las Vegas, Nevada. This facility encompasses
approximately 31,500 square feet. The lease commenced on June 15, 1998 and
will expire on June 15, 2003. The lease may be extended for an additional 60
months upon 180 days notice by the Company at a base rent equal to the fair
market value of comparable office space in the area. Currently, the base rent
is approximately $40,000 per month, plus $7,000 per month for property taxes,
building insurance and common area maintenance. In July 2001, the Company
entered into an agreement with a sublessor that increased its office space by
leasing approximately 7,000 square feet contiguous to its existing office
space. The lease commenced on July 30, 2001 and will expire on April 26, 2003.
The lease may be extended for an additional 60 months upon 180 days notice by
the Company at a base rent equal to the fair market value of comparable office
space in the area. Currently, the base rent for the additional office space is
approximately $10,000 per month, plus $1,600 per month for property taxes,
building insurance and common area maintenance.

The Company also leases approximately 11,000 square feet in Corvallis,
Oregon. The new lease commenced on September 1, 1999 and will expire on August
31, 2004. The base rent for the total facility is approximately $15,000 per
month, which includes property taxes, building insurance and common area
maintenance.

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




ITEM 3. LEGAL PROCEEDINGS

Two related lawsuits were filed in the U.S. District Court for the
District of Nevada in 1997 and 1998, alleging violation of the federal
securities laws by the Company and its executive officers. The suits were
consolidated, and in September 2000, the Company agreed to settle the
litigation for approximately $2 million. The Company recorded a charge of $2.0
million in the year ended June 30, 2000, to account for the settlement. In
April 2001, the Company selected the cash payment option and on January 30,
2002 made the final payment due under the settlement.

Two lawsuits have been filed regarding ownership of the Wheel of Gold
(WOG) technology that is the subject of two patents that were assigned to
Anchor Gaming (Anchor). In the first suit, now pending in U.S. District
Court for the District of Nevada, the WOG plaintiffs brought patent
infringement, breach of warranty and breach of contract claims against the
Company based on the WOG patents and the Companys supply agreement with
Anchor. Plaintiffs seek to enjoin the Company from infringing the WOG patents
and from competing with it in the sale of wheel styled bonus gaming devices.
The plaintiffs also seek unspecified compensatory damages for patent
infringement and breach of contract, compensatory damages substantially in
excess of $1 million for breach of warranty, treble damages, costs of suit, and
attorneys fees. The Company has denied the allegations and is pursuing a
counterclaim in that proceeding for a declaration that the Company is the joint
owner of the WOG patents. Discovery in the lawsuit is formally closed.
Currently pending before the Court are four summary judgment motions and one
discovery-related motion filed by Anchor, as well as one summary judgment
motion filed by the Company. No trial date has been set. The Company cannot
predict the outcome, nor estimate the range of possible loss, if any, related
to this suit but believes that an unfavorable outcome could have a material
adverse effect on the Companys financial condition, results of operations and
cash flows.

The defense of this suit with Anchor was accepted by the Companys former
professional errors and omissions insurance carrier. However, in April 2000,
the carrier denied coverage. The Company is involved in litigation, now
pending in the U.S. District Court of Nevada, with its former insurance carrier
regarding such coverage. On motions for summary judgment, the court found on
February 28, 2002 that the insurance carrier has a duty to defend the Company
against the lawsuit. A motion to have the court reconsider its decision filed
by the insurance carrier is pending. The Company cannot predict the outcome of
this suit.

In the second action regarding the WOG patents, now pending in U.S.
District Court for the District of Oregon, the Company filed suit against
Anchor and Spin for Cash Wide Area Progressive Joint Venture (collectively
Anchor) alleging that Anchor wrongfully used the Companys intellectual
property to obtain the WOG patents, that the filing of the patent applications
was fraudulently concealed from the Company, that Anchor was unjustly enriched
by retaining the benefits of the Companys technology without compensating the
Company and that Anchor breached fiduciary duties owed to the Company. The
Company seeks $40 million in compensatory damages, treble damages, costs of
suit and attorneys fees. The lawsuit has been stayed pending resolution of
the first Anchor lawsuit.

A series of related lawsuits resulting from the Companys efforts to
enforce its patent rights or third parties efforts to challenge the Companys
patent rights, have been settled or adjudicated. The suits were consolidated
in the U.S. District Court for the District of Nevada under Acres Gaming
Incorporated v. Mikohn Gaming Corp., et al. In separate settlements, all
claims in that litigation between the Company and Casino Data Systems (CDS)
and Sunset Station Hotel and Casino, respectively, were dismissed with
prejudice. Effective December 27, 2001, the Company and Mikohn settled the
remaining claims from the litigation. Pursuant to the settlement agreement,
Mikohn agreed to license the Companys bonusing patents, paid the Company a
settlement of $1.5 million for use of the patents prior to September 1, 2001
and agreed to pay additional royalties for future use of those patents.

In a separate but related action, the Company sued a former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of the claims alleged by the CDS defendant. That suit is now
pending in U.S. District Court for the District of Nevada. The insurance
carrier seeks a declaration that no coverage is provided for the claim; if
coverage is provided it should be provided by the prior insurance carrier; and
the Company must reimburse the insurance carrier for nominal amounts paid under
its insurance policy to defend the

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Company. On motions for summary judgment, the court found on February 28,
2002 that the insurance carrier did not have a duty to defend the Company
against the lawsuit and that the Company must repay the insurance carrier for
approximately $70,000 in defense costs previously paid by the insurance
carrier. A motion seeking to have the court reconsider its decision filed by
the Company is pending. At June 30, 2002, the Company recorded a liability in
the amount of $70,000 to provide for the contingency. The Company cannot
predict the outcome of this suit but believes that an unfavorable outcome would
not have a material adverse effect on the Companys financial condition,
results of operations or cash flows.

Wild Game NG, LLC, a Nevada limited liability company, which owns and
operates Siena Hotel Spa Casino in Reno, Nevada, filed a lawsuit against the
Company in November 2001 in the Second Judicial District Court of the State of
Nevada in the County of Washoe. Siena alleges that the Company failed to
perform its obligations under a $1.8 million Equipment Sale Agreement to
install and maintain a networked slot accounting, cage and credit and player
tracking system in Sienas casino. Siena seeks unspecified damages in excess
of $10,000. The Company believes that Sienas claims are unfounded and has
filed counterclaims seeking, among other things, payments Siena owes the
Company for installation of the Companys hardware in Sienas casino. The
Company cannot predict the outcome of this suit but believes that an
unfavorable outcome would not have a material adverse effect on the Companys
financial condition, results of operations or cash flows.

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




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

There were no matters submitted to a vote of security holders during the
quarter ended June 30, 2002.




EXECUTIVE OFFICERS OF REGISTRANT

As of September 27, 2002, the executive officers of the Company were as
set forth below:

|                     |  |     |    |                       |  |                                                              |  |  |      | 
|-------------------- |  | --- | -- | --------------------- |  | ------------------------------------------------------------ |  |  | ---- | 
|Name                 |  | Age |    | Positions and Offices |  | ExecutiveOfficer Since                                      
|                     |  |     |    |                       |  |                                                             
|Floyd W. Glisson     |  |     | 55 |                       |  | Chairman and Chief
Executive Officer                         |  |  | 1998 | 
|                    
|Richard J. Schneider |  |     | 45 |                       |  | President and Chief
Operating Officer                        |  |  | 1999 | 
|                    
|Patrick W. Cavanaugh |  |     | 42 |                       |  | Senior Vice President,
Chief Financial Officer
and Treasurer |  |  | 2001 | 
|                    
|Reed M. Alewel       |  |     | 38 |                       |  | Senior Vice President -
Sales and Secretary                  |  |  | 1999 | 

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

Floyd W. Glissonbecame Chairman of the Board of Directors in April 2000
and has served as the Chief Executive Officer since July 1998. Mr. Glisson
also served as President from July 1998 to April 2000. Mr. Glisson was senior
vice president, finance and administration and chief financial officer for
ConAgra Grocery Products Company, a unit of ConAgra, Inc., from June 1993 to
July 1998. Prior to June 1993, Mr. Glisson was senior vice president, finance
and administration and chief financial officer of Hunt Wesson, Inc., a food
processing company that is a subsidiary of ConAgra, Inc. In addition to normal
staff functions, Mr. Glisson was also responsible for Food Service and
International Operations.

Richard J. Schneiderhas served the Company as President since April 2000,
and as Chief Operating Officer since July 1999. Mr. Schneider served as Vice
President from July 1999 to April 2000 and as Vice President of Game
Development from December 1997 until July 1999. From September 1995 to
December 1997, Mr. Schneider was the vice president of game engineering for
Casino Data Systems, a designer and manufacturer of

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casino management information systems. From 1992 to 1995, Mr. Schneider
was the director of engineering for United Coin Machine Company, the largest
slot machine route operator in Nevada.

Patrick W. Cavanaughjoined Acres in September 2001 as Senior Vice
President, Chief Financial Officer and Treasurer. From January 1997 until
joining Acres, Mr. Cavanaugh was chief financial officer and treasurer of Oasis
Technologies, Inc., a company that produces networked gaming systems. From
1993 to 1996, Mr. Cavanaugh served as chief financial officer and treasurer of
Casino Data Systems, a designer and manufacturer of casino management
information systems. Prior to, Mr. Cavanaugh served in positions of
increasing responsibility with the international accounting firm of KPMG, most
recently as audit senior manager. Mr. Cavanaugh is a Certified Public
Accountant.

Reed M. Alewel, has served Acres as Senior Vice President of Sales since
May 2001 and as Secretary since November 1999. Mr. Alewel served as Senior
Vice President from July 2000 to May 2001, Vice President from July 1999 to
July 2000, Chief Financial Officer and Treasurer from July 1999 to May 2001,
Controller from October 1996 to July 1999, and as Assistant Secretary from July
1999 to November 1999. Mr. Alewel was the manager of financial planning and
analysis for the American Italian Pasta Company, a food manufacturing company,
from May 1992 to October 1996. Mr. Alewel is a Certified Public Accountant.




PART II




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

|                                 |                |  |                        |      |      |  |               |      |  |  |   |      | 
|-------------------------------- | -------------- |  | ---------------------- | ---- | ---- |  | ------------- | ---- |  |  | - | ---- | 
|                                 |                |  | Market Price per Share
|                                 |                |  |                       
|                                 |                |  | Low                    |      | High |  | End of Period
|                                 |                |  |                        |      |      |  |              
|FISCAL YEAR ENDED JUNE 30, 2002: |                |  |                        |      |      |  |               |      |  |  |   |     
|                                 | First quarter  |  | $                      | 2.10 |      |  | $             | 5.27 |  |  | $ | 2.15 | 
|                                 | Second quarter |  |                        | 2.20 |      |  |               | 5.98 |  |  |   | 5.70 | 
|                                 | Third quarter  |  |                        | 2.98 |      |  |               | 5.85 |  |  |   | 5.24 | 
|                                 | Fourth quarter |  |                        | 4.13 |      |  |               | 5.74 |  |  |   | 4.58 | 
|FISCAL YEAR ENDED JUNE 30, 2001: |                |  |                        |      |      |  |               |      |  |  |   |     
|                                 | First quarter  |  | $                      | 1.38 |      |  | $             | 3.00 |  |  | $ | 1.69 | 
|                                 | Second quarter |  |                        | 1.13 |      |  |               | 2.38 |  |  |   | 2.13 | 
|                                 | Third quarter  |  |                        | 1.50 |      |  |               | 6.75 |  |  |   | 6.25 | 
|                                 | Fourth quarter |  |                        | 4.30 |      |  |               | 7.25 |  |  |   | 4.96 | 

The Company estimates that there are approximately 3,037 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.

Disclosure Regarding the Companys Equity Compensation Plans

The Company maintains its 1993 Stock Option and Incentive Plan (the 1993
Plan) pursuant to which the Company may grant equity awards to eligible
persons. The material terms of the 1993 Plan are described below. In
addition, the Company has issued options outside the 1993 Plan to three of its
officers, Floyd W. Glisson, Richard J. Schneider and Reed M. Alewel. The
material terms of these options are also described below.

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The following table summarizes information about equity awards under the
Companys 1993 Plan and those outside of the 1993 Plan as of June 30, 2002:

|                                                                  |       |          |                      |           |                   |                        |                      |      |                     |  |         |         | 
|----------------------------------------------------------------- | ----- | -------- | -------------------- | --------- | ----------------- | ---------------------- | -------------------- | ---- | ------------------- |  | ------- | ------- | 
|                                                                  |       |          | Number of shares of  |           |                   |                        |                      |      | Number of Shares of
|                                                                  |       |          | Common Stock to be   |           | Weighted Average  |                        | Common Stock        
|                                                                  |       |          | issued upon exercise |           | Exercise Price of |                        | Available for Future
|                                                                  |       |          | of Outstanding       |           | Outstanding       |                        | Issuance (excluding 
|Plan Category                                                     |       | Options* |                      | Options   |                   | shares reflected in *)
|                                                                  |       |          |                      |           |                   |                       
|Equity compensation plans approved by
security holders: 1993
Plan |       |          | 1,009,525            |           |                   | $                      | 4.17                 |      |                     |  | 311,500 |        
|Equity compensation
plan not approved by
security holders:        |       |          |                      |           |                   |                        |                      |      |                     |  |         |        
|Richard J. Schneider(1)                                           |       |          | 25,000               |           |                   | $                      | 1.00                 |      |                     |  | N/A     |        
|Reed M. Alewel(2)                                                 |       |          | 25,000               |           |                   | $                      | 1.00                 |      |                     |  | N/A     |        
|Floyd W. Glisson(3)                                               |       |          | 135,000              |           |                   | $                      | 1.00                 |      |                     |  | N/A     |        
|                                                                  |       |          |                      |           |                   |                        |                      |      |                     |  |         |        
|                                                                  | Total |          |                      | 1,194,525 |                   |                        | $                    | 3.68 |                     |  |         | 311,500 | 
|                                                                  |       |          |                      |           |                   |                        |                      |      |                     |  |         |        

(1) Options were issued pursuant to a Nonqualified Stock Option Agreement
dated December 8, 1999 between the Company and Mr. Schneider. The exercise
price for the options is $1.00 per share. The options vested as follows: 25%
vested on December 8, 1999, and 25% vested on April 1, 2000, 2001 and 2002,
respectively. The options expire on December 8, 2009.

(2) Options were issued pursuant to a Nonqualified Stock Option Agreement
dated December 8, 1999 between the Company and Mr. Alewel. The exercise price
for the options is $1.00 per share. The options vested as follows: 25% vested
on December 8, 1999, and 25% vested on April 1, 2000, 2001 and 2002,
respectively. The options expire on December 8, 2009.

(3) Options were issued pursuant to a Nonqualified Stock Option Agreement
dated December 8, 1999 between the Company and Mr. Glisson. The exercise price
for the options is $1.00 per share. All of the options vested on December 8,
1999. The options expire on December 8, 2009.

Summary Description of the Companys Equity Compensation Plans

Description of 1993 Stock Option and Incentive Plan

The Companys Board of Directors adopted the 1993 Stock Option and
Incentive Plan in July 1993 and it was approved by the shareholders in July
1993. In 1996 the Company amended the 1993 Plan, and these amendments were
approved by the shareholders in October 1996.

An aggregate of 1,750,000 shares (subject to adjustment in the event of
any stock dividend or split, recapitalization, reclassification, combination,
exchange of shares, or other similar corporate change) of the Companys Common
Stock is reserved for issuance pursuant to awards under the 1993 Plan.

Under the 1993 Plan, the Company may grant incentive stock options (ISOs),
nonqualified stock options (NSOs) or restricted stock awards.

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Eligibility

Under the 1993 Plan, the Company may grant incentive stock options (ISOs),
nonqualified stock options (NSOs) or restricted stock awards. Any employee,
director or consultant of the Company or any of its ''Affiliates (as such
term is defined in the 1993 Plan) is eligible for awards under the 1993 Plan;
provided, however, that only employees of the Company may be awarded ISOs. In
the fiscal year ended June 30, 2002, options to purchase an aggregate of 80,000
shares of Common Stock were granted to all executive officers as a group and
options to purchase an aggregate of 185,000 shares of Common Stock were granted
to all other employees of the Company as a group (including officers who are
not executive officers) at exercise prices ranging from $2.30 to $5.61.
Directors receive an award of 7,500 options upon joining the board and 2,500
options after each of the Companys Annual Meetings of Shareholders.

Administration

The 1993 Plan is currently administered by the Companys Board of
Directors, which has the sole authority, subject to the provisions of the 1993
Plan, to determine the persons to whom awards will be made, the type, amount,
size and terms of awards and other terms, conditions and restrictions of the
awards.

Terms and Conditions of Options

The number of shares that may be purchased upon the exercise of options
and the price at which shares may be purchased will be established by the Board
of Directors; provided, however, that with regard to ISOs, the aggregate fair
market value of shares (determined at the time the ISO is granted) with respect
to which ISOs are exercisable for the first time by an employee during any
calendar year may not exceed $100,000.

With regard to ISOs, the exercise price cannot be less than the fair
market value of the Common Stock on the date of grant or 110 percent of such
fair market value in the case of ISOs granted to individuals who hold 10
percent or more of the Common Stock on the date of grant. The exercise price
of NSOs cannot be less than 85 percent of the fair market value of the Common
Stock on the date of grant. Upon exercise of any option, payment for shares as
to which an option is being exercised may be made in cash, in shares of the
Companys Common Stock having an aggregate fair market value on the date of
exercise which is not less than the exercise price of the option, or by a
combination of cash and such shares, as the Board of Directors may determine.

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

Options granted under the 1993 Plan are non-transferable except to the
extent permitted by the agreement evidencing such option; provided, however,
that no option will be transferable by any optionee other than by will or the
laws of descent and distribution.

Terms and Conditions of Restricted Stock Awards

Restricted stock awards granted pursuant to the 1993 Plan entitle the
holder to receive shares of the Companys Common Stock, subject to forfeiture
to the Company if specified conditions are not satisfied by the end of a
specified period. The Board of Directors is to establish a period (the
Restricted Period) at the time a restricted stock award is granted during
which the holder will not be permitted to sell, transfer, pledge, encumber, or
assign the shares of Common Stock subject to the award.

During the Restricted Period, the holder of shares subject to a restricted
stock award will have all of the rights of a shareholder of the Company with
respect to such shares, including the right to vote the shares and to receive
any dividends or other distributions with respect to the shares. Except to the
extent otherwise provided in the restricted stock agreement governing each
restricted stock award, if prior to the expiration of the Restricted Period,
the holder ceases to be an employee or consultant to the Company or its
Affiliates, or any condition established by the Board of Directors for the
release of any restriction has not occurred, all shares of the Common Stock
then subject to any restriction will be forfeited to the Company without
further obligation of the Company to the holder thereof, and all rights to the
holder with respect to such shares will terminate.

The Board of Directors 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) is the holder of the stock,

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and/or any one or more of such persons; provided, that the donee enters
into an agreement with the Company pursuant to which it agrees that the
restricted shares will be subject to the same restrictions in the hands of such
donee as it was in the hands of the donor.

Termination and Amendment

The 1993 Plan will terminate on the earlier of the date on which the 1993
Plan is terminated by the Board of Directors or July 20, 2003. The 1993 Plan
may be amended at any time by the Board of Directors, subject to approval by
shareholders holding a majority of the voting stock of any amendment that will
(i) materially increase the benefits accruing to participants under the 1993
Plan; (ii) increase the number of shares available for issuance or sale
pursuant to the 1993 Plan (other than as permitted in certain circumstances
provided by the 1993 Plan); or (iii) materially modify the requirements as to
eligibility for participation in the 1993 Plan.

Federal Income Tax Consequences

The following discussion summarizes the material federal income tax
consequences of participation in the 1993 Plan. The discussion is general in
nature and does not address issues related to the tax circumstances of any
particular participant in the 1993 Plan. The discussion is based on federal
income tax laws in effect on the date hereof and is, therefore, subject to
possible future changes in law. The discussion does not address state, local
or foreign consequences.

Non-Qualified Stock
Options. There are no tax consequences to the Company or the optionee upon the
grant of an NSO under the 1993 Plan. Upon the exercise of an NSO, an optionee
recognizes ordinary income equal to the difference between the exercise price
for the shares and the fair market value of the shares on the date of exercise.
The Company is entitled to a corresponding tax deduction equal to the amount
of income recognized by the optionee at the time of recognition by the
optionee, provided that the Company meets its federal income and employment tax
withholding obligations and that the deduction is not otherwise disallowed by
the Code.

Incentive Stock Options. An optionee does not recognize income upon the
grant or exercise of an ISO, except that the excess of the fair market value of
the shares at the time of exercise over the option price will be income for
purposes of calculating the optionees alternative minimum tax, if any. An
option loses its status as an ISO if the optionee exercises the ISO (i) more
than three months after the optionee terminates employment or retires for
reasons other than death or disability or (ii) more than one year after the
optionee terminates employment because of disability. If an optionee does not
make a disqualifying disposition (defined below) of an ISO, the gain, if any,
upon a subsequent sale (i.e., the excess of the proceeds received over the
option price) will be long-term capital gain.

For shares acquired through exercise of an ISO, a disqualifying
disposition is a transfer of the shares (i) within two years after the grant
of the ISO or (ii) within one year after the transfer of the shares to the
optionee pursuant to the ISOs exercise. If the optionee makes a disqualifying
disposition, the optionee generally will recognize income in the year of the
disqualifying disposition equal to the excess of the amount received for the
shares over the option price. Of that income, the portion equal to the excess
of the fair market value of the shares at the time the ISO was exercised over
the option price will be ordinary income and the balance, if any, will be
long-term or short-term capital gain, depending on whether the shares were sold
more than one year after the ISO was exercised. If, however, the optionee
sells the shares to an unrelated party at a price that is below the fair market
value of the shares at the time the ISO was exercised and the sale is a
disqualifying disposition, the amount of ordinary income will be limited to the
amount realized on the sale over the option price.

The Company is entitled to a deduction with respect to an ISO only in the
taxable year in which a disqualifying disposition occurs. In that event, the
deduction would be equal to the ordinary income, if any, recognized by the
optionee upon disposition of the shares, provided that the deduction is not
otherwise disallowed under the Code.

Restricted Stock Awards. A participant who receives an award of
restricted stock under the 1993 Plan generally will recognize ordinary income
at the time at which the restrictions on such shares (the Restrictions)
lapse, in an amount equal to the excess of (i) the fair market value of such
shares at the time the Restrictions lapse, over (ii) the price, if any, paid
for such shares. If the participant makes an election with respect to such
shares under Section 83(b) of the Code, not later than 30 days after the date
shares are transferred to the participant pursuant to such award, the
participant will recognize ordinary income at the time of transfer in an amount
equal to the excess of

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(i) the fair market value of the shares covered by the award (determined
without regard to any restriction other than a restriction which by its terms
will never lapse) at the time of such transfer over (ii) the price, if any,
paid for such shares.

A participants tax basis in shares received pursuant to a restricted
stock award granted under the 1993 Plan will be equal to the sum of the price
paid for such shares, if any, and the amount of ordinary income recognized by
such participant with respect to the transfer of such shares or the lapse of
the Restrictions thereon. The participants holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin
immediately after the transfer of such shares to the participant, if a Section
83(b) election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made.

Generally, a deduction will be allowed to the Company, for federal income
tax purposes, in an amount equal to the ordinary income recognized by a
participant with respect to shares awarded pursuant to the 1993 Plan, provided
that such amount constitutes an ordinary and necessary business expense of the
Company and is reasonable.

If, subsequent to the lapse of Restrictions on his or her shares, the
participant sells such shares, the difference, if any, between the amount
realized from such sale and the tax basis of such shares to the holder will be
taxed as long-term or short-term capital gain or loss, depending on whether the
participants holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time.

If a Section 83(b) election is made and, before the Restrictions on the
shares lapse, the shares which are subject to such election are resold to the
Company or are forfeited, (i) no deduction would be allowed to such participant
for the amount included in the income of such participant by reason of such
Section 83(b) election, and (ii) the participant would realize a loss in an
amount equal to the excess, if any, of the amount paid for such shares over the
amount received by the participant upon such resale or forfeiture (which loss
would be a capital loss if the shares are held as a capital asset at such
time). In such event, the Company would be required to include in its income
the amount of any deduction previously allowable to it in connection with the
transfer of such shares.

Description of Other Equity Compensation Agreements

Non-Plan Options. In December 1999, the Companys Board of Directors
granted nonqualified stock options (NSOs) outside the 1993 Plan to three of the
Companys officers for the numbers of shares and upon the terms set forth in
the table above (the Non-Plan Options). The Non-Plan Options were not
submitted to the Companys stockholders for approval.

Administration

The Companys Board of Directors has the sole authority to determine the
terms of awards and other terms, conditions and restrictions of the Non-Plan
Options.

Terms and Conditions of Options

The Non-Plan Options are non-transferable except to the extent permitted
by the agreement evidencing such Non-Plan Option; provided, however, that no
Non-Plan Option will be transferable by any optionee other than by will or the
laws of descent and distribution.

Termination and Amendment

The Non-Plan Options will terminate on December 8, 2009, unless earlier
terminated upon the termination of employment or death of the holder of the
Non-Plan Option. The Non-Plan Options may be amended at any time by the Board
of Directors, subject to approval by the holder of such Non-Plan Option with
respect to any amendment that would materially and adversely affect the rights
of the holder of such Non-Plan Option.

Federal Income Tax Consequences

The following discussion summarizes the material federal income tax
consequences to the holders of the Non-Plan Options. The discussion is general
in nature and does not address issues related to the tax circumstances

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of any particular holder. The discussion is based on federal income tax
laws in effect on the date hereof and is, therefore, subject to possible future
changes in law. The discussion does not address state, local or foreign
consequences.

Non-Qualified Stock Options. There are no tax consequences to the Company
or the optionee upon the grant of a non-qualified stock option. Upon the
exercise of an NSO, an optionee recognizes ordinary income equal to the
difference between the exercise price for the shares and the fair market value
of the shares on the date of exercise. The Company is entitled to a
corresponding tax deduction equal to the amount of income recognized by the
optionee at the time of recognition by the optionee, provided that the Company
meets its federal income and employment tax withholding obligations and that
the deduction is not otherwise disallowed by the Code.

Restricted Stock Award. The Company issued 300,000 shares of restricted
Common Stock to Floyd W. Glisson, its Chairman and Chief Executive Officer, in
connection with his employment agreement dated as of January 1, 2001. This
restricted stock award was not submitted to the Companys stockholders for
approval. See Note 3 Commitments And Contingencies  Deferred Compensation
to the Notes to Consolidated Financial Statements for a more detailed
description of the restricted stock award.




ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial information concerning
the Company and should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operation and the audited
financial statements and notes included in Financial Statements and
Supplementary Data. The balance sheets and statements of operations data as
of and for each of the five years in the period ended June 30, 2002 are derived
from the audited financial statements of the Company. The historical results
are not necessarily indicative of the results of operations to be expected in
the future.

|                                           |  |                                      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |     
|------------------------------------------ |  | ------------------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ----
|                                           |  | Years Ended June 30,                
|                                           |  |                                     
|                                           |  | 2002                                 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                           |  |                                      |        |      |  |      |        |      |  |     
|                                           |  | (in thousands except per share data)
|Statements of Operations Data:             |  |                                      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |     
|Net revenues                               |  | $                                    | 26,404 |      |  | $    | 44,053 |      |  | $    | 17,002 |      |  | $ | 13,972 |      |  | $ | 17,573 |     
|Gross profit                               |  |                                      | 15,345 |      |  |      | 15,811 |      |  |      | 8,593  |      |  |   | 5,719  |      |  |   | 6,623  |     
|Income (loss) from operations              |  |                                      | 3,991  |      |  |      | 3,992  |      |  |      | (2,231 | )    |  |   | (7,248 | )(2) |  |   | (4,660 | )(3)
|Net income (loss)                          |  |                                      | 3,905  |      |  |      | 4,169  |      |  |      | (4,159 | )(1) |  |   | (6,988 | )(2) |  |   | (4,177 | )(3)
|Net income (loss) per common share-basic   |  | $                                    | .43    |      |  | $    | .47    |      |  | $    | (.47   | )(1) |  | $ | (.79   | )(2) |  | $ | (.48   | )(3)
|Net income (loss) per common
share-diluted |  | $                                    | .38    |      |  | $    | .41    |      |  | $    | (.47   | )(1) |  | $ | (.79   | )(2) |  | $ | (.48   | )(3)

(1) During 2000, the Company recorded a charge of $2.0 million ($.23 per share) for the settlement of the shareholder litigation.

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

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

|                                       |  |                |        |      |  |      |        |      |  |      |        |   |  |   |        |  |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                       |  | As of June 30,
|                                       |  |               
|                                       |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                       |  |                |        |      |  |      |        |      |  |     
|                                       |  | (in thousands)
|Balance Sheet Data:                    |  |                |        |      |  |      |        |      |  |      |        |   |  |   |        |  |  |   |        | 
|Working capital                        |  | $              | 8,058  |      |  | $    | 6,150  |      |  | $    | 3,308  |   |  | $ | 4,649  |  |  | $ | 12,091 | 
|Total assets                           |  |                | 20,872 |      |  |      | 22,229 |      |  |      | 10,732 |   |  |   | 16,097 |  |  |   | 17,194 | 
|Current liabilities                    |  |                | 11,260 |      |  |      | 14,005 |      |  |      | 4,834  |   |  |   | 8,050  |  |  |   | 2,435  | 
|Long-term debt                         |  |                | 1,046  |      |  |      |       |      |  |      |       |   |  |   |       |  |  |   |       | 
|Redeemable convertible preferred stock |  |                |       |      |  |      | 4,948  |      |  |      | 4,948  |   |  |   | 4,948  |  |  |   | 4,948  | 
|Stockholders equity (deficit)         |  |                | 8,566  |      |  |      | 3,276  |      |  |      | (1,060 | ) |  |   | 3,099  |  |  |   | 9,811  | 

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|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

Overview

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

The Companys financial position and operating results may be materially
affected by a number of factors, including the timing of receipt, installation
and regulatory approval of any one order, availability of additional capital,
competition and technological change. Historically, three or fewer customers
have accounted for more than 50 percent of annual revenues. (See Business 
Customers and Factors That May Affect Our Future Operating Results).

Critical Accounting Policies and Estimates

The Companys financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States
of America. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. These estimates and assumptions are
affected by managements application of accounting policies. Management of the
Company has discussed the development and selection of these critical
accounting estimates with the audit committee of our board of directors and the
audit committee has reviewed the Companys disclosure relating to them in this
MD&A. Critical accounting policies for the Company include revenue
recognition, accounting for research and development costs, and accounting for
legal contingencies.

Revenue Recognition

Revenue for hardware sales is recognized when hardware components and the
primary application software have been installed and are available for the
customers use. The Company accounts for the licensing of software in
accordance with American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, Software Revenue Recognition. The
application of SOP 97-2 requires judgment, including whether a software
arrangement includes multiple elements, and if so, whether vendor-specific
objective evidence (VSOE) of fair value exists for those elements. Revenue
earned on software arrangements involving multiple elements is required to be
allocated to each element based on the relative fair values of the elements.
The Companys sales of software products generally include multiple elements
such as installation of software, training, post contract customer support and
maintenance services. Changes to the elements in a software arrangement, the
ability to identify VSOE for those elements, the fair value of the respective
elements, and the specific terms of the agreement with the customer, could
materially impact the amount of earned and unearned revenue. Judgment is also
required to assess whether future releases of certain software represent new
products or upgrades and enhancements to existing products. Software license
revenue is recognized upon acceptance of the software and the criteria for
customer acceptance are generally defined by agreement. The only undelivered
element at the time of revenue recognition for software is generally support
and maintenance services. The Company uses renewal rates to establish VSOE for
support and maintenance services. Revenue allocated to support and maintenance
is recognized ratably over the maintenance term.

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

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

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Research and Development Costs

The Company accounts for research and development costs in accordance with
several accounting pronouncements, including SFAS 2, Accounting for Research
and Development Costs,and SFAS 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Other-wise Marketed.SFAS 86 specifies that
costs incurred internally in creating a computer software product should be
charged to expense when incurred as research and development until
technological feasibility has been established for the product. Once
technological feasibility is established, all software costs should be
capitalized until the product is available for general release to customers.
Judgment is required in determining when the technological feasibility of a
product is established. The Company has determined that technological
feasibility for its products is reached shortly before the products are
released to customers. Costs incurred after technological feasibility is
established are not material, and accordingly, the Company expenses all
research and development costs when incurred.

Legal Contingencies

The Company is subject to various legal proceedings and claims, the
outcomes of which are subject to significant uncertainty. SFAS 5, Accounting
for Contingencies,requires that an estimated loss from a loss contingency
should be accrued by a charge to income if it is probable that an asset has
been impaired or a liability has been incurred and the amount of the loss can
be reasonably estimated. Disclosure of a contingency is required if there is
at least a reasonable possibility that a loss has been incurred. The Company
evaluates, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss.
Changes in these factors could materially impact the Companys financial
condition, results of operations and cash flow.

Results of Operations

Comparison of the Years Ended June 30, 2002 and 2001

The Companys net revenues during the year ended June 30, 2002 were $26.4
million, a decrease of $17.7 million over the prior years revenues of $44.1
million. The decrease in revenues is primarily attributable to contractual
restrictions on the Companys ability to recognize revenue under its contract
with Station Casinos until certain additional bonuses are installed; the
general slowdown that occurred after September 11, 2001; and fewer hardware
deliveries to and software installations for large customers by the Company
compared to the year ended June 30, 2001. The Companys revenues fluctuate
significantly based on the timing of the delivery of any large order. Revenues
in fiscal 2002 included $1.2 million in royalty revenue representing 8% of the
Companys gross profit for fees the Company received from Mikohn Gaming
Corporation for the license of certain of its bonusing patents in connection
with the settlement of litigation. The balance of revenues was primarily
comprised of Acres Advantage sales to IGT for installations at MGM MIRAGE
casinos, to MGM Mirage and to four other domestic casinos and to three
international casinos. Revenues in fiscal 2001 were primarily comprised of
Acres Advantage sales to IGT for installations at MGM MIRAGE casinos, to
Station Casinos Inc., seven other domestic casinos and two international
casinos.

Component materials purchased primarily from computer and electronics
vendors comprised 56 percent of the cost of revenues in fiscal 2002 and 76
percent in fiscal 2001. Manufacturing, procurement, software customization,
service and installation labor and expenses accounted for the remaining cost of
revenues. Changes in the components of the cost of revenues result from
changes in the mix of products sold. Materials comprised a lower percentage of
cost of revenues in 2002 because of a lower percentage of hardware sales.

Gross profit margin increased to 58% in fiscal 2002 from 36% in fiscal
2001. This increase resulted primarily because of a greater percentage of
higher margin software sales and royalty fees, and a lower quantity of
discounts to large customers as compared to fiscal 2001.

The Companys research and development expenses increased to $5.7 million
in fiscal 2002, from $4.7 million in fiscal 2001. This increase resulted
primarily from an overall average increase in the number of research and
development personnel and from expenses for prototypes and outside services to
support the Companys new product and product enhancement efforts. The Company
expects to continue to spend a significant portion of its revenue on research
and development in order to enhance and expand the capabilities of Acres
Advantage, Acres Cashless, Acres Bonusing and develop additional bonus games.

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Selling, general and administrative costs decreased to $5.7 million in
fiscal 2002 from $7.1 million in the prior year, primarily as a result of a
reduction in legal expenses and management incentive bonuses during the year
compared to fiscal 2001.

Other expense, net of other income, was $86,000 for fiscal 2002, compared
to $177,000 of other income for fiscal 2001. The increase in other expense
during fiscal 2002, is primarily attributed to the increase in interest
expense, which includes the amortization of the issuance costs and discount on
the 6% convertible subordinated debentures issued December 2001.

The Company has cumulative net operating losses of approximately $15.3
million available to offset future taxable income through 2020. The full
realizability of these net operating loss carryforwards is uncertain and the
Company has provided a valuation allowance for the entire amount. Net
operating loss carryforwards were utilized to reduce taxable income in fiscal
2002 and 2001, and therefore no income tax provision has been recorded. Net
income for the year ended June 30, 2002 was $3.9 million ($0.38 per share)
compared to $4.2 million ($0.41 per share) for the year ended June 30, 2001.

Comparison of the Years Ended June 30, 2001 and 2000

The Companys net revenues during the year ended June 30, 2001 were $44.1
million, an increase of $27.1 million over the prior years revenues of $17.0
million. The increase in revenues was primarily attributable to increased
sales to large, multi-casino operators as opposed to sales to individual casino
operators. The Companys revenues fluctuate significantly based on the timing
of the delivery of any large order. Revenues in fiscal 2001 were primarily
comprised of Acres Advantage sales to IGT for installations at MGM MIRAGE
casinos, to Station Casinos Inc., a multi-casino operator, to seven other
domestic casinos and to two international casinos. Revenues in fiscal 2000
were primarily comprised of Acres Advantage sales to one domestic casino and
three international casinos.

Component materials purchased primarily from computer and electronics
vendors comprised 76 percent of the cost of revenues in fiscal 2001 and 50
percent in fiscal 2000. Manufacturing, procurement, software customization,
service and installation labor and expenses accounted for the remaining cost of
revenues. Changes in the components of the cost of revenues result from
changes in the mix of products sold. Revenues in fiscal 2001 included a
greater percentage of hardware sales, resulting in materials comprising a
higher percentage of cost of revenues.

Gross profit margin decreased to 36% in fiscal 2001 from 51% in fiscal
2000. This decrease resulted primarily from changes in the mix of products
sold. Revenues in fiscal 2001 included a greater percentage of hardware sales,
which typically have lower gross profit margins than software sales, and
included a greater number of quantity discounts to large customers as compared
to fiscal 2000.

The Companys research and development expenses decreased to $4.7 million
in fiscal 2001, from $5.1 million in fiscal 2000. This decrease resulted
primarily from a reduction in depreciation and amortization and the
reallocation of engineering resources between research and development and
installation and service, which are classified as cost of goods sold.

Selling,
general and administrative costs increased to $7.1 million in fiscal 2001 from
$5.7 million in the prior year. This increase resulted primarily from
incentive bonuses to employees and an increase in occupancy, compliance and
personnel recruiting expenses to support the significant increase in revenue
and expanded customer base.

In September 2000, the Company and the plaintiffs agreed in principle to
settle the outstanding shareholder litigation. Under the terms of the
settlement, the Company became obligated to pay $435,000 and could elect to
make additional cash payments aggregating $1.6 million by January 31, 2002 or
issue warrants to purchase an aggregate of one million shares of the Companys
Common Stock at $2.50 per share, valued at $1.6 million. The Company recorded
a charge of $2.0 million in the year ended June 30, 2000, to account for the
settlement. In April 2001, the Company selected the cash payment option.

Other income, primarily comprised of interest income, increased by $95,000
as a result of increased balances of invested cash and equivalents.

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Aggregate Indebtedness and Fixed Payment Obligations

The Company leases its office facilities, certain office equipment and
service vehicles under operating leases that extend through June 30, 2006.
Future minimum lease payments under these non-cancelable operating leases as of
June 30, 2002 are $882,000, $200,000, $42,000 and $7,600 in 2003, 2004, 2005
and 2006, respectively. Total lease expense was $969,000, $832,000 and
$786,000 for the years ended June 30, 2002, 2001 and 2000, respectively.

On February 21, 2002, the Company issued an unsecured promissory note to
IGT in the amount of $494,000 to settle amounts previously in dispute. The
note bears interest at 4.75% payable monthly and principal payments of $25,000
due quarterly for three years, with the unpaid balance due at maturity.

On December 21, 2001, the Company sold to three institutional investors
$5,000,000 principal amount of 6% convertible subordinated debentures that are
convertible into shares of the Companys common stock at $4.6433 per share.
The investors also acquired warrants to purchase 177,674 shares of the
Companys common stock at an exercise price of $4.6433 per share. Interest on
the debentures at the rate of 6% is payable semi-annually starting in April
2002. Principal payments of $300,000 are due monthly from June 2002 to August
2003 and principal payments of $500,000 are due monthly from September 2003
until the principal is repaid no later than December 21, 2003. The Company may
elect to pay the principal of and interest on the debentures in shares of its
common stock at a discounted price rather than cash, in the case of principal
payments, or market price, in the case of interest payments, as more fully
described below. The Company also issued a warrant to purchase 75,317 shares
of its common stock at an exercise price of $4.6433 per share to the placement
agent in connection with the sale of the debentures and warrants.

The Companys long-term indebtedness and fixed payment obligations are
summarized by fiscal year below.

|                                     |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |   | 
|------------------------------------ | ----------------------------------- |  | -------------- | ----- | ---- |  | ----- | ----- | ---- |  | ---- | --- | ---------- |  | - | - |  |  | - | - |  |  | - | - | 
|                                     |                                     |  | 2003           |       | 2004 |  | 2005  |       | 2006 |  | 2007 |     | Thereafter
|                                     |                                     |  |                |       |      |  |       |       |      |  |      |     |           
|                                     |                                     |  | (in thousands)
|Long-Term Indebtedness               |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |  
|                                     | Convertible subordinated debentures |  |                | 3,600 |      |  |       | 1,100 |      |  |      |    |            |  |   |  |  |  |   |  |  |  |   |  | 
|                                     | Note payable                        |  |                | 100   |      |  |       | 100   |      |  |      | 269 |            |  |   |  |  |  |   |  |  |  |   |  | 
|Fixed Payment Obligations            |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |  
|                                     | Nevada main office facility         |  |                | 538   |      |  |       |      |      |  |      |    |            |  |   |  |  |  |   |  |  |  |   |  | 
|                                     | Nevada contiguous office facility   |  |                | 114   |      |  |       |      |      |  |      |    |            |  |   |  |  |  |   |  |  |  |   |  | 
|                                     | Oregon office facility              |  |                | 183   |      |  |       | 183   |      |  |      | 30  |            |  |   |  |  |  |   |  |  |  |   |  | 
|                                     | Other
office equipment/leases       |  |                | 47    |      |  |       | 17    |      |  |      | 12  |            |  |   | 8 |  |  |   |  |  |  |   |  | 
|                                     |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |  
|Total Indebtedness and Fixed Payment |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |  
|Obligations                          |                                     |  | 4,582          |       |      |  | 1,400 |       |      |  | 311  |     |            |  | 8 |   |  |  |  |   |  |  |  |  
|                                     |                                     |  |                |       |      |  |       |       |      |  |      |     |            |  |   |   |  |  |   |   |  |  |   |  

At June 30, 2002, the Company had $875,000 outstanding under
non-cancelable purchase commitments and safety-stock agreements with suppliers.
These commitments generally require that the Company take physical delivery of
and pay for the items within 180 days.

Liquidity and Capital Resources

As of June 30, 2002, the Company had cash and equivalents of $7.3 million.
The Company invests its cash in highly liquid marketable securities with
maturities of three months or less at date of purchase.

On December 21, 2001, the Company sold $5.0 million principal amount of 6%
convertible subordinated debentures and warrants in a private placement.
Interest on the debentures at the rate of 6% is due semi-annually starting in
April 2002. Principal payments of $300,000 are due monthly from June 2002 to
August 2003, and principal payments of $500,000 are due monthly from September
2003 until the principal is repaid.

Effective January 28, 2002, the Company used the proceeds from the sale of
its 6% convertible subordinated debentures to redeem all of the 519,481
outstanding shares of its Series A Convertible Preferred Stock

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for an aggregate cost of $5.0 million.

Pursuant to the settlement agreement with respect to its shareholder
litigation, the Company paid $2.0 million in cash in fiscal 2002, of which the
final $654,000 was paid on January 30, 2002.

At June 30, 2002, the Company had collected $3.6 million in advance
deposits against its order backlog of approximately $20.0 million. Backlog,
however, may not be a meaningful indication of future sales. Sales are made
pursuant to purchase orders or sales agreements for specific system
installations and products are often delivered within a few months after
receipt of an order. The Company does not have any material ongoing long-term
sales contracts. The Companys revenues and results of operations may be
materially affected, in the near term, by the receipt, loss or delivery over an
extended period of time of any one order.

The Company believes that it can complete the deliveries and installations
comprising its order backlog, and obtain and complete enough additional sales
to provide sufficient operating cash flow for fiscal 2003. Failure to
successfully deliver the products comprising the order backlog, failure to
obtain additional orders or failure to subsequently collect the resulting
revenues could have a material adverse affect on the Companys liquidity. The
Company could reduce operating expenses to improve liquidity, by reducing
personnel and other expenses.

In August 2002, the Company entered into a loan agreement with a
commercial bank to provide up to $3.0 million in financing secured by inventory
and accounts receivable. The agreement contains certain financial covenants
including minimum net worth, minimum cash flow, net income and operating income
requirements.

The Company made capital expenditures of $445,000, $947,000 and $731,000
in 2002, 2001 and 2000, respectively, primarily for computers and equipment to
support research and development efforts. During fiscal 2002 and fiscal 2001,
the Company incurred no capitalizable software development costs. During
fiscal 2000, the Company capitalized $326,000 of software development costs
incurred in the creation of additional modules of the Acres Advantage product
line.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations and Statement No. 142, Goodwill and Other
Intangible Assets. SFAS 141 is effective as follows: (a) use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to
business combinations completed before July 1, 2001 which were accounted for by
the purchase method.

SFAS 142 is effective for fiscal years beginning after December 15, 2001
and applies to all goodwill and other intangible assets recognized in an
entitys statement of financial position at that date, regardless of when those
assets were initially recognized.

In August 2001, the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Obligations Associated with the Retirement of
Long-Lived Assets. The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal
years beginning after June 15, 2002.

In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and, generally, is to be applied
prospectively.

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145 (SFAS 145), Rescission of FASB Statements Nos. 4, 44, and 64 and
Amendment of FASB Statement No. 13. SFAS 145 addresses the presentation for
losses on early retirements of debt in the statement of operations. The
Company has adopted SFAS 145 and will not present losses on early retirements
of debt as an extraordinary item. Adoption of SFAS 145 has had no impact on
the Companys financial position, results of operations or cash
flows.

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In June 2002, the Financial Accounting Standards Board issued Statement
No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities. The provisions of SFAS 146 become effective for exit or disposal
activities commenced subsequent to December 31, 2002.

The Company is currently evaluating the provisions of SFAS 142, SFAS 143,
SFAS 144 and SFAS 146 and it does not anticipate that the effects of these
changes will have a material impact on its financial position, results of
operations or cash flows. The adoption of SFAS 141 had no impact on the
Companys financial position, results of operations or cash flows.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not invest in market risk sensitive instruments, except
that it did enter into forward currency exchange contracts during fiscal 2000
to manage a well-defined foreign currency risk related to a sale in Australia
denominated in Australian dollars. The counterparty to the foreign exchange
contracts was a large bank, resulting in minimal risk of credit loss due to
non-performance by the bank. The purpose of these forward exchange contracts
was to secure for the Company the U.S. dollar value of the sale that was
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts are substantially offset by the impact
of such changes on the value of the related sales contracts and accounts
receivable. The Companys results of operations were not affected by the
foreign exchange contract. The Company had not entered into any foreign
exchange contracts during the fiscal years 2002 and 2001, and has no current
plans to enter into any such contracts. (See Factors That May Affect Our
Future Operating Results  Other Risks  Foreign Currency Exchange Rate Risk).




FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

You should carefully consider the risks and uncertainties described below
and the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we
currently deem immaterial also may affect our business. If any of the
following risks actually occur, our business, financial condition and operating
results could be materially adversely affected and the trading price of our
common stock could decline.

Changes in Business and Economic Conditions Generally and in the Gaming
Industry; Economic Impact of Terrorist Attacks

The strength and profitability of the Companys business depends on the
overall demand for its products and growth in the gaming industry. Gaming
industry revenues are sensitive to general economic conditions and generally
rise or fall rapidly in relation to the condition of the overall economy. In a
period of reduced demand, such as resulted from the terrorist attacks that
occurred on September 11, 2001, the Company may not be able to lower its costs
rapidly enough to counter a decrease in revenues.

All of the Companys customers are in the gaming industry and a
significant portion of those customers rely on tourism involving air travel for
a large portion of their business. The Company expects that any significant
sustained reduction in air travel and tourism will negatively affect the
business of many of the Companys casino customers. This in turn may lead to a
decrease in sales of the Companys products to its casino customers and a
corresponding decrease in the Companys revenues.

Liquidity

Historically, the Companys operations have used cash. Although
management believes that sufficient revenues will be generated during fiscal
2003 to meet operating, product development and other cash flow requirements,
such revenues will depend on the completion of existing orders and the receipt
of future orders.

On December 21, 2001, the Company sold $5.0 million principal amount of 6%
convertible subordinated debentures and warrants in a private placement.
Interest on the debentures at the rate of 6% is due semi-annually starting in
April 2002. Principal payments of $300,000 are due monthly from June 2002 to
August 2003 and principal payments of $500,000 are due monthly from September
2003 until the principal is repaid.

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Sufficient funds to maintain new product development efforts and expected
levels of operations may not be available and additional capital, if and when
needed by the Company, may not be available on terms acceptable to Company. If
the Company cannot obtain sufficient capital on acceptable terms when needed,
the Company may not be able to carry out its planned product development
efforts and level of operations, which inability could have a material adverse
effect on the Companys financial condition and results of operations.

Reliance on a Few Major Customers

The Company is dependent on sales of its products to a limited number of
casino operators for a substantial portion of its revenues in any given fiscal
year. Historically, three or fewer customers have accounted for more than 50%
of annual revenues. The following factors could have a material adverse effect
on the Companys revenues:



| |  |  | a significant reduction, delay or cancellation of orders from
one or more significant customers; or
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | a decision by one or more significant customers to select
products provided by a competitor.       

The Company expects its operating results to continue to depend on sales
of its products to a relatively small number of customers.

Other Risks

Litigation.The Company is engaged in a variety of litigation as more
fully discussed in Item 3. Legal Proceedings. This litigation is expensive
and could have a material adverse effect on the Company. Additionally, an
unfavorable outcome in one or more of these suits could have a material adverse
effect on the Company.

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

Government Regulation; Potential Restrictions on Sales. The Company is
subject to gaming regulations in each jurisdiction in which its products are
sold or are used by persons licensed to conduct gaming activities. The
Companys products generally are regulated as associated equipment, pursuant
to which gaming regulators have discretion to subject the Company, its
officers, directors, key employees, other affiliates and certain shareholders
to licensing, approval and suitability requirements. In the event that gaming
authorities determine that any person is unsuitable to act in such capacity,
the Company would be required to terminate its relationship with such person,
and under certain circumstances, the Company has the right to redeem its
securities from persons who are found unsuitable. Products offered and
expected to be offered by the Company include features that are not available
on products currently in use. These new features may, in some cases, result in
additional regulatory review and licensing requirements for the products or the
Company. Compliance with such regulatory requirements may be time consuming
and expensive, and may delay or prevent a sale in one or more jurisdictions.
In addition, associated equipment generally must be approved by the regulatory
authorities for use by each licensed location within the jurisdiction,
regardless of whether the Company is subject to licensing, approval or
suitability requirements. Failure by the Company to obtain, or the loss or
suspension of, any necessary licenses, approvals or suitability findings, may
prevent the Company from selling or distributing its product in such
jurisdiction. Such results may have a material adverse effect on the Company.
The Company often enters into contracts that are contingent upon the Company
and/or the customer obtaining the necessary regulatory approvals to sell or use
the Companys products or to operate

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a casino. Failure to timely obtain such approvals may result in the
termination of the contract and the return of amounts paid pursuant to such
contract.

Availability of hardware components.Certain of the Companys hardware
components have long lead times and may be difficult to obtain within a
reasonable period of time. Additionally, components can be discontinued by the
Companys vendors requiring modifications to the Companys hardware to utilize
similar, but more readily available, components. The inability to obtain
components within a reasonable period of time could negatively affect the
receipt or delivery of orders.

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

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

Management of Growth; Liquidity. To compete effectively and to manage
future growth, the Company must continue to improve its financial and
management controls, reporting systems and procedures on a timely basis and
expand, train and manage its employees. Any failure by the Company to
implement and improve any of the foregoing could have a material adverse effect
on the Companys business, operating results and financial condition.

Purchase Commitment Contingencies.Pursuant to the Companys arrangements
with contract manufacturers, the Company may have to pay for materials it
directed such manufacturers to purchase on the Companys behalf if the Company
fails to take delivery of such materials within a reasonable period of time,
generally no longer than a few months. If the Company were obligated to pay
for a significant amount of materials that were not included in finished
products, its operating results and financial condition could be materially,
adversely affected.

Foreign Currency Exchange Rate Risk. To the extent that the Company sells
products under contracts denominated in other than U.S. dollars, the Company is
subject to foreign currency exchange risks. The Company can manage these risks
by entering into hedging arrangements in the foreign exchange market. These
hedging arrangements may be imperfect and may increase the Companys cost of
doing business.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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|----------------------------------------------- |  | ---- | -- | 
|                                                |  | Page
|                                                |  |     
|Reports of Independent Accountants              |  |      | 28 | 
|Consolidated Balance Sheets                     |  |      | 30 | 
|Consolidated Statements of Operations           |  |      | 31 | 
|Consolidated Statements of Stockholders Equity |  |      | 32 | 
|Consolidated Statements of Cash Flows           |  |      | 33 | 
|Notes to Consolidated Financial Statements      |  |      | 34 | 

27



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##### Table of Contents



Report of Independent Accountants



To the Board of Directors and Stockholders of
Acres Gaming Incorporated and Subsidiary:



In our opinion, the accompanying consolidated balance sheet as of June 30,
2002, and the related consolidated statements of operations, stockholders
equity and cash flows present fairly, in all material respects, the financial
position of Acres Gaming Incorporated and Subsidiary at June 30, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. The consolidated
financial statements of Acres Gaming Incorporated and Subsidiary as of June 30,
2001, and for each of the two years in the period ended June 30, 2001, were
audited by other independent accountants who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in
their report dated August 16, 2001.



PricewaterhouseCoopers LLP
Las Vegas, Nevada
July 26, 2002

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##### Table of Contents



THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

Report of Independent Public Accountants

To the Stockholders of Acres Gaming Incorporated:

We have audited the accompanying consolidated balance sheets of Acres
Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 2001
and 2000 and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended June 30,
2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Acres Gaming Incorporated
and subsidiary as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States.



ARTHUR ANDERSEN LLP

Las Vegas, Nevada
August 16, 2001

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ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
ASSETS

|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |         |        | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | --------------------------------- | ------ | ---- | ------ | ------- | ------ | 
|                                           |                                                                                                                                     |                             |        | 2002                              |        | 2001
|                                           |                                                                                                                                     |                             |        |                                   |        |     
|                                           |                                                                                                                                     |                             |        | (in thousands, except share data)
|CURRENT ASSETS:                            |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           | Cash and equivalents                                                                                                                |                             | $      | 7,312                             |        |      | $      | 11,958  |       
|                                           | Receivables, net of allowance of $932 and $592, respectively                                                                        |                             |        | 7,582                             |        |      |        | 3,266   |       
|                                           | Inventories                                                                                                                         |                             |        | 3,985                             |        |      |        | 4,764   |       
|                                           | Prepaid expenses                                                                                                                    |                             |        | 439                               |        |      |        | 167     |       
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                     | Total current assets        |        |                                   | 19,318 |      |        |         | 20,155 | 
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|PROPERTY AND EQUIPMENT:                    |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           | Furniture and fixtures                                                                                                              |                             |        | 1,944                             |        |      |        | 2,006   |       
|                                           | Equipment                                                                                                                           |                             |        | 3,618                             |        |      |        | 4,278   |       
|                                           | Leasehold improvements                                                                                                              |                             |        | 486                               |        |      |        | 439     |       
|                                           | Accumulated depreciation                                                                                                            |                             |        | (5,280                            | )      |      |        | (5,422  | )     
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                     | Property and equipment, net |        |                                   | 768    |      |        |         | 1,301  | 
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|OTHER ASSETS, NET                          |                                                                                                                                     |                             | 786    |                                   |        |      | 773    |        
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|TOTAL ASSETS                               |                                                                                                                                     | $                           | 20,872 |                                   |        | $    | 22,229 |        
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY      
|CURRENT LIABILITIES:                       |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           | Accounts payable                                                                                                                    |                             | $      | 2,277                             |        |      | $      | 3,104   |       
|                                           | Accrued compensation                                                                                                                |                             |        | 654                               |        |      |        | 1,270   |       
|                                           | Accrued other expenses                                                                                                              |                             |        | 254                               |        |      |        | 958     |       
|                                           | Deferred revenue                                                                                                                    |                             |        | 4,375                             |        |      |        | 6,663   |       
|                                           | Convertible subordinated debentures, current                                                                                        |                             |        | 3,600                             |        |      |        |        |       
|                                           | Note payable, current                                                                                                               |                             |        | 100                               |        |      |        |        |       
|                                           | Litigation settlement obligation                                                                                                    |                             |        |                                  |        |      |        | 2,010   |       
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                     | Total current liabilities   |        |                                   | 11,260 |      |        |         | 14,005 | 
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           | Convertible subordinated debentures, net of current
portion and discount                                                            |                             |        | 677                               |        |      |        |        |       
|                                           | Note payable, net of current portion                                                                                                |                             |        | 369                               |        |      |        |        |       
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                     | Total liabilities           |        |                                   | 12,306 |      |        |         | 14,005 | 
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                     |                             |        |                                   |        |      |        |        
|REDEEMABLE CONVERTIBLE PREFERRED STOCK     |                                                                                                                                     |                             |       |                                   |        |      | 4,948  |        
|STOCKHOLDERS EQUITY:                      |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           | Common Stock, $.01 par value, 50 million shares authorized,
9.4 million and 9.3 million shares issued and
outstanding, respectively |                             |        | 94                                |        |      |        | 93      |       
|                                           | Additional paid-in capital                                                                                                          |                             |        | 22,003                            |        |      |        | 20,944  |       
|                                           | Deferred stock-based compensation                                                                                                   |                             |        | (552                              | )      |      |        | (877    | )     
|                                           | Accumulated deficit                                                                                                                 |                             |        | (12,979                           | )      |      |        | (16,884 | )     
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                     | Total stockholders equity  |        |                                   | 8,566  |      |        |         | 3,276  | 
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                     | $                           | 20,872 |                                   |        | $    | 22,229 |        
|                                           |                                                                                                                                     |                             |        |                                   |        |      |        |        

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |       |        | 
|------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------------------------- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                      |                                     |                          |        | 2002                                  |        | 2001 |        | 2000 
|                                      |                                     |                          |        |                                       |        |      |        |      
|                                      |                                     |                          |        | (in thousands, except per share data)
|NET REVENUES                          |                                     | $                        | 26,404 |                                       |        | $    | 44,053 |       |        | $ | 17,002 |      
|COST OF REVENUES                      |                                     |                          | 11,059 |                                       |        |      | 28,242 |       |        |   | 8,409  |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|GROSS PROFIT                          |                                     |                          | 15,345 |                                       |        |      | 15,811 |       |        |   | 8,593  |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|OPERATING EXPENSES:                   |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|                                      | Research and development            |                          |        | 5,700                                 |        |      |        | 4,739 |        |   |        | 5,097 |       
|                                      | Selling, general and administrative |                          |        | 5,654                                 |        |      |        | 7,080 |        |   |        | 5,727 |       
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|                                      |                                     | Total operating expenses |        |                                       | 11,354 |      |        |       | 11,819 |   |        |       | 10,824 | 
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|INCOME (LOSS) FROM OPERATIONS         |                                     |                          | 3,991  |                                       |        |      | 3,992  |       |        |   | (2,231 | )    
|SETTLEMENT OF LITIGATION              |                                     |                          |       |                                       |        |      |       |       |        |   | (2,010 | )    
|OTHER INCOME (EXPENSE), net           |                                     |                          | (86    | )                                     |        |      | 177    |       |        |   | 82     |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS)                     |                                     | $                        | 3,905  |                                       |        | $    | 4,169  |       |        | $ | (4,159 | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS) PER SHARE  BASIC   |                                     | $                        | .43    |                                       |        | $    | .47    |       |        | $ | (.47   | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS) PER SHARE  DILUTED |                                     | $                        | .38    |                                       |        | $    | .41    |       |        | $ | (.47   | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |        |  
|--------------------------- | ------------------------------------------ |  | -------------- | --- | ---------- | - | ----------- | - | -------- | - | ------------ | --- | ----- | - | ------- | ------ | - | - | ---- | ---- | - | - | ------ | ------ | -
|                            |                                            |  | Common Stock   |     | Additional |   |             |   |          |   |              |     |       |   |         |        |  
|                            |                                            |  |                |     | Paid-In    |   | Accumulated |   | Deferred |   |              |     |      
|                            |                                            |  | Shares         |     | Amount     |   | Capital     |   | Deficit  |   | Compensation |     | Total
|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |      
|                            |                                            |  | (in thousands)
|Balance as of June 30, 1999 |                                            |  | 8,913          |     |            | $ | 89          |   |          | $ | 19,904       |     |       | $ | (16,894 | )      |   | $ |     |      |   | $ | 3,099  |       
|                            | Net loss                                   |  |                |    |            |   |             |  |          |   |              |    |       |   |         | (4,159 | ) |   |      |     |   |   |        | (4,159 | )
|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 2000 |                                            |  | 8,913          |     |            |   | 89          |   |          |   | 19,904       |     |       |   | (21,053 | )      |   |   |     |      |   |   | (1,060 | )     
|                            | Issuance of common stock                   |  |                | 57  |            |   |             | 1 |          |   |              | 68  |       |   |         |       |   |   |      |     |   |   |        | 69     |  
|                            | Issuance of restricted
common stock        |  |                | 300 |            |   |             | 3 |          |   |              | 972 |       |   |         |       |   |   |      | (975 | ) |   |        |       |  
|                            | Amortization of
deferred compensation      |  |                |    |            |   |             |  |          |   |              |    |       |   |         |       |   |   |      | 98   |   |   |        | 98     |  
|                            | Net income                                 |  |                |    |            |   |             |  |          |   |              |    |       |   |         | 4,169  |   |   |      |     |   |   |        | 4,169  |  
|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 2001 |                                            |  | 9,270          |     |            |   | 93          |   |          |   | 20,944       |     |       |   | (16,884 | )      |   |   | (877 | )    |   |   | 3,276  |       
|                            | Issuance of common stock                   |  |                | 92  |            |   |             | 1 |          |   |              | 339 |       |   |         |       |   |   |      |     |   |   |        | 340    |  
|                            | Issuance of common
stock purchase warrants |  |                |    |            |   |             |  |          |   |              | 720 |       |   |         |       |   |   |      |     |   |   |        | 720    |  
|                            | Amortization of
deferred compensation      |  |                |    |            |   |             |  |          |   |              |    |       |   |         |       |   |   |      | 325  |   |   |        | 325    |  
|                            | Net income                                 |  |                |    |            |   |             |  |          |   |              |    |       |   |         | 3,905  |   |   |      |     |   |   |        | 3,905  |  
|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 2002 |                                            |  | 9,362          |     |            | $ | 94          |   |          | $ | 22,003       |     |       | $ | (12,979 | )      |   | $ | (552 | )    |   | $ | 8,566  |       
|                            |                                            |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |        |   |       |        |  
|----------------------------------------------- | --------------------------------------------------------------------------------- | - | ------------------------------------------------- | ---------------------------------------- | - | -------------- | ------ | ----- | - | ----- | ------ | ------ | - | ----- | ------ | -
|                                                |                                                                                   |   |                                                   |                                          |   | 2002           |        | 2001  |   | 2000 
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |      
|                                                |                                                                                   |   |                                                   |                                          |   | (in thousands)
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                | Net income (loss)                                                                 |   | $                                                 | 3,905                                    |   |                | $      | 4,169 |   |       | $      | (4,159 | )
|                                                | Adjustments to reconcile net income (loss) to net cash
from operating activities: |   |                                                   |                                          |   |                |        |       |   |       |        |        |  
|                                                |                                                                                   |   | Depreciation and amortization                     |                                          |   | 1,251          |        |       |   | 1,532 |        |        |   | 1,891 |       
|                                                |                                                                                   |   | Amortization of debt issuance costs               |                                          |   | 170            |        |       |   |      |        |        |   |      |       
|                                                |                                                                                   |   | Amortization of debt discount                     |                                          |   | 222            |        |       |   |      |        |        |   |      |       
|                                                |                                                                                   |   | Amortization of deferred stock-based compensation |                                          |   | 325            |        |       |   | 98    |        |        |   |      |       
|                                                |                                                                                   |   | Provision for doubtful accounts                   |                                          |   | 340            |        |       |   | 577   |        |        |   |      |       
|                                                |                                                                                   |   | Changes in assets and liabilities:                |                                          |   |                |        |       |   |       |        |        |   |       |       
|                                                |                                                                                   |   |                                                   | Receivables                              |   |                | (4,656 | )     |   |       | (302   | )      |   |       | (1,965 | )
|                                                |                                                                                   |   |                                                   | Inventories                              |   |                | 779    |       |   |       | (1,035 | )      |   |       | 1,180  |  
|                                                |                                                                                   |   |                                                   | Prepaid expenses                         |   |                | (272   | )     |   |       | (84    | )      |   |       | 182    |  
|                                                |                                                                                   |   |                                                   | Accounts payable and accrued expenses    |   |                | (1,653 | )     |   |       | 1,353  |        |   |       | 81     |  
|                                                |                                                                                   |   |                                                   | Accrued litigation settlement obligation |   |                | (2,010 | )     |   |       |       |        |   |       | 2,010  |  
|                                                |                                                                                   |   |                                                   | Deferred revenue                         |   |                | (2,288 | )     |   |       | 5,808  |        |   |       | (3,297 | )
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                |                                                                                   |   |                                                   | Net cash from operating activities       |   |                | (3,887 | )     |   |       | 12,116 |        |   |       | (4,077 | )
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                | Purchase of property and equipment                                                |   |                                                   | (445                                     | ) |                |        | (947  | ) |       |        | (731   | )
|                                                | Capitalized software costs                                                        |   |                                                   |                                         |   |                |        |      |   |       |        | (326   | )
|                                                | Other, net                                                                        |   |                                                   | 104                                      |   |                |        | (69   | ) |       |        | (26    | )
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                |                                                                                   |   |                                                   | Net cash from investing activities       |   |                | (341   | )     |   |       | (1,016 | )      |   |       | (1,083 | )
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                | Redemption of preferred stock                                                     |   |                                                   | (5,000                                   | ) |                |        |      |   |       |        |       |  
|                                                | Issuance of common stock, net                                                     |   |                                                   | 40                                       |   |                |        | 69    |   |       |        |       |  
|                                                | Proceeds from convertible subordinated debentures                                 |   |                                                   | 5,000                                    |   |                |        |      |   |       |        |       |  
|                                                | Debt issuance costs                                                               |   |                                                   | (433                                     | ) |                |        |      |   |       |        |       |  
|                                                | Payments on note payable                                                          |   |                                                   | (25                                      | ) |                |        |      |   |       |        |       |  
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|                                                |                                                                                   |   |                                                   | Net cash from financing activities       |   |                | (418   | )     |   |       | 69     |        |   |       |       |  
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS |                                                                                   |   | (4,646                                            | )                                        |   |                | 11,169 |       |   |       | (5,160 | )     
|CASH AND EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                   |   | 11,958                                            |                                          |   |                | 789    |       |   |       | 5,949  |       
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       
|CASH AND EQUIVALENTS AT END OF YEAR             |                                                                                   | $ | 7,312                                             |                                          |   | $              | 11,958 |       |   | $     | 789    |       
|                                                |                                                                                   |   |                                                   |                                          |   |                |        |       |   |       |        |       

Supplemental Cash Flow Disclosures:

In fiscal year 2002, the Company issued common stock purchase warrants valued
at $595,000, $125,000 and $128,000, respectively, in conjunction with
convertible subordinated debentures, as debt issuance costs and as a cost of
equity, respectively. In June 2002, the debenture holders elected to
take stock rather than cash in satisfaction of the first $300,000
principal redemption.

In fiscal year 2002, the Company issued an unsecured promissory note to IGT in
the amount of $494,000 to settle amounts previously in dispute. The $494,000
was originally accrued by the Company in fiscal year 2001.

In fiscal year 2001, the Company issued 300,000 shares of restricted stock to
an executive and recorded $975,000 of additional paid-in capital, $98,000 of
compensation expense and $877,000 of deferred compensation.

In fiscal year 2000, the Company recorded a $2.0 million charge for settlement
of shareholder litigation and such amount was paid in fiscal year 2002.

The Company recorded interest paid in the amount of $114,000 $0, and $0 for the
fiscal years 2002, 2001 and 2000, respectively.

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

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ACRES GAMING INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:

Company Operations and Basis of Consolidation

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

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

Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the
Company also offers slot accounting, player tracking, table game management and
visual analysis modules that may be purchased and installed individually or as
components of an integrated system marketed as the Acres Advantage. The
Company primarily sells its products in the United States, Australia and South
Africa. Sales in Australia totaled $1.6 million, $426,000 and $9.5 million,
for the years ended June 30, 2002, 2001 and 2000, respectively. Sales to South
Africa totaled $1.8 million, $3.1 million and $1.7 million for the years ended
June 30, 2002, 2001 and 2000, respectively.

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

Revenue Recognition

The Company sells certain of its products under contracts that generally
provide for a deposit to be paid before commencement of the project and for a
final payment to be made after completion of the project. Customer deposits
received under sales agreements are reflected as liabilities until the related
revenue is recognized.

Revenue for hardware sales is recognized when hardware components and
primary application software have been installed and are available for the
customers use. For software license revenue, the Company applies the
provisions of Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), and Statement of Position 98-9 Modification of SOP 97-2 (SOP 98-9),
Software Revenue Recognition with Respect to Certain Transactions, which amends
SOP 97-2. The Companys sales of software products generally include multiple
elements such as installation of software, training, post contract customer
support and maintenance services. SOP 97-2 and SOP 98-9, as amended, generally
require revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The fair value of an element must be based on the evidence that is specific to
the vendor (VSOE). The Company follows the residual method under SOP 97-2
for software product sales with multiple elements. Software license revenue is
recognized upon acceptance of the software. The only undelivered element at
the time of revenue recognition for software is generally support and
maintenance services. The Company uses renewal rates to establish VSOE for
support and maintenance services. Revenue allocated to support and maintenance
is recognized ratably over the maintenance term.

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

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

Included in accounts receivable are unbilled receivables of $757,000 at
June 30, 2002. The Company had no unbilled receivables at June 30, 2001.
Unbilled receivables represent revenues recognized in excess of billings on
certain contracts accounted for under the percentage of completion method.
Unbilled receivables were not billable at the balance sheet date, but were
recoverable as billings were made in accordance with the contract terms.

Major Customers

Historically, in any
fiscal year, greater than 50% of the Companys net revenues have been
derived from sales to three or fewer customers. The following table sets
forth net revenues for each of the
Companys major customers as a percentage of total net revenues for the fiscal years ended June 30, 2002, 2001 and
2000, respectively.

|                                          |  |                          |      |      |  |      |      |  |  |  |      | 
|----------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                          |  | 2002                     |      | 2001 |  | 2000
|                                          |  |                          |      |      |  |     
|                                          |  | (as a % of net revenues)
|Crown Casino                              |  |                          | 0.8  |      |  |      | 0.2  |  |  |  | 37.0 | 
|IGT for properties operated by MGM MIRAGE |  |                          | 20.5 |      |  |      | 20.0 |  |  |  | 2.8  | 
|Mandalay Resort Group                     |  |                          | 2.4  |      |  |      | 6.6  |  |  |  | 23.1 | 
|MGM MIRAGE                                |  |                          | 21.0 |      |  |      | 1.1  |  |  |  | 1.8  | 
|Paragon Casino Resort                     |  |                          | 12.3 |      |  |      |     |  |  |  |     | 
|Star City                                 |  |                          | 0.9  |      |  |      | 0.9  |  |  |  | 19.1 | 
|Station Casinos Inc.                      |  |                          | 4.0  |      |  |      | 37.8 |  |  |  | 0.4  | 
|Tsogo Sun Holdings                        |  |                          | 6.7  |      |  |      | 7.1  |  |  |  | 10.1 | 

The Companys revenues from sales to customers in the United
states totaled $23.0 million, $40.5 million and
$5.8 million for the years ended June 30, 2002, 2001 and
2000, respectively. The Companys revenues from sales to customers
outside the United States totaled $3.4 million,
$3.5 million and $11.2 million for the years ended
June 30, 2002, 2001 and 2000, respectively. (See note 1 to
the consolidated financial statements.) The following table sets
forth net revenues for the United States and outside the United
States as a percentage of total net revenues for the fiscal years
ended June 30, 2002, 2001 and 2000, respectively.

|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | 2002                     |       | 2001 |  | 2000
|                         |  |                          |       |      |  |     
|                         |  | (as
a % of net revenues)
|Revenues  Australia     |  |                          | 6.1   |      |  |      | 0.9   |  |  |  | 56.0  | 
|Revenues  South Africa  |  |                          | 6.7   |      |  |      | 7.1   |  |  |  | 9.9   | 
|Revenues  United States |  |                          | 87.2  |      |  |      | 92.0  |  |  |  | 34.1  | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|Total                    |  |                          | 100.0 |      |  |      | 100.0 |  |  |  | 100.0 | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 

(See note 1 to the consolidated financial statements.)

The Companys
backlog of orders for its products were approximately $20.0 million, $21.1 million and $6.7 million as of June 30, 2002, 2001 and 2000,
respectively. Backlog, however, may not be a meaningful indication of future
sales. Sales to the Companys customers are made pursuant to purchase orders
or sales agreements for specific system installations and products are often
delivered after several months of receipt of the order. The Company does not
have any ongoing long-term sales contracts. The Companys revenues and results
of operations may be materially affected, in the near term, by the receipt,
loss or delivery over an extended period of time of any one order.

Related Party

The Company had sales transactions with IGT, the holder of the Series A
Preferred Stock, of $5.4 million, $9.3 million and $473,000 for the years ended
June 30, 2002, 2001 and 2000, respectively. The Company had $239,000 and
$487,000 in related party receivables as of June 30, 2002 and 2001,
respectively. Additionally, the Company had related party payables of $40,000
and $317,000 as of June 30, 2002 and 2001, respectively. Effective

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January 28, 2002, the Company redeemed all of the 519,481 outstanding
shares of its Series A Convertible Preferred Stock at a price of $9.625 per
share, for an aggregate cost of $5.0 million.

Income Taxes

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

Cash and Equivalents

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

Fair Value of Financial Instruments

The Companys financial instruments consist of receivables, 6% convertible
subordinated debentures, and a note payable. At June 30, 2002 and 2001, the
fair value of the Companys receivables, 6% convertible subordinated debentures
and note payable approximated their carrying value.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects managements best estimate of
probable losses inherent in the accounts receivable balance. Management
determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence. Activity in the allowance
for doubtful accounts is as follows:

|                                     |  |                |     |           |  |             |     |             |  |   |   |  |  |   |     | 
|------------------------------------ |  | -------------- | --- | --------- |  | ----------- | --- | ----------- |  | - | - |  |  | - | --- | 
|                                     |  | Balances       |     | Additions |  | Amounts     |     |             |  |  
|                                     |  | at             |     | charged   |  | charged     |     |             |  |  
|                                     |  | beginning      |     | to income |  | off,
net of |     | Balances at
|                                     |  | of year        |     | statement |  | collections |     | end of year
|                                     |  |                |     |           |  |             |     |            
|                                     |  | (in thousands)
|Allowance for
uncollectible
accounts |  |                |     |           |  |             |     |             |  |   |   |  |  |   |     | 
|2002                                 |  | $              | 592 |           |  | $           | 340 |             |  | $ |  |  |  | $ | 932 | 
|2001                                 |  |                | 15  |           |  |             | 577 |             |  |   |  |  |  |   | 592 | 
|2000                                 |  |                | 15  |           |  |             |    |             |  |   |  |  |  |   | 15  | 

Inventories

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

|                  |  |                         |       |      |  |   |       | 
|----------------- |  | ----------------------- | ----- | ---- |  | - | ----- | 
|                  |  | Inventories at June 30,
|                  |  |                        
|                  |  | 2002                    |       | 2001
|                  |  |                         |       |     
|                  |  | (in thousands)         
|Raw materials     |  | $                       | 3,823 |      |  | $ | 2,792 | 
|Work-in-progress  |  |                         | 52    |      |  |   | 47    | 
|Finished goods    |  |                         | 110   |      |  |   | 1,925 | 
|                  |  |                         |       |      |  |   |       | 
|Total inventories |  | $                       | 3,985 |      |  | $ | 4,764 | 
|                  |  |                         |       |      |  |   |       | 

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed on the
straight-line basis over the assets estimated useful lives of two to five
years. Leasehold improvements are amortized over the shorter of the

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useful life or lease term. Expenditures for maintenance and repairs are
charged to operations when incurred. The Company recorded depreciation expense
of $932,000, $1.1 million and $1.6 million for the years ended June 30, 2002,
2001 and 2000, respectively.

Intangible Assets

Intangible assets consist of costs associated with the establishment of
patents, gaming licenses and gaming product approvals in various jurisdictions.
Amortization of patents is calculated using the straight-line method over the
estimated life of the patent. Gaming licenses and product approvals are
amortized using the straight-line basis over periods of five years and two
years, respectively. Intangible assets, net of accumulated amortization of
$398,000 and $344,000, were $124,000 and $178,000 at June 30, 2002 and 2001,
respectively, and are included in other assets.

Capitalized Software and Research and Development Costs

Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting
software product is commercially feasible. Technological feasibility is deemed
to be established when the Company, using the detail program design method,
completes the research necessary to determine that the software can be produced
to function according to required specifications at an economically feasible
cost. Capitalized software costs, net of accumulated amortization of $937,000
and $670,000, were $124,000 and $391,000 at June 30, 2002 and 2001,
respectively and are included in other assets. Capitalized costs are amortized
on a straight-line basis over the estimated life of the product beginning when
the product becomes commercially feasible. The Company recorded $267,000,
$354,000 and $229,000 of amortization for the years ended June 30, 2002, 2001
and 2000, respectively. All research and development costs are expensed as
incurred.

Use of Estimates

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

Foreign Currency Transactions

The Company only enters into market risk sensitive instruments to manage
well-defined foreign currency risks. The Company previously entered into
forward exchange contracts to secure the value of sales contracts and accounts
receivable denominated in Australian dollars. Foreign exchange contracts have
gains and losses that are recognized at the settlement date. The impact of
changes in exchange rates on the forward contracts are substantially offset by
the impact of such changes on the value of the related sales contracts and
accounts receivable. As of June 30, 2002 and 2001, the Company had no
outstanding foreign exchange contracts.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations and Statement No. 142, Goodwill and Other
Intangible Assets. SFAS 141 is effective as follows: (a) use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to
business combinations completed before July 1, 2001 which were accounted for by
the purchase method.

SFAS 142 is effective for fiscal years beginning after December 15, 2001
and applies to all goodwill and other intangible assets recognized in an
entitys statement of financial position at that date, regardless of when those
assets were initially recognized.

In August 2001, the Financial Accounting Standards Board issued Statement
No. 143, Accounting for Obligations Associated with the Retirement of
Long-Lived Assets. The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal
years beginning after June 15, 2002.

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In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and, generally, is to be applied
prospectively.

In April 2002, the Financial Accounting Standards Board issued Statement
No. 145 (SFAS 145), Rescission of FASB Statements Nos. 4, 44, and 64 and
Amendment of FASB Statement No. 13. SFAS 145 addresses the presentation for
losses on early retirements of debt in the statement of operations. The
Company has adopted SFAS 145 and will not present losses on early retirements
of debt as an extraordinary item. Adoption of SFAS 145 has had no impact on
the Companys financial position, results of operations or cash flows.

In June 2002, the Financial Accounting Standards Board issued Statement
No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities. The provisions of SFAS 146 become effective for exit or disposal
activities commenced subsequent to December 31, 2002.

The Company is currently evaluating the provisions of SFAS 142, SFAS 143,
SFAS 144 and SFAS 146 and it does not anticipate that the effects of these
changes will have a material impact on its financial position, results of
operations or cash flows. The adoption of SFAS 141 had no impact on the
Companys financial position, results of operations or cash flows.

2. INCOME TAXES:

At June 30, 2002, the Company had cumulative net operating losses totaling
approximately $15.3 million that are available to offset future taxable income
and begin to expire in 2009 through 2020. The Company has provided a valuation
allowance for the remaining amount of the benefit related to these net
operating loss carryforwards as realizability is uncertain.

Deferred income taxes are provided for the temporary differences between
the carrying amounts of the Companys assets and liabilities for financial
statement purposes and their tax bases. The sources of the differences that
give rise to the deferred income tax assets and liabilities as of June 30, 2002
and 2001, are as follows:

|                                    |                           |   |                            |       |      |   |        |       | 
|----------------------------------- | ------------------------- | - | -------------------------- | ----- | ---- | - | ------ | ----- | 
|                                    |                           |   | Deferred income tax assets
|                                    |                           |   | and liabilities           
|                                    |                           |   | at June 30,               
|                                    |                           |   |                           
|                                    |                           |   | 2002                       |       | 2001
|                                    |                           |   |                            |       |     
|                                    |                           |   | (in thousands)            
|Operating loss carryforwards        |                           | $ | 5,834                      |       |      | $ | 4,856  |      
|Research and development tax credit |                           |   | 1,337                      |       |      |   | 1,317  |      
|Property and equipment              |                           |   | 361                        |       |      |   | 384    |      
|Accruals and reserves               |                           |   | 438                        |       |      |   | 1,091  |      
|Intangible and other assets         |                           |   | 227                        |       |      |   | 259    |      
|                                    |                           |   |                            |       |      |   |        |      
|                                    | Total deferred tax assets |   |                            | 8,197 |      |   |        | 7,907 | 
|Less valuation allowance            |                           |   | (8,197                     | )     |      |   | (7,907 | )    
|                                    |                           |   |                            |       |      |   |        |      
|Net deferred tax assets             |                           | $ |                           |       |      | $ |       |      
|                                    |                           |   |                            |       |      |   |        |      

The Companys research and development tax credits are available to offset
future taxable income and begin to expire in 2009 through 2020. The Companys
alternative minimum tax credit carryforward as of June 30, 2002, is $54,000 and
may be carried forward indefinitely. The valuation allowance related to
deferred tax assets increased by approximately $290,000 and decreased by $1.3
million in 2002 and 2001, respectively.

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A reconciliation of the expected income tax provision (benefit) assuming a
34% federal statutory rate to the financial statement income tax provision for
the years ended June 30, 2002, 2001 and 2000 is as follows:

|                                     |  |      |       |      |  |      |       |    |  |  |       |   
|------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                     |  | 2002 |       | 2001 |  | 2000
|                                     |  |      |       |      |  |     
|Expected tax provision (benefit)     |  |      | 34.0  | %    |  |      | 34.0  | %  |  |  | (34.0 | )%
|State income tax provision (benefit) |  |      | 4.0   | %    |  |      | 4.0   | %  |  |  | (4.0  | )%
|Non-deductible items                 |  |      | 1.7   | %    |  |      | .9    | %  |  |  | .4    | % 
|Valuation allowance                  |  |      | (39.7 | )%   |  |      | (31.4 | )% |  |  | 39.9  | % 
|Other                                |  |      |      |      |  |      | (7.5  | )% |  |  | (2.3  | )%
|                                     |  |      |       |      |  |      |       |    |  |  |       |   
|                                     |  |      |      | %    |  |      |      | %  |  |  |      | % 

3. COMMITMENTS AND CONTINGENCIES:

Litigation

Two related lawsuits were filed in the U.S. District Court for the
District of Nevada in 1997 and 1998, alleging violation of the federal
securities laws by the Company and its executive officers. The suits were
consolidated, and in September 2000, the Company agreed to settle the
litigation for approximately $2 million. The Company recorded a charge of $2.0
million in the year ended June 30, 2000, to account for the settlement. In
April 2001, the Company selected the cash payment option and on January 30,
2002 made the final payment due under the settlement.

Two lawsuits have been filed regarding ownership of the Wheel of Gold
(WOG) technology that is the subject of two patents that were assigned to
Anchor Gaming (Anchor). In the first suit, now pending in U.S. District
Court for the District of Nevada, the WOG plaintiffs brought patent
infringement, breach of warranty and breach of contract actions against the
Company based on the WOG patents and the Companys supply agreement with
Anchor. Plaintiffs seek to enjoin the Company from infringing the WOG patents
and from competing with it in the sale of wheel styled bonus gaming devices.
The plaintiffs also seek unspecified compensatory damages for patent
infringement and breach of contract, compensatory damages substantially in
excess of $1.0 million for breach of warranty, treble damages, costs of suit,
and attorneys fees. The Company has denied the allegations and is pursuing a
counterclaim in that proceeding for a declaration that the Company is the joint
owner of the WOG patents. Discovery in the lawsuit is formally closed.
Currently pending before the Court are four summary judgment
motions and one discovery-related motion filed by Anchor, as well as one
summary judgment motion filed by the Company. No trial date has been set. The
Company cannot predict the outcome, nor estimate the range of possible loss, if
any, related to this suit but believes that an unfavorable outcome could have a
material adverse effect on the Companys financial condition, results of
operations and cash flows.

The defense of this suit with Anchor was accepted by the Companys former
professional errors and omissions insurance carrier. However, in April 2000,
the carrier denied coverage. The Company is involved in litigation, now
pending in the U.S. District Court of Nevada, with its former insurance carrier
regarding such coverage. On motions for summary judgment, the court found on
February 28, 2002 that the insurance carrier has a duty to defend the Company
against the lawsuit. A motion to have the court reconsider its decision filed
by the insurance carrier is pending. The Company cannot predict the outcome of
this suit.

In the second action regarding the WOG patents, now pending in U.S.
District Court for the District of Oregon, the Company has filed suit against
Anchor and Spin for Cash Wide Area Progressive Joint Venture (collectively,
Anchor) alleging that Anchor wrongfully used the Companys intellectual
property to obtain the WOG patents, that the filing of the patent applications
was fraudulently concealed from the Company, that Anchor was unjustly enriched
by retaining the benefits of the Companys technology without compensating the
Company and that Anchor breached fiduciary duties owed to the Company. The
Company seeks $40 million in compensatory damages, treble damages, costs of
suit and attorneys fees. The lawsuit has been stayed pending resolution of
the first Anchor lawsuit.

A series of related lawsuits resulting from the Companys efforts to
enforce its patent rights or third parties efforts to challenge the Companys
patent rights, have been settled or adjudicated. The suits were consolidated
in the U.S. District Court for the District of Nevada under Acres Gaming
Incorporated v. Mikohn Gaming Corp., et al. In separate settlements, all
claims in that litigation between the Company and Casino Data Systems (CDS)
and Sunset

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Station Hotel and Casino, respectively, were dismissed with
prejudice. Effective December 27, 2001, the Company and Mikohn settled the
remaining claims from the litigation. Pursuant to the settlement agreement,
Mikohn agreed to license the Companys bonusing patents, paid the Company a
settlement of $1.5 million for use of the patents prior to September 1, 2001
and agreed to pay additional royalties for future use of the patents.

In a separate but related action, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of the claims alleged by the CDS defendant. That suit is now
pending in U.S. District Court for the District of Nevada. The insurance
carrier seeks a declaration that no coverage is provided for the claim; if
coverage is provided it should be provided by the prior insurance carrier; and
the Company must reimburse the insurance carrier for nominal amounts paid under
its insurance policy to defend the Company. On motions for summary judgment,
the court found on February 28, 2002 that the insurance carrier did not have a
duty to defend the Company against the lawsuit and that the Company must repay
the insurance carrier approximately $70,000 in defense costs previously paid by
the insurance carrier. A motion seeking to have the court reconsider its
decision filed by the Company is pending. At June 30, 2002, the Company
recorded a liability in the amount of $70,000 to provide for the contingency.
The Company cannot predict the outcome of this suit but believes that an
unfavorable outcome would not have a material adverse effect on the Companys
financial condition, results of operations or cash flows.

Wild Game NG, LLC, a Nevada limited liability company, which owns and
operates Siena Hotel Spa Casino in Reno, Nevada, filed a lawsuit against the
Company in November 2001 in the Second Judicial District Court of the State of
Nevada in the County of Washoe. Siena alleges that the Company failed to
perform its obligations under a $1.8 million Equipment Sale Agreement to
install and maintain a networked slot accounting, cage and credit and player
tracking system in Sienas casino. Siena seeks unspecified damages in excess
of $10,000. The Company believes that Sienas claims are unfounded and has
filed counterclaims seeking, among other things, payments Siena owes the
Company for installation of the Companys hardware in Sienas casino. The
Company cannot predict the outcome of this suit but believes that an
unfavorable outcome would not have a material adverse effect on the Companys
financial condition, results of operations or cash flows.

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

Deferred Compensation

The Company entered into an employment agreement with Floyd W. Glisson
effective as of January 1, 2001 (the Glisson Employment Agreement), pursuant
to which Mr. Glisson was granted a restricted stock award for 300,000 shares of
the companys common stock and received a base salary of $275,000 for the
period from July 1, 2001 to June 30, 2002. No bonus was accrued or paid to Mr.
Glisson for the fiscal year ended June 30, 2002. Half, or 150,000 shares, of
the restricted stock become unrestricted on June 30, 2003, and the remaining
150,000 shares become unrestricted on June 30, 2005, subject to acceleration of
a ratable portion of the remaining restricted shares in the applicable period
if Mr. Glissons employment is terminated by the Company without cause.
Pursuant to the Glisson Employment Agreement, Mr. Glisson will receive
severance payments equal to 1.6 times his annual base salary under certain
circumstances. Currently, Mr. Glissons annual compensation under the Glisson
Employment Agreement consists of a base salary of $300,000 and a bonus of up to
ninety percent of his annual base salary depending on the Companys performance
as measured against targets set by the Board of Directors.

The 300,000 restricted shares of the Companys Common Stock issued to Mr.
Glisson have been included in the Common Stock issued and outstanding presented
in the Companys balance sheet. As of June 30, 2002, 100,000 shares would
become unrestricted if Mr. Glissons employment were terminated by the Company
under this agreement. The Company recorded approximately $325,000 and $98,000
of compensation expense for the years ended June 30, 2002 and 2001,
respectively. Approximately $552,000 and $877,000 of deferred compensation has
been recorded to reflect the remaining restricted balance of the stock as of
June 30, 2002 and 2001, respectively.

Operating Leases

The Company leases its office facilities, certain office equipment and
service vehicles under operating leases that extend through June 30, 2006.
Future minimum lease payments under these non-cancelable operating leases as of
June 30, 2002 are $882,000, $200,000, $42,000 and $7,600 in fiscal years 2003,
2004, 2005 and 2006,

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respectively. Total lease expense was $969,000, $832,000
and $786,000 for the years ended June 30, 2002, 2001 and 2000, respectively.

Note Payable

On February 21, 2002, the Company issued an unsecured promissory note to
IGT in the amount of $494,000 to settle amounts previously in dispute. The
note bears interest at 4.75% payable monthly and principal payments of $25,000
due quarterly for three years, with the unpaid balance due at maturity. Final
payment of all outstanding principal and interest will be payable on March 1,
2005.

Purchase Commitments

At June 30, 2002, the Company had $875,000 outstanding under
non-cancelable purchase commitments and safety-stock agreements with suppliers.
These commitments generally require that the Company take physical delivery of
and pay for the items within 180 days.

4. CONVERTIBLE SUBORDINATED DEBENTURES:

On December 21, 2001, the Company sold to three institutional investors
$5,000,000 principal amount of 6% convertible subordinated debentures that are
convertible into shares of the Companys common stock at $4.6433 per share.
The investors also acquired warrants to purchase 177,674 shares of the
Companys common stock at an exercise price of $4.6433 per share. Interest on
the debentures at the rate of 6% is payable semi-annually starting in April
2002. Principal payments of $300,000 are due monthly from June 2002 to August
2003 and principal payments of $500,000 are due monthly from September 2003
until the principal is repaid no later than December 21, 2003. The Company may
elect to pay the principal of and interest on the debentures in shares of its
common stock at a discounted price rather than cash, in the case of principal
payments, or market price, in the case of interest payments, as more fully
described below. The Company also issued a warrant to purchase 75,317 shares
of its common stock at an exercise price of $4.6433 per share to the placement
agent in connection with the sale of the debentures and warrants. Pursuant to
a Form S-3 Registration Statement, which became effective as of February 25,
2002, the Company has registered sufficient shares of common stock to be issued
upon conversion of the debentures or exercise of the warrants.

The Company may elect to repay the outstanding principal amount of the
debentures in shares of its common stock, rather than in cash, at a conversion
price equal to the lesser of $4.6433 or 90% of an average market price per
share (the average of the five lowest daily volume-weighted average prices of
the Companys common stock on the Nasdaq Small Cap Market for the 22
consecutive trading days immediately preceding the conversion date). The
Company may also elect to make interest payments due under the debentures in
shares of its common stock, rather than in cash, at an interest conversion
price, which will be calculated as the average of the daily volume-weighted
average prices of the Companys common stock on the Nasdaq SmallCap Market for
the five consecutive trading days immediately preceding the interest payment
date.

5. REDEEMABLE PREFERRED STOCK:

Effective January 28, 2002, the Company redeemed all of the 519,481
outstanding shares of its Series A Convertible Preferred Stock from IGT at a
price of $9.625 per share, for an aggregate cost of $5.0 million. The Company
used the proceeds from the sale of 6% convertible subordinated debentures to
fund this redemption.

6. STOCKHOLDERS EQUITY:

The Company has a Stock Option Plan (the Plan) that permits the granting
of awards to directors, employees and consultants of the Company in the form of
stock options. Stock options granted under the Plan may be incentive stock
options or nonqualified options. Options generally vest over five years and
expire in ten years. The Company accounts for the Plan under APB Opinion No.
25 Accounting for Stock Issued to Employees, under which compensation expense
is based on the difference, if any, on the date of grant, between the fair
value of the Companys stock and the exercise price for the option. Had
compensation cost for the Plan been determined consistent with FASB Statement
of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123), the Companys net income (loss) and income (loss)
per share would have approximated the following pro forma amounts:

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|                                   |  |             |  |   |       |                                      |  |      |       |      |  |   |        |   |  | 
|---------------------------------- |  | ----------- |  | - | ----- | ------------------------------------ |  | ---- | ----- | ---- |  | - | ------ | - |  | 
|                                   |  |             |  |   |       | For the years ended June 30,        
|                                   |  |             |  |   |       |                                     
|                                   |  |             |  |   |       | 2002                                 |  | 2001 |       | 2000
|                                   |  |             |  |   |       |                                      |  |      |       |     
|                                   |  |             |  |   |       | (in thousands except per share data)
|Net income (loss):                 |  | As reported |  | $ | 3,905 |                                      |  | $    | 4,169 |      |  | $ | (4,159 | )
|                                   |  | Pro forma   |  | $ | 3,484 |                                      |  |      | 3,773 |      |  |   | (4,700 | )
|Income (loss) per share  basic:   |  | As reported |  | $ | .43   |                                      |  | $    | .47   |      |  | $ | (.47   | )
|                                   |  | Pro forma   |  | $ | .38   |                                      |  |      | .42   |      |  |   | (.53   | )
|Income (loss) per share  diluted: |  | As reported |  | $ | .38   |                                      |  | $    | .41   |      |  | $ | (.47   | )
|                                   |  | Pro forma   |  | $ | .34   |                                      |  |      | .37   |      |  |   | (.53   | )

A total of 1,750,000 shares of the Companys Common Stock have been
reserved for issuance pursuant to awards granted under the Plan. Under the
Plan, the Company has granted 1,446,000 options, net of cancellations, through
June 30, 2002. In addition to issuances under the Plan, the Company issued
185,000 options to purchase Common Stock that were not subject to the
provisions of the Plan. Stock option activity is summarized below:

|                                               |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|---------------------------------------------- |  | ---------------------------- | --------- | ----- |  | -------- | ---- | ----- |  | ------ | --------- | -------- |  | - | ---- |  |  | -------- | --------- | - |  | - | ---- | 
|                                               |  | For the years ended June 30,
|                                               |  |                             
|                                               |  | 2002                         |           | 2001  |  | 2000    
|                                               |  |                              |           |       |  |         
|                                               |  |                              |           |       |  | Weighted |      |       |  |        |           | Weighted |  |   |      |  |  | Weighted
|                                               |  |                              |           |       |  | Average  |      |       |  |        |           | Average  |  |   |      |  |  | Average 
|                                               |  |                              |           |       |  | Exercise |      |       |  |        |           | Exercise |  |   |      |  |  | Exercise
|                                               |  | Shares                       |           | Price |  | Shares   |      | Price |  | Shares |           | Price   
|                                               |  |                              |           |       |  |          |      |       |  |        |           |         
|Outstanding at beginning of year               |  |                              | 1,306,517 |       |  | $        | 3.77 |       |  |        | 1,354,242 |          |  | $ | 3.68 |  |  |          | 1,196,925 |   |  | $ | 5.05 | 
|Granted                                        |  |                              | 265,000   |       |  |          | 4.73 |       |  |        | 179,500   |          |  |   | 3.66 |  |  |          | 556,300   |   |  |   | 1.14 | 
|Exercised                                      |  |                              | (24,500   | )     |  |          | 1.48 |       |  |        | (58,025   | )        |  |   | 1.26 |  |  |          |          |   |  |   |     | 
|Canceled                                       |  |                              | (537,492  | )     |  |          | 3.60 |       |  |        | (169,200  | )        |  |   | 3.70 |  |  |          | (398,983  | ) |  |   | 4.23 | 
|                                               |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Outstanding at end of year                     |  |                              | 1,009,525 |       |  |          | 4.17 |       |  |        | 1,306,517 |          |  |   | 3.77 |  |  |          | 1,354,242 |   |  |   | 3.68 | 
|                                               |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Exercisable at end of year                     |  |                              | 606,040   |       |  |          | 4.15 |       |  |        | 882,063   |          |  |   | 3.92 |  |  |          | 847,444   |   |  |   | 3.93 | 
|                                               |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Weighted average fair value of
options granted |  | $                            | 3.71      |       |  |          |      |       |  | $      | 2.94      |          |  |   |      |  |  | $        | .88       |   |  |   |      | 
|                                               |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

|                                  |  |         |  |         |  |         |  |  |  |  |  | 
|--------------------------------- |  | ------- |  | ------- |  | ------- |  |  |  |  |  | 
|                                  |  | 2002    |  | 2001    |  | 2000   
|                                  |  |         |  |         |  |        
|Risk free
          interest rate |  | 3.8%    |  | 5.3%    |  | 6.3%   
|Expected
          life of option |  | 5 years |  | 5 years |  | 5 years
|Expected
          volatility     |  | 106%    |  | 108%    |  | 99%    
|Dividends                         |  | none    |  | none    |  | none   

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The following table summarizes the options to purchase Common Stock
outstanding at June 30, 2002:

|                |  |             |           |                |  |                  |       |             |  |                  |  |  |         |  |  |   |       |          |  | 
|--------------- |  | ----------- | --------- | -------------- |  | ---------------- | ----- | ----------- |  | ---------------- |  |  | ------- |  |  | - | ----- | -------- |  | 
|                |  |             |           |                |  |                  |       |             |  |                  |  |  |         |  |  |   |       | Weighted
|                |  | Options for |           | Weighted       |  | Weighted         |       | Options for |  | Average Exercise
|                |  | Shares      |           | Average        |  | Average          |       | Shares      |  | Price of Shares 
|Exercise Prices |  | Outstanding |           | Exercise Price |  | Contractual Life |       | Exercisable |  | Exercisable     
|                |  |             |           |                |  |                  |       |             |  |                 
|$0.94 - $3.53   |  |             | 442,375   |                |  | $                | 1.90  |             |  | 6.6 years        |  |  | 309,090 |  |  | $ | 1.84  |         
|$3.53 - $5.29   |  |             | 259,750   |                |  |                  | 4.67  |             |  | 6.8 years        |  |  | 146,950 |  |  |   | 4.73  |         
|$5.29 - $7.05   |  |             | 244,400   |                |  |                  | 5.93  |             |  | 8.0 years        |  |  | 87,000  |  |  |   | 6.22  |         
|$7.05 - $8.81   |  |             | 12,500    |                |  |                  | 8.51  |             |  | 4.2 years        |  |  | 12,500  |  |  |   | 8.51  |         
|$8.81 - $10.58  |  |             | 14,500    |                |  |                  | 9.19  |             |  | 4.4 years        |  |  | 14,500  |  |  |   | 9.19  |         
|$10.58 - $12.34 |  |             | 12,000    |                |  |                  | 11.00 |             |  | 5.0 years        |  |  | 12,000  |  |  |   | 11.00 |         
|$12.34 - $14.10 |  |             | 12,000    |                |  |                  | 13.00 |             |  | 5.0 years        |  |  | 12,000  |  |  |   | 13.00 |         
|$14.10
- $15.00 |  |             | 12,000    |                |  |                  | 15.00 |             |  | 5.0 years        |  |  | 12,000  |  |  |   | 15.00 |         
|                |  |             |           |                |  |                  |       |             |  |                  |  |  |         |  |  |   |       |          |  | 
|$0.94 - $15.00  |  |             | 1,009,525 |                |  | $                | 4.17  |             |  | 6.9 years        |  |  | 606,040 |  |  | $ | 4.15  |         
|                |  |             |           |                |  |                  |       |             |  |                  |  |  |         |  |  |   |       |          |  | 

7. EMPLOYEE BENEFIT PLAN:

The Company has a profit sharing plan that operates under the provisions
of Section 401(k) of the Internal Revenue Code and covers substantially all
full-time employees. Employer contributions may be made at the discretion of
the Board of Directors. There were no employer contributions during the years
ended June 30, 2002, 2001 and 2000.

8. PER SHARE COMPUTATION:

The Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding is used to
compute basic earnings per share. The computation of diluted earnings per
share includes the effect of stock options, warrants, convertible subordinated
debentures and redeemable convertible preferred stock, if such effect is
dilutive.

|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |       | 
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | - | ------------------------------------ | ------ | ---- | - | ----- | ------ |  | - | ------ | ----- | 
|                                                                                            |                                                                                                        |   | For the year ended June 30,         
|                                                                                            |                                                                                                        |   |                                     
|                                                                                            |                                                                                                        |   | 2002                                 |        | 2001 |   | 2000 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |      
|                                                                                            |                                                                                                        |   | (in thousands except per share data)
|Net income (loss)                                                                           |                                                                                                        | $ | 3,905                                |        |      | $ | 4,169 |        |  | $ | (4,159 | )    
|Dilutive effect of interest on convertible subordinated debentures                          |                                                                                                        |   | 159                                  |        |      |   |      |        |  |   |       |      
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|Net income (loss) allocable to common stockholders                                          |                                                                                                        | $ | 4,064                                |        |      | $ | 4,169 |        |  | $ | (4,159 | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|Weighted average number of shares of common stock and common
stock equivalents outstanding: |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|                                                                                            | Weighted average number of common shares outstanding  basic                                           |   |                                      | 9,074  |      |   |       | 8,948  |  |   |        | 8,913 | 
|                                                                                            | Dilutive effect of warrants and employee stock options
after application of the treasury stock method  |   |                                      | 340    |      |   |       | 264    |  |   |        |      | 
|                                                                                            | Dilutive effect of convertible subordinated debentures
after application of the if-converted method    |   |                                      | 538    |      |   |       |       |  |   |        |      | 
|                                                                                            | Dilutive effect of redeemable convertible preferred stock
after application of the if-converted method |   |                                      | 644    |      |   |       | 954    |  |   |        |      | 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|                                                                                            | Weighted
average number of common shares outstanding 
diluted                                         |   |                                      | 10,596 |      |   |       | 10,166 |  |   |        | 8,913 | 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|Income (loss) per share  basic                                                             |                                                                                                        | $ | .43                                  |        |      | $ | .47   |        |  | $ | (.47   | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      
|Income (loss) per share  diluted                                                           |                                                                                                        | $ | .38                                  |        |      | $ | .41   |        |  | $ | (.47   | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |        |      

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

|                                                                                                                         |  |                                    |     |      |  |      |     |  |  |  |       | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | --- | ---- |  | ---- | --- |  |  |  | ----- | 
|                                                                                                                         |  | Balance outstanding as of June 30,
|                                                                                                                         |  |                                   
|                                                                                                                         |  | 2002                               |     | 2001 |  | 2000
|                                                                                                                         |  |                                    |     |      |  |     
|                                                                                                                         |  | (in thousands)                    
|Warrants and employee stock options                                                                                      |  |                                    | 674 |      |  |      | 764 |  |  |  | 1,479 | 
|Redeemable convertible preferred
stock, if converted, assuming
conversion at rates in effect at
each respective year end |  |                                    |    |      |  |      |    |  |  |  | 2,228 | 

Effective January 28, 2002, the Company redeemed all of the 519,481
outstanding shares of its Series A Convertible Preferred Stock from IGT at a
price of $9.625 per share, for an aggregate cost of $5.0 million. The Company
used the proceeds from the sale of 6% convertible subordinated debentures to
fund this redemption.

9. SUBSEQUENT EVENT

In August 2002, the Company entered into a loan agreement with a
commercial bank to provide up to $3.0 million in financing secured by inventory
and accounts receivable. The agreement contains certain financial covenants
including minimum net worth, minimum cash flow, net income and operating income
requirements.

10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

|                                             |  |               |       |                |  |               |       |                |  |   |       |   |  |   |       | 
|-------------------------------------------- |  | ------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | - | ----- | - |  | - | ----- | 
|Year ended June 30, 2002                     |  | First Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                             |  |               |       |                |  |               |       |               
|(in thousands except per share data)         |  |               |       |                |  |               |       |                |  |   |       |   |  |   |       | 
|Net revenues                                 |  | $             | 6,092 |                |  | $             | 5,346 |                |  | $ | 5,632 |   |  | $ | 9,334 | 
|Gross profit                                 |  |               | 3,013 |                |  |               | 3,390 |                |  |   | 2,779 |   |  |   | 6,163 | 
|Income (loss) from operations                |  |               | 354   |                |  |               | 382   |                |  |   | (46   | ) |  |   | 3,301 | 
|Net income (loss)                            |  |               | 417   |                |  |               | 729   |                |  |   | (259  | ) |  |   | 3,018 | 
|Net income (loss) per common
share  basic   |  | $             | .05   |                |  | $             | .08   |                |  | $ | (.03  | ) |  | $ | .33   | 
|Net income (loss) per common
share  diluted |  | $             | .04   |                |  | $             | .07   |                |  | $ | (.03  | ) |  | $ | .29   | 

|                                             |  |               |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|-------------------------------------------- |  | ------------- | ------ | -------------- |  | ------------- | ------ | -------------- |  | - | ------ |  |  | - | ------ | 
|Year ended June 30, 2001                     |  | First Quarter |        | Second Quarter |  | Third Quarter |        | Fourth Quarter
|                                             |  |               |        |                |  |               |        |               
|(in thousands except per share data)         |  |               |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|Net revenues                                 |  | $             | 2,739  |                |  | $             | 10,222 |                |  | $ | 17,465 |  |  | $ | 13,627 | 
|Gross profit                                 |  |               | 622    |                |  |               | 4,106  |                |  |   | 6,285  |  |  |   | 4,798  | 
|Income (loss) from operations                |  |               | (1,612 | )              |  |               | 1,483  |                |  |   | 2,522  |  |  |   | 1,599  | 
|Net income (loss)                            |  |               | (1,616 | )              |  |               | 1,506  |                |  |   | 2,596  |  |  |   | 1,683  | 
|Net income (loss) per common
share  basic   |  | $             | (.18   | )              |  | $             | .17    |                |  | $ | .29    |  |  | $ | .18    | 
|Net income (loss) per common
share  diluted |  | $             | (.18   | )              |  | $             | .13    |                |  | $ | .25    |  |  | $ | .16    | 






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

On March 14, 2002, Arthur Andersen LLP, the Companys independent public
accounting firm since 1993, was indicted on federal obstruction of justice
charges arising from the governments investigation of Enron. On May 6, 2002,
the Company dismissed Arthur Andersen LLP as its independent public
accountants, and on May 8, 2002 hired PricewaterhouseCoopers LLP as its
independent auditors for the year ended June 30, 2002.

There
may be risks, and recovery by the Companys shareholders may be
limited as a result of the Companys prior use of Arthur Andersen LLP as its
independent accounting firm. As a public company, the

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Company is required to
file financial statements audited or reviewed by an independent accountant,
including those contained in Item 8 of this annual report on Form 10-K.
Because the Companys former audit partner has left Arthur Andersen LLP, the
Company has not been able to obtain, after reasonable efforts, the written
consent of Arthur Andersen LLP as required by Section 7 of the Securities Act
of 1933 as amended (the Securities Act), to incorporate Arthur Andersens audit report with respect to the Companys
consolidated financial statements as of June 30, 2001 and for the two years in
the period then-ended into existing registration statements on Forms S-3 (Nos.
33-75570 and 333-99945) and S-8 (Nos. 333-77050, 333-2258 and 333-21913) filed
by the Company with the SEC. The Commission has recently provided regulatory
relief designed to allow companies that file reports with the Commission to
dispense with the requirement to file a consent of Arthur Andersen LLP in
certain circumstances. However, the Companys shareholders will not be able to
sue Arthur Andersen LLP pursuant to Section 11(a)(4) of the Securities Act and
therefore may have their recovery limited as a result of the lack of consent.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors of the Company is incorporated
herein by reference to the Companys Proxy Statement that will be filed
pursuant to Regulation 14A within 120 days of June 30, 2002.




ITEM 11. EXECUTIVE COMPENSATION

Information with respect to Executive Compensation is incorporated herein
by reference to the Companys Proxy Statement that will be filed pursuant to
Regulation 14A within 120 days of June 30, 2002.






|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------

Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Companys
Proxy Statement that will be filed pursuant to Regulation 14A within 120 days
of June 30, 2002.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to the Companys Proxy Statement that will
be filed pursuant to Regulation 14A within 120 days of June 30, 2002.




ITEM 14. CONTROLS AND PROCEDURES

Not applicable.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

|    |  |     |  |                                                          
|--- |  | --- |  | ---------------------------------------------------------
|(a) |  | (1) |  | Financial Statements                                     
|    |  |     |  | See Item 8. Financial Statements and Supplementary Data
|   
|    |  | (2) |  | Exhibits                                                 
|    |  |     |  | See Index to Exhibits.                                 
|   
|(b) |  |     |  | Reports on Form 8-K                                      

| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a Form 8-K on May 6, 2002, to report the
termination of Arthur Andersen LLP and the appointment of
PricewaterhouseCoopers LLP as its independent public accountants.

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SIGNATURES

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



| | ACRES GAMING INCORPORATED
| | -------------------------



|Date: September 30, 2002 | By: | /s/ | Floyd W. Glisson                                                  
|------------------------ | --- | --- | ------------------------------------------------------------------
|                         |     |    
|                         |     |     | Floyd W. Glisson
Chairman of the Board and Chief Executive
Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Floyd
W. Glisson and Patrick W. Cavanaugh, either of whom may act without the joinder
of the other, as his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities to sign any and all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.

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



|                         |                          |  |                                                                                                                               
|------------------------ | ------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------
|Date: September 30, 2002 | /s/ Floyd W. Glisson    
|                         |                          |  | Floyd W. Glisson
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)                              
|                        
|Date: September 30, 2002 | /s/ Patrick W. Cavanaugh
|                         |                          |  | Patrick W. Cavanaugh
Senior Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
|                        
|Date: September 30, 2002 | /s/ Ronald G. Bennett   
|                         |                          |  | Ronald G. Bennett
Director                                                                                                    
|                        
|Date: September 30, 2002 | /s/ Robert W. Brown     
|                         |                          |  | Robert W. Brown
Director                                                                                                      
|                        
|Date: September 30, 2002 | /s/ Richard D. Furash   
|                         |                          |  | Richard D. Furash
Director                                                                                                    

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|                         |                        |  |                            
|------------------------ | ---------------------- |  | ---------------------------
|Date: September 30, 2002 | /s/ Roger B. Hammock  
|                         |                        |  | Roger B. Hammock
Director  
|                        
|Date: September 30, 2002 | /s/ David R. Willensky
|                         |                        |  | David R. Willensky
Director

47



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##### Table of Contents






CERTIFICATIONS



|   |  | I, Floyd W. Glisson, certify that:                                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. |  | I have reviewed this annual report on Form 10-K of Acres Gaming
Incorporated;                                                                                                                                                                                                                                         
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.                 



|Date: September 30, 2002 | By: | /s/ | Floyd W. Glisson                                     
|------------------------ | --- | --- | -----------------------------------------------------
|                         |     |     | Floyd W. Glisson
Chairman and Chief Executive Officer



|   |  | I, Patrick W. Cavanaugh, certify that:                                                                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|1. |  | I have reviewed this annual report on Form 10-K of Acres Gaming
Incorporated;                                                                                                                                                                                                                                         
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.                 



|Date: September 30, 2002 | By: | /s/ | Patrick W. Cavanaugh                                                             
|------------------------ | --- | --- | ---------------------------------------------------------------------------------
|                         |     |     | Patrick W. Cavanaugh
Senior Vice President, Chief Financial Officer
and Treasurer

48



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##### Table of Contents






INDEX TO EXHIBITS

|                  |  |                                                                                                                                                                                                                                                                                                                                    
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit           |  |                                                                                                                                                                                                                                                                                                                                    
|No.               |  | Description                                                                                                                                                                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|3.1               |  | Articles
          of Incorporation of Acres Gaming Incorporated, as amended(1)                                                                                                                                                                                                                                                    
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|3.2               |  | Bylaws
          of Acres Gaming Incorporated, as amended(2)                                                                                                                                                                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|4.1               |  | Convertible
          Subordinated Debentures and Warrants Purchase Agreement dated December 21,
          2001, by and between Acres Gaming Incorporated, Deephaven Private Placement
          Trading Ltd., Omicron Partners, LP and Riverview Group, LLC(3)                                                                    
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|4.2               |  | Form
          of Convertible Subordinated Debentures dated December 21, 2001, entered
          into by Acres Gaming Incorporated and each of Deephaven Private Placement
          Trading Ltd., Omicron Partners, LP and Riverview Group, LLC in the amounts
          of $1,500,000, $1,000,000 and $2,500,000, respectively(3)
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|4.3               |  | Form
          of Stock Purchase Warrant dated December 21, 2001, issued by Acres
          Gaming Incorporated to each of Deephaven Private Placement Trading Ltd.,
          Omicron Partners, LP and Riverview Group, LLC for 53,302, 35,535 and
          88,837 shares of common stock, respectively(3)                       
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|4.4               |  | Registration
          Rights Agreement dated December 21, 2001, by and between Acres
          Gaming Incorporated to each of Deephaven Private Placement Trading Ltd.,
          Omicron Partners, LP and Riverview Group, LLC(3)                                                                                                
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|4.5               |  | Stock
          Purchase Warrant dated December 21, 2001, issued by Acres Gaming
          Incorporated to Roth Capital Partners, LLC(3)                                                                                                                                                                                           
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.1  |  | Acres
          Gaming Incorporated 1993 Stock Option and Incentive Plan, as amended(1)                                                                                                                                                                                                                                            
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.2  |  | Employment
          Agreement dated July 1, 1996 between the Company and John F. Acres(1)                                                                                                                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.3  |  | Amendment
          to Employment Agreement dated July 20, 1998 between the Company
          and John F. Acres(4)                                                                                                                                                                                                                 
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.4              |  | Lease
          dated March 3, 1998 between the Company and #26 McCarran Center,
          LC(5)                                                                                                                                                                                                                                   
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.5              |  | Lease
          dated August 5, 1999, between the Company and Avery Investments(6)                                                                                                                                                                                                                                                 
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.6              |  | System
          Upgrade Agreement dated June 7, 1999 between Crown Limited and
          the Company(7)                                                                                                                                                                                                                           
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.7  |  | Nonqualified
          Stock Option Agreement between Acres Gaming Incorporated and Richard
          Schneider dated December 8, 1999.(8)                                                                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.8  |  | Nonqualified
          Stock Option Agreement between Acres Gaming Incorporated and Reed Alewel
          dated December 8, 1999.(8)                                                                                                                                                                                               
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.9  |  | Nonqualified
          Stock Option Agreement between Acres Gaming Incorporated and Floyd Glisson
          dated December 8, 1999.(8)                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.10             |  | Product
          Sales, Delivery and License Agreement dated December 8, 2000 between
          Acres Gaming Incorporated and IGT(9)                                                                                                                                                                                              
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.11             |  | Acres
          Software Maintenance Agreement dated December 8, 2000 between Acres
          Gaming Incorporated and IGT(9)                                                                                                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.12             |  | Equipment
          Sale Agreement dated February 14, 2001 between AGI Distribution
          Inc. and Acres Gaming Incorporated and Station Casinos, Inc. and Stations
          affiliates(10)                                                                                                                                  
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|+
          10.13 |  | Employment
          Agreement between Acres Gaming Incorporated and Floyd W. Glisson dated
          as of January 1, 2001(11)                                                                                                                                                                                                    
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|10.14             |  | Lease
          dated July 30, 2001 between the Company and URS Corporation(12)                                                                                                                                                                                                                                                    
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|21.1              |  | Subsidiaries
          of the Registrant                                                                                                                                                                                                                                                                                           
|                  |  |                                                                                                                                                                                                                                                                                                                                    
|23.1              |  | Consent
          of PricewaterhouseCoopers LLP, Independent Accountants                                                                                                                                                                                                                                                           

1



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##### Table of Contents



|        |  |                                         
|------- |  | ----------------------------------------
|Exhibit |  |                                         
|No.     |  | Description                             
|        |  |                                         
|99.1    |  | Certification of Chief Executive Officer
|       
|99.2    |  | Certification of Chief Financial Officer



---

|+    |  | Management contract or compensatory plan or arrangement.                                                                                                                         
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(1)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996,
previously filed with the Commission. 
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to the exhibits to the Companys Registration
Statement on Form S-3 (File No. 333-77050), previously filed with the
Commission on January 18, 2002.    
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998,
previously filed with the Commission.
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to the exhibits to the Companys Annual Report
on Form 10-K for the year ended June 30, 1998, previously filed with the
Commission.                    
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999,
previously filed with the Commission.
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to the exhibits to the Companys Annual Report
on Form 10-K for the year ended June 30, 1999, previously filed with the
Commission.                    
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to the exhibits to the Companys Registration
Statement on Form S-8 (File No. 333-99945), previously filed with the
Commission on September 20, 2002.  
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 2000,
previously filed with the Commission. 
|    
|    
|    
|    
|(10) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001,
previously filed with the Commission.    
|    
|    
|    
|    
|(11) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001,
previously filed with the Commission.
|    
|    
|    
|    
|(12) |  | Incorporated by reference to the exhibits to the Companys Annual Report
on Form 10-K for the year ended June 30, 2001, previously filed with the
Commission.                    

2