##### Table of Contents



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

For the fiscal year ended June 30, 2003


(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 o


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

Indicate by check mark whether the Registrant is an accelerated filed (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes x No o


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 December 31, 2002 was $49,174,872. 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, 2003 was 10,571,426 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Companys Proxy Statement to be filed
pursuant to Regulation 14A within 120 days of June 30, 2003.





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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                   
|              |                                                                                                         | Available Information       
|              | ITEM 2. PROPERTIES                                                                                     
|              | ITEM 3. LEGAL PROCEEDINGS                                                                              
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|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 ESULTS OF OPERATIONS           
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|              | ITEM 9A. CONTROLS AND PROCEDURES                                                                       
|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. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                        
|PART IV      
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K                                        
|SIGNATURES   
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                                |  |                                        |                              |  |    |    |      |  | 
|-------- |  | ---------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------------------------- |  | -- | -- | ---- |  | 
|         |  |                                                                                                |  |                                        |                              |  |    |    | PAGE
|         |  |                                                                                                |  |                                        |                              |  |    |    |     
|PART I   |  |                                                                                                |  |                                       
|ITEM 1.  |  | BUSINESS                                                                                       |  |                                        | 1                            | 
|         |  |                                                                                                |  |                                        | General                      |  |    | 1  |     
|         |  |                                                                                                |  |                                        | The Market                   |  |    | 1  |     
|         |  |                                                                                                |  |                                        | Products                     |  |    | 2  |     
|         |  |                                                                                                |  |                                        | Research and Development     |  |    | 4  |     
|         |  |                                                                                                |  |                                        | Customers                    |  |    | 4  |     
|         |  |                                                                                                |  |                                        | Marketing                    |  |    | 5  |     
|         |  |                                                                                                |  |                                        | Production and Manufacturing |  |    | 5  |     
|         |  |                                                                                                |  |                                        | Patents                      |  |    | 6  |     
|         |  |                                                                                                |  |                                        | Competition                  |  |    | 6  |     
|         |  |                                                                                                |  |                                        | Government Regulation        |  |    | 6  |     
|         |  |                                                                                                |  |                                        | Employees                    |  |    | 10 |     
|         |  |                                                                                                |  |                                        | Available Information        |  |    | 10 |     
|ITEM 2.  |  | PROPERTIES                                                                                     |  |                                        | 10                           | 
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                              |  |                                        | 10                           | 
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  |                                        | 11                           | 
|         |  |                                                                                                |  | EXECUTIVE OFFICERS OF REGISTRANT       |                              |  | 11 |   
|PART II  |  |                                                                                                |  |                                       
|ITEM 5.  |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                       |  |                                        | 12                           | 
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                        |  |                                        | 13                           | 
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS          |  |                                        | 14                           | 
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  |                                        | 19                           | 
|         |  |                                                                                                |  | FACTORS THAT MAY AFFECT FUTURE RESULTS |                              |  | 19 |   
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  |                                        | 23                           | 
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE           |  |                                        | 42                           | 
|ITEM 9A  |  | CONTROLS AND PROCEDURES                                                                        |  |                                        | 42                           | 
|PART III |  |                                                                                                |  |                                       
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  |                                        | 43                           | 
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                         |  |                                        | 43                           | 
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  |                                        | 43                           | 
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  |                                        | 45                           | 
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |  |                                        | 45                           | 
|PART IV  |  |                                                                                                |  |                                       
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K                                         |  |                                        | 45                           | 
|         |  |                                                                                                |  | SIGNATURES                             |                              |  | 46 |   





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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 do not intend 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.

On June 29, 2003, International Game Technology (IGT) and the Company
entered into a definitive agreement pursuant to which Acres will merge with a
subsidiary of IGT. Under the terms of the agreement, IGT will pay $11.50 per
share in an all cash transaction, representing an aggregate purchase price of
approximately $130 million. The agreement was unanimously approved by the
Boards of Directors of both companies. The waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 applicable to the proposed
acquisition of the Company by IGT expired on August 25, 2003 and the merger was
approved by Acres stockholders on September 26, 2003. The merger is subject
to gaming regulatory approvals, and other conditions. In June 2003, a putative
class action lawsuit was filed in Nevada state court against the Company and
its directors alleging that the directors breached their fiduciary duties to
the Companys stockholders in connection with the approval of the merger
transaction and seeking to enjoin and/or void the merger agreement among other
forms of relief. The lawsuit is more fully discussed in Item 3. Legal
Proceedings. The Company anticipates that the transaction will be completed
in the fourth calendar quarter of 2003.




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,
the growth of Native American casino gaming in other states and growth in the
established Nevada market.

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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 640,000
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 player promotions and entertainment enhancements of the
type offered by the Company. New or expanding casinos represent a significant
part of the potential market for the Companys products. Existing casinos also
represent a significant potential market as casino managers seek to maintain or
improve casino profitability by employing bonusing and other promotional
programs for gaming machines.




Products

Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the
Company also offers slot 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 AdvantageTM, 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. The Company had
begun development of its own slot machine so that Bonus Games can be
offered without another companys slot machine.

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, three states or territories in Australia and three
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 NexGenTM 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

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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 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. 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 credits 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.

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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 large jackpots every few weeks or
longer. 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.

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 68
full-time employees involved in research and development as of August 31, 2003.
Research and development expenses were $6.9 million, $5.7 million and $4.7
million in the years ended June 30, 2003, 2002 and 2001, 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.

Prior to fiscal 2003, more than 50% of the Companys net revenues were
derived from sales to three or fewer customers in any given fiscal year. In
fiscal 2003, sales to five customers accounted for slightly more than 50% of
the Companys net revenue. 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, 2003, 2002 and 2001, respectively.

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|                                          |  |                                   |      |      |  |      |      |  |  |  |      | 
|----------------------------------------- |  | --------------------------------- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                          |  | 2003                              |      | 2002 |  | 2001
|                                          |  |                                   |      |      |  |     
|                                          |  | (as a percentage of net revenues)
|Agua Caliente                             |  |                                   | 7.8  |      |  |      |     |  |  |  |     | 
|Big Jackpot Slots                         |  |                                   | 5.1  |      |  |      |     |  |  |  |     | 
|IGT for properties operated by MGM MIRAGE |  |                                   | 1.2  |      |  |      | 20.5 |  |  |  | 20.0 | 
|IGT                                       |  |                                   | 19.0 |      |  |      |     |  |  |  | 0.9  | 
|Mandalay Resort Group                     |  |                                   | 9.4  |      |  |      | 2.4  |  |  |  | 6.6  | 
|MGM MIRAGE                                |  |                                   | 3.3  |      |  |      | 21.0 |  |  |  | 1.1  | 
|Paragon Casino Resort                     |  |                                   | 2.3  |      |  |      | 12.3 |  |  |  |     | 
|Station Casinos Inc.                      |  |                                   | 11.3 |      |  |      | 4.0  |  |  |  | 37.8 | 
|Tsogo Sun Holdings                        |  |                                   | 7.1  |      |  |      | 6.7  |  |  |  | 7.1  | 

The Companys revenues from sales to customers in the United States
totaled $41.2 million, $23.0 million and $40.5 million for the years ended June
30, 2003, 2002 and 2001, respectively. The Companys revenues from sales to
customers outside the United States totaled $5.9 million, $3.4 million and $3.5
million for the years ended June 30, 2003, 2002 and 2001, respectively. (See
note 1 of notes 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, 2003,
2002 and 2001, respectively.

|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | 2003                     |       | 2002 |  | 2001
|                         |  |                          |       |      |  |     
|                         |  | (as a % of net revenues)
|Revenues  Australia     |  |                          | 1.3   |      |  |      | 6.1   |  |  |  | 0.9   | 
|Revenues  South Africa  |  |                          | 7.1   |      |  |      | 6.7   |  |  |  | 7.1   | 
|Revenues  South Korea   |  |                          | 4.0   |      |  |      |      |  |  |  |      | 
|Revenues  United States |  |                          | 87.6  |      |  |      | 87.2  |  |  |  | 92.0  | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|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 $19.0
million, $20.0 million and $21.1 million as of June 30, 2003, 2002 and 2001,
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 or
loss of, or delivery over an extended period of time required under, 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

The Company outsources the manufacture of almost all of the hardware
components of its products. The circuit boards used in certain of the
Companys products are manufactured and assembled to the Companys
specifications by contract manufacturers. A key component of each of the
Companys products is computer software that is copied onto electronic chips by
contract manufacturers. The Company believes that the component parts and
services used in its products can be obtained from multiple sources and
therefore that it is not overly reliant on any single vendor. The Companys
engineers conduct the development, testing and maintenance of the software.

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Patents

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

The Company has been issued 26 U.S. patents and 18 foreign patents,
related to the method and apparatus covering a variety of networked bonusing
systems. The patents generally have a life of 20 years from the original
filing date of the patent and begin to expire starting in 2014 through 2021.

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.




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 the Companys 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, which 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 it with a competitive advantage
and that none of its competitors has the number of bonusing products available
from the Company.




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 to 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 and approval 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, Connecticut, Illinois, Indiana, Louisiana, Michigan, Mississippi,
Missouri, Nevada, New Jersey, New Mexico, North Dakota; Eastern Cape, Gauteng
Province and KwaZulu Natal, 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.

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Corporate Regulation

Nevada

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

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

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

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

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

Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the common stock
of a Registered Corporation beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The Company is
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with the
Company or AGID, the Company: (i) pays that person any dividend or interest
upon voting securities of the Company; (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person; (iii) pays remuneration in any form to that person for services
rendered or otherwise; or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value. Additionally, the Clark County, Nevada 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.

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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.

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

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

Any person who is licensed, required to be licensed, registered, required
to be registered or is under common control with such persons (collectively,
Licensees), and who proposes to become involved in a gaming venture outside
of Nevada, is required to deposit with the Nevada Board and, thereafter,
maintain a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are also required
to comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of 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.

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The Company might not obtain or be granted renewals for required licenses,
permits, certificates or approvals necessary to conduct its business in all
jurisdictions in which it is required to do so. 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, 2003, the Company had 162 full-time employees of whom 68
were involved in research and development, 54 in customer service and support,
15 in material control, 7 in sales and marketing and 18 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.




Available Information

Our Web site Internet address is www.acresgaming.com. We make available
on our Web site, free of charge, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our SEC reports can be accessed
through the investor relations section of our Web site. The information found
on our Web site is not part of this or any other report we file with or furnish
to the SEC.




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 39,000 square feet. The lease commenced on June 15, 1998 and was
extended in June 2003 for an additional 60 months with a new expiration date of
June 15, 2008. Currently, the base rent is approximately $52,600 per month,
plus $9,700 per month for property taxes, building insurance and common area
maintenance.

The Company also leases approximately 11,000 square feet in Corvallis,
Oregon. The current lease commenced on September 1, 1999 and will expire on
August 31, 2004. The base rent for the total facility is approximately $15,500
per month, which includes property taxes, building insurance and common area
maintenance.

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

As of April 21, 2003, the Company and Anchor Gaming (Anchor) settled
both of the lawsuits filed in U.S. District Court for the District of Nevada
and U.S. District Court for the District of Oregon regarding ownership of the
Wheel of Gold (WOG) technology that is the subject of two patents that were
assigned to Anchor. The Company relinquished all claims to the WOG patents and
acknowledged the scope and validity of those patents. The parties stipulated
to the dismissal of their respective claims in U.S. District Court in Oregon
and their respective claims in U.S. District Court in Nevada other than the
Companys claim for joint inventorship of the WOG patents. The Company also
agreed to assign all rights it may have in the WOG patents to Anchor Coin, a
wholly-owned subsidiary of IGT.

The defense of the lawsuit with Anchor in the U.S. District Court for the
District of Nevada 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 for the District 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. Upon a motion for reconsideration, on March 5, 2003 the
court found that the insurance carrier has a duty to defend the Company against
the entire Anchor lawsuit, but is entitled to reimbursement from the Company
for the amount the insurance carrier paid for claims alleged by Anchor that are
not covered by the Companys policy. The Company cannot predict the outcome of
this suit.

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In another insurance coverage suit, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of claims alleged by Casino Data Systems in a separate lawsuit
that has been settled. The suit against the insurance carrier 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, that if coverage is
provided it should be provided by the prior insurance carrier, and that the
Company must reimburse the insurance carrier for 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. At June 30, 2002, the Company recorded a liability in the
amount of $70,000 to provide for the contingency. Upon a motion for
reconsideration, on March 5, 2003 the court found that the insurance carrier
has a duty to defend the Company against the lawsuit. The insurance carrier
has filed a motion requesting leave to file an interlocutory appeal of the
trial courts ruling on the motion for reconsideration. 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 damages in excess of
$30,000,000, largely comprised of consequential damages (damages for lost
profits). On September 25, 2003, the Company filed a motion for partial
summary judgment to preclude Siena from seeking consequential damages, which
are not recoverable pursuant to the terms of the Equipment Sale Agreement. 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.

In June 2003, a putative class action lawsuit was filed in Clark County,
Nevada District Court against the Company and its directors, entitled Paul
Miller v. Acres Gaming Incorporated, et al., Case No. 470016. The complaint
alleges that the Companys directors breached their fiduciary duties to
stockholders in connection with the approval of the merger transaction between
the Company and IGT and seeks to enjoin and/or void the merger agreement among
other forms of relief. On September 19, 2003, the judge presiding over the
case denied plaintiffs motion for a temporary restraining order (TRO) to
prevent Acres stockholders from voting on the merger. On
September 24, 2003, plaintiff petitioned the Nevada Supreme Court to vacate the
denial of the TRO and to enjoin the Company from holding its stockholder vote
on the merger. The Nevada Supreme Court denied the petition on September 25,
2003. The Company believes that the plaintiffs claims are without merit.

The Company from time to time is involved in various other 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, 2003.

EXECUTIVE OFFICERS OF REGISTRANT

As of September 26, 2003, the executive officers of the Company were as
set forth below:

|                     |  |     |    |                       |  |                                       |  |           |      | 
|-------------------- |  | --- | -- | --------------------- |  | ------------------------------------- |  | --------- | ---- | 
|                     |  |     |    |                       |  |                                       |  | Executive
|Name                 |  | Age |    | Positions and Offices |  | Officer Since                        
|                     |  |     |    |                       |  |                                      
|Floyd W. Glisson     |  |     | 56 |                       |  | Chairman and Chief
Executive Officer  |  |           | 1998 | 
|Richard J. Schneider |  |     | 46 |                       |  | President and Chief
Operating Officer |  |           | 1999 | 

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|                     |  |     |    |                       |  |                                                              |  |           |      | 
|-------------------- |  | --- | -- | --------------------- |  | ------------------------------------------------------------ |  | --------- | ---- | 
|                     |  |     |    |                       |  |                                                              |  | Executive
|Name                 |  | Age |    | Positions and Offices |  | Officer Since                                               
|                     |  |     |    |                       |  |                                                             
|Patrick W. Cavanaugh |  |     | 43 |                       |  | Senior Vice
President, Chief
Financial Officer
and Treasurer |  |           | 2001 | 
|Reed M. Alewel       |  |     | 39 |                       |  | 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
financial and administrative 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 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 1993, 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, 2003: |                |  |                        |      |      |  |               |       |  |  |   |      
|                                 | First quarter  |  | $                      | 3.50 |      |  | $             | 6.50  |  |  | $ | 5.55  | 
|                                 | Second quarter |  |                        | 4.97 |      |  |               | 6.20  |  |  |   | 5.29  | 
|                                 | Third quarter  |  |                        | 5.03 |      |  |               | 7.88  |  |  |   | 7.58  | 
|                                 | Fourth quarter |  |                        | 7.29 |      |  |               | 11.66 |  |  |   | 11.26 | 

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|                                 |                |  |                        |      |      |  |               |      |  |  |   |      | 
|-------------------------------- | -------------- |  | ---------------------- | ---- | ---- |  | ------------- | ---- |  |  | - | ---- | 
|                                 |                |  | 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 | 

The Company estimates that there are approximately 3,800 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.




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, 2003 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,                
|                                           |  |                                     
|                                           |  | 2003                                 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                           |  |                                      |        |      |  |      |        |      |  |     
|                                           |  | (in thousands except per share data)
|Statements of Operations Data:             |  |                                      |        |      |  |      |        |      |  |      |        |  |  |   |        |      |  |   |        |     
|Net revenues                               |  | $                                    | 47,059 | (1)  |  | $    | 26,404 |      |  | $    | 44,053 |  |  | $ | 17,002 |      |  | $ | 13,972 |     
|Gross profit                               |  |                                      | 34,492 | (1)  |  |      | 15,345 |      |  |      | 15,811 |  |  |   | 8,593  |      |  |   | 5,719  |     
|Income (loss) from operations              |  |                                      | 18,012 | (1)  |  |      | 3,991  |      |  |      | 3,992  |  |  |   | (2,231 | )    |  |   | (7,248 | )(3)
|Net income (loss)                          |  |                                      | 17,137 | (1)  |  |      | 3,905  |      |  |      | 4,169  |  |  |   | (4,159 | )(2) |  |   | (6,988 | )(3)
|Net income (loss) per common share-basic   |  | $                                    | 1.79   | (1)  |  | $    | .43    |      |  | $    | .47    |  |  | $ | (.47   | )(2) |  | $ | (.79   | )(3)
|Net income (loss) per common
share-diluted |  | $                                    | 1.59   | (1)  |  | $    | .38    |      |  | $    | .41    |  |  | $ | (.47   | )(2) |  | $ | (.79   | )(3)



---

|(1) |  | Revenues in fiscal 2003 included $8.6 million in royalty revenue representing, 25% of the Companys gross profit, for fees the
Company received from IGT for the license of certain of its bonusing patents in connection with the settlement of litigation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | During 2000, the Company recorded a charge of $2.0 million for the settlement of shareholder litigation.                                                                                                                                                    
|   
|(3) |  | During 1999, the Company recorded a non-recurring charge of $400,000 for the costs of the Companys relocation of its headquarters to Las Vegas, Nevada.                                                                                                    

|                                       |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                       |  | As of June 30,
|                                       |  |               
|                                       |  | 2003           |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                       |  |                |        |      |  |      |        |      |  |     
|                                       |  | (in thousands)
|Balance Sheet Data:                    |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |        | 
|Working capital                        |  | $              | 29,684 |      |  | $    | 8,058  |      |  | $    | 6,150  |  |  | $ | 3,308  |   |  | $ | 4,649  | 
|Total assets                           |  |                | 43,277 |      |  |      | 20,872 |      |  |      | 22,229 |  |  |   | 10,732 |   |  |   | 16,097 | 
|Current liabilities                    |  |                | 12,074 |      |  |      | 11,260 |      |  |      | 14,005 |  |  |   | 4,834  |   |  |   | 8,050  | 
|Long-term debt                         |  |                |       |      |  |      | 1,046  |      |  |      |       |  |  |   |       |   |  |   |       | 
|Redeemable convertible preferred stock |  |                |       |      |  |      |       |      |  |      | 4,948  |  |  |   | 4,948  |   |  |   | 4,948  | 
|Stockholders equity (deficit)         |  |                | 31,203 |      |  |      | 8,566  |      |  |      | 3,276  |  |  |   | (1,060 | ) |  |   | 3,099  | 

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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. Prior to fiscal year 2003, three or
fewer customers have accounted for more than 50 percent of annual revenues.
(See Item 1. Business  Customers and Factors That May Affect Our Future
Operating Results).

On June 29, 2003, IGT and the Company entered into a definitive agreement
pursuant to which Acres will merge with a subsidiary of IGT. Under the terms
of the agreement, IGT will pay $11.50 per share in an all cash transaction,
representing an aggregate purchase price of approximately $130 million. The
agreement was unanimously approved by the Boards of Directors of both
companies. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 applicable to the proposed acquisition of the Company
by IGT expired on August 25, 2003 and the merger was approved by Acres
stockholders on September 26, 2003. The merger is subject to gaming regulatory
approvals, and other conditions. In July 2003, a putative class action lawsuit
was filed in Nevada state court against the Company and its directors alleging
that the directors breached their fiduciary duties to the Companys
stockholders in connection with the approval of the merger transaction and
seeking to enjoin and/or void the merger agreement among other forms of relief.
The lawsuit is more fully discussed in Item 3. Legal Proceedings. The
Company anticipates that the transaction will be completed in the fourth
calendar quarter of 2003.

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, accounting for
legal contingencies, and accounting for income taxes.

Revenue Recognition

Revenue for hardware sales is recognized when hardware components and the
primary application software have been installed and have been accepted by the
customer. 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 affect 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

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services. Revenue allocated to support and maintenance is recognized
ratably over the maintenance term.

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.

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 affect the Companys financial
condition, results of operations and cash flow.

Income Taxes

SFAS 109, Accounting for Income Taxes, establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entitys
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in our financial
statements or tax returns. Fluctuations in the actual outcome of these future
tax consequences could materially impact our financial position or our results
of operations.

Results of Operations

Comparison of the Years Ended June 30, 2003 and 2002

The Companys net revenues for the year ended June 30, 2003 were $47.1
million, a increase of $20.7 million over the prior years revenues of $26.4
million. This increase in revenues resulted primarily from increased volume of
patent license fees and hardware deliveries to, and software installations for,
customers in the year ended June 30, 2003 as compared to the year ended June
30, 2002. The Companys revenues fluctuate significantly based on the timing
of the delivery of any large order. Revenues in fiscal 2003 included $8.6
million in royalty revenue (representing 25% of the Companys gross profit)
received from IGT for the license of certain of the Companys bonusing patents
in connection with the settlement of litigation. Revenues in fiscal 2002
included $1.3 million in royalty revenue from Mikohn Gaming Corporation for the
license of certain of the Companys bonusing patents in connection with the
settlement of litigation. Revenues for the year ended June 30, 2003 and 2002,
included $14.1

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million and $11.6 million, respectively, from sales of hardware components
and $24.3 million and $13.5 million, respectively, from sales of software and
services.

Component materials purchased primarily from computer and electronics
vendors comprised 55 percent of the cost of revenues in fiscal 2003 and 56
percent in fiscal 2002. 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 represented a smaller portion
of cost of revenues in fiscal 2003 because hardware sales represented a smaller
portion of total revenues.

Gross profit margin increased to 73% in fiscal 2003 from 58% in fiscal
2002. This increase resulted from increased software sales and royalty fees,
which generate higher margins, in fiscal 2003 as compared to fiscal 2002.

The Companys research and development expenses increased to $6.9 million
in fiscal 2003, from $5.7 million in fiscal 2002. 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 percentage of its revenue on
research and development to enhance and expand the capabilities of Acres
Advantage, Acres Cashless and Acres Bonusing products and develop additional
bonus games.

Selling, general and administrative costs increased to $9.6 million in
fiscal 2003 from $5.7 million in the prior year, primarily as a result of an
increase in legal and other professional expenses, insurance premiums, salary
and benefit expenses, provisions for doubtful accounts and management incentive
bonuses during fiscal 2003 as compared to fiscal 2002.

Other expense, net of other income, was $1.1 million for fiscal 2003,
compared to $86,000 for fiscal 2002. The increase in other expense during
fiscal 2003, is primarily attributable to the increase in interest expense,
which includes the amortization of the issuance costs and discount on the 6%
convertible subordinated debentures that were issued December 2001 and retired
in June 2003.

At March 31, 2003, the Company performed an assessment of the
recoverability of its net deferred tax assets and determined that tax benefits
associated with previously reserved net deferred tax assets are more likely
than not realizable. The assessment was based on financial and taxable income
forecasts and most notably, the agreements the Company entered into to license
certain of its bonusing patents to IGT and to settle outstanding litigation
over the Wheel of Gold patents. The Companys assessment indicated that
income tax on forecast income would be sufficient to offset the previously
reserved net deferred tax assets. As a result, at March 31, 2003 the Company
recorded a tax benefit resulting from the reduction of previously recorded
valuation reserves against net deferred tax assets, totaling $4.2 million.

Net income for the year ended June 30, 2003 was $17.1 million ($1.59 per
diluted share) compared to $3.9 million ($0.38 per diluted share) for the year
ended June 30, 2002.

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 fiscal year 2001 revenues of $44.1
million. The decrease in revenues was 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. Revenues in fiscal 2002 included
$1.2 million in royalty revenue 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 for
fiscal 2002 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.

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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.

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 fiscal 2002
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, was primarily attributed to the increase in interest
expense, which included the amortization of the issuance costs and discount on
the 6% convertible subordinated debentures issued by the Company in December
2001.

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 diluted
share) compared to $4.2 million ($0.41 per diluted share) for the year ended
June 30, 2001.

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 2008. Future
minimum lease payments under these non-cancelable operating leases as of June
30, 2003 are $992,000, $815,000, $770,000, $748,000 and $716,000 in fiscal
years 2004, 2005, 2006, 2007 and 2008, respectively. Total lease expense was
$951,000, $969,000 and $832,000 for the years ended June 30, 2003, 2002 and
2001, respectively.

On February 21, 2002, to settle amounts previously in dispute, the Company
issued an unsecured promissory note to IGT in the amount of $494,000 bearing
interest at 4.75% payable monthly, with principal payments of $25,000 due
quarterly for three years, and the unpaid balance due at maturity. In May
2003, the Company paid in full the notes outstanding principal balance of
$394,000.

On December 21, 2001, the Company sold $5,000,000 principal amount of 6%
convertible subordinated debentures convertible into shares of the Companys
common stock at $4.6433 per share to three institutional investors. In June
2003, the debentures remaining principal balance of $1.4 million was converted
into shares of Acres common stock. 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 accrued at the rate of 6%
payable semi-annually starting in April 2002. Principal payments of $300,000
were due monthly from June 2002 to August 2003 and principal payments of
$500,000 were due monthly from September 2003 until the principal was repaid no
later than December 21, 2003. 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.

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The Companys fixed payment obligations are summarized by fiscal year
below.

|                                |                             |   |                |     |      |   |      |     |      |   |      |     |            |   |     |     |  |   |     |     |  |  |   |   | 
|------------------------------- | --------------------------- | - | -------------- | --- | ---- | - | ---- | --- | ---- | - | ---- | --- | ---------- | - | --- | --- |  | - | --- | --- |  |  | - | - | 
|                                |                             |   | 2004           |     | 2005 |   | 2006 |     | 2007 |   | 2008 |     | Thereafter
|                                |                             |   |                |     |      |   |      |     |      |   |      |     |           
|                                |                             |   | (in thousands)
|Fixed Payment Obligations       |                             |   |                |     |      |   |      |     |      |   |      |     |            |   |     |     |  |   |     |     |  |  |   |  
|                                | Nevada main office facility |   | $              | 748 |      |   | $    | 748 |      |   | $    | 748 |            |   | $   | 748 |  |   | $   | 716 |  |  |   |  | 
|                                | Oregon office facility      |   |                | 188 |      |   |      | 31  |      |   |      |    |            |   |     |    |  |   |     |    |  |  |   |  | 
|Other office equipment/leases   |                             |   | 56             |     |      |   | 36   |     |      |   | 22   |     |            |   |    |     |  |   |    |     |  |  |  |  
|                                |                             |   |                |     |      |   |      |     |      |   |      |     |            |   |     |     |  |   |     |     |  |  |   |   | 
|Total Fixed Payment Obligations |                             | $ | 992            |     |      | $ | 815  |     |      | $ | 770  |     |            | $ | 748 |     |  | $ | 716 |     |  |  |  |  
|                                |                             |   |                |     |      |   |      |     |      |   |      |     |            |   |     |     |  |   |     |     |  |  |   |  

At June 30, 2003, the Company had $1.6 million 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, 2003, the Company had cash and equivalents of $24.1
million. The Company invests its cash in highly liquid marketable securities
with maturities of three months or less at date of purchase.

On April 21, 2003, the Company entered into agreements to license certain
of its bonusing patents to IGT and to settle outstanding litigation over the
Wheel of Gold patents which were pending in U.S. District Courts in Nevada and
Oregon. With respect to IGTs licensing of certain of the Companys bonusing
patents, IGT paid a royalty advance of $10 million to the Company for the
licensing of those patents as well as other licensing fees.

At June 30, 2003, the Company had collected $4.2 million in advance
deposits against its order backlog of approximately $19.0 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 2004. 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 one-year revolving loan
agreement with a commercial bank to provide up to $3.0 million in financing
secured by inventory and accounts receivable. The agreement provides for
interest at a rate equal to Prime plus 1%. The agreement contains certain
financial covenants including minimum net worth, minimum cash flow, net income
and operating income requirements. Management believes that the Company was in
compliance with all covenants under the agreement through its expiration in
August 2003. The Company has elected not to renew the loan agreement.

The Company made capital expenditures of $738,000, $445,000 and $947,000
in fiscal years 2003, 2002 and 2001, respectively, primarily for computers and
equipment to support research and development efforts. During fiscal 2003 and
fiscal 2002, the Company incurred no capitalizable software development costs.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45), which elaborates on the disclosures to be made by a guarantor in its
interim and

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annual financial statements concerning the guarantors obligations under
certain guarantees that it has issued. FIN 45 also clarifies (for guarantees
issued after January 1, 2003) that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations
undertaken in issuing the guarantee. The Company does not have any outstanding
guarantees and accordingly the adoption of FIN 45 had no effect on its
financial position, results of operations, or cash flows.

In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), which addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for variable interest entities
(VIEs) created after January 31, 2003. The Company has reviewed its major
relationships and its overall economic interests with other companies
consisting of related parties and other suppliers to determine the extent of
its variable economic interest in these parties. The adoption of FIN 46 did
not have an impact on the Companys financial position, results of operations or
cash flows.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables, which provides guidance on
accounting for arrangements involving the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of Issue 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company has not yet determined the impact that the
adoption of EITF 00-21 may have on the Companys financial position, results of
operations, or cash flows.

In May 2003, the Financial Accounting Standards Board issued Statement No.
150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company is currently evaluating the provisions of SFAS 150 and does not
anticipate that SFAS 150 will have a significant 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.

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.

Failure to complete the merger with IGT

On June 29, 2003, IGT and the Company entered into a definitive agreement
pursuant to which the Company will merge with a subsidiary of IGT.
The merger is subject to gaming regulatory approvals and other
conditions. In
June
2003, a putative class action lawsuit was filed in Nevada state court against
the Company and its directors alleging that the directors breached their
fiduciary duties to the Companys stockholders in connection with the approval
of the merger transaction and seeking to enjoin and/or void the merger
agreement among other forms of relief. The lawsuit is more fully discussed in
Item 3. Legal Proceedings. The Companys business and stock price may be
adversely affected if the merger with IGT is not completed. If the merger is
not completed, the Company could be subject to a number of risks that may
adversely affect its business and stock price, including: the diversion of
management attention from the Companys day-to-day business and the disruption
to its employees and its relationships with customers; the potential loss of
market position that the Company might not be able to regain; the market price
of shares of the Companys Common Stock may decline to the extent that the
current market price of those shares reflects a market assumption that the
merger will be completed; the Company could be required to pay a termination
fee to IGT of $3.9 million under certain
 circumstances; and the Company may not be able to take advantage of future
opportunities or effectively respond to competitive pressures, any of which
could have a material adverse effect on its business and results of operations.

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A delay in closing the planned merger could have an adverse effect on the
Companys revenues in the near-term if customers delay, defer, or cancel
purchases pending completion of the planned merger with IGT. To the extent a
prolonged delay in completing the planned merger creates uncertainty among
those persons and organizations contemplating purchases of products or services
such that a few large customers, or a significant group of small customers,
delay purchase decisions pending resolution of the planned merger, this could
have an adverse effect on the Companys results of operations, and quarterly
revenues could be substantially below the expectations of market analysts and
could cause a reduction in the Companys stock price.

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

Although management believes that sufficient revenues will be generated
during fiscal 2004 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.

Sufficient funds to maintain new product development efforts and expected
levels of operations may not be available and additional capital, if and when
needed by the Company, may not be available on terms acceptable to the Company.
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. Prior to fiscal 2003, three or fewer customers accounted for more than
50% of annual net revenues in any given fiscal year, and in fiscal 2003 five
customers accounted for more than 50% of the Companys net 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 affect on
the Company.

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Product Concentration; Competition; Risks of Technological Change.
The Company expects to derive most of its revenues from the sale of Acres
Advantage and Acres Bonusing products and the Companys future success will
depend in part upon its ability to continue to generate sales of these
products. A decline in demand or prices for the Companys 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 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
21Table of Contents

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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                |  |      |    | 
|----------------------------------------------- |  | ---- | -- | 
|                                                |  | Page
|                                                |  |     
|Report of Independent Accountants               |  |      | 24 | 
|Consolidated Balance Sheets                     |  |      | 26 | 
|Consolidated Statements of Operations           |  |      | 27 | 
|Consolidated Statements of Stockholders Equity |  |      | 28 | 
|Consolidated Statements of Cash Flows           |  |      | 29 | 
|Notes to Consolidated Financial Statements      |  |      | 31 | 

23



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Report of Independent Accountants

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

In our opinion, the accompanying consolidated balance sheets 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the two years in the
period ended June 30, 2003, 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 audits. We conducted our
audits 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 audits provide a reasonable basis for our
opinion. The consolidated financial statements of Acres Gaming Incorporated
and Subsidiary for the year ended June 30, 2001 were audited by other
independent accountants who have ceased operations. Those accountants expressed
an unqualified opinion on those financial statements in their report dated
August 16, 2001.

PricewaterhouseCoopers LLP
Las Vegas, Nevada
July 29, 2003, except for the fifth paragraph of Note 1,
  and the fourth and fifth paragraphs of Note 3,
  as to which the date is September 26, 2003.

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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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##### Table of Contents



ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND 2002
ASSETS

|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |         |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------ | --------------------------------- | ------ | ---- | ------ | ------- | ------ | 
|                                           |                                                                                                                                      |                             |        | 2003                              |        | 2002
|                                           |                                                                                                                                      |                             |        |                                   |        |     
|                                           |                                                                                                                                      |                             |        | (in thousands, except share data)
|CURRENT ASSETS:                            |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           | Cash and equivalents                                                                                                                 |                             | $      | 24,067                            |        |      | $      | 7,312   |       
|                                           | Receivables, net of allowance of $1,445 and $932, respectively                                                                       |                             |        | 9,556                             |        |      |        | 7,582   |       
|                                           | Inventories                                                                                                                          |                             |        | 4,072                             |        |      |        | 3,985   |       
|                                           | Deferred income taxes                                                                                                                |                             |        | 2,909                             |        |      |        |        |       
|                                           | Prepaid expenses                                                                                                                     |                             |        | 1,154                             |        |      |        | 439     |       
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                      | Total current assets        |        |                                   | 41,758 |      |        |         | 19,318 | 
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|PROPERTY AND EQUIPMENT:                    |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           | Furniture and fixtures                                                                                                               |                             |        | 2,012                             |        |      |        | 1,944   |       
|                                           | Equipment                                                                                                                            |                             |        | 3,972                             |        |      |        | 3,618   |       
|                                           | Leasehold improvements                                                                                                               |                             |        | 487                               |        |      |        | 486     |       
|                                           | Accumulated depreciation                                                                                                             |                             |        | (5,763                            | )      |      |        | (5,280  | )     
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                      | Property and equipment, net |        |                                   | 708    |      |        |         | 768    | 
|DEFERRED INCOME TAXES:                     |                                                                                                                                      |                             | 649    |                                   |        |      |       |        
|OTHER ASSETS, NET                          |                                                                                                                                      |                             | 162    |                                   |        |      | 786    |        
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|TOTAL ASSETS                               |                                                                                                                                      | $                           | 43,277 |                                   |        | $    | 20,872 |        
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY      
|CURRENT LIABILITIES:                       |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           | Accounts payable                                                                                                                     |                             | $      | 1,926                             |        |      | $      | 2,277   |       
|                                           | Accrued compensation                                                                                                                 |                             |        | 1,565                             |        |      |        | 654     |       
|                                           | Accrued other expenses                                                                                                               |                             |        | 325                               |        |      |        | 254     |       
|                                           | Income taxes payable                                                                                                                 |                             |        | 2,302                             |        |      |        |        |       
|                                           | Deferred revenue                                                                                                                     |                             |        | 5,956                             |        |      |        | 4,375   |       
|                                           | Convertible subordinated debentures, current                                                                                         |                             |        |                                  |        |      |        | 3,600   |       
|                                           | Note payable, current                                                                                                                |                             |        |                                  |        |      |        | 100     |       
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                      | Total current liabilities   |        |                                   | 12,074 |      |        |         | 11,260 | 
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           | Convertible subordinated debentures, net of current
portion and discount                                                             |                             |        |                                  |        |      |        | 677     |       
|                                           | Note payable, net of current portion                                                                                                 |                             |        |                                  |        |      |        | 369     |       
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                      | Total liabilities           |        |                                   | 12,074 |      |        |         | 12,306 | 
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                      |                             |        |                                   |        |      |        |        
|STOCKHOLDERS EQUITY:                      |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           | Common Stock, $.01 par value, 50 million shares authorized,
10.5 million and 9.4 million shares issued and
outstanding, respectively |                             |        | 105                               |        |      |        | 94      |       
|                                           | Additional paid-in capital                                                                                                           |                             |        | 27,167                            |        |      |        | 22,003  |       
|                                           | Deferred stock-based compensation                                                                                                    |                             |        | (227                              | )      |      |        | (552    | )     
|                                           | Accumulated earnings (deficit)                                                                                                       |                             |        | 4,158                             |        |      |        | (12,979 | )     
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|                                           |                                                                                                                                      | Total stockholders equity  |        |                                   | 31,203 |      |        |         | 8,566  | 
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                      | $                           | 43,277 |                                   |        | $    | 20,872 |        
|                                           |                                                                                                                                      |                             |        |                                   |        |      |        |        

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, 2003, 2002 AND 2001

|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |        |        | 
|------------------------------ | ----------------------------------- | ------------------------ | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                               |                                     |                          |        | 2003                                  |        | 2002 |        | 2001  
|                               |                                     |                          |        |                                       |        |      |        |       
|                               |                                     |                          |        | (in thousands, except per share data)
|NET REVENUES:                  |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|                               | Systems and services                |                          | $      | 38,360                                |        |      | $      | 25,096 |        |   | $      | 44,053 |       
|                               | Patent licenses                     |                          |        | 8,699                                 |        |      |        | 1,308  |        |   |        |       |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|                               |                                     | Total net revenues       |        |                                       | 47,059 |      |        |        | 26,404 |   |        |        | 44,053 | 
|COST OF REVENUES               |                                     |                          | 12,567 |                                       |        |      | 11,059 |        |        |   | 28,242 |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|GROSS PROFIT                   |                                     |                          | 34,492 |                                       |        |      | 15,345 |        |        |   | 15,811 |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|OPERATING EXPENSES:            |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|                               | Research and development            |                          |        | 6,852                                 |        |      |        | 5,700  |        |   |        | 4,739  |       
|                               | Selling, general and administrative |                          |        | 9,628                                 |        |      |        | 5,654  |        |   |        | 7,080  |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|                               |                                     | Total operating expenses |        |                                       | 16,480 |      |        |        | 11,354 |   |        |        | 11,819 | 
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|INCOME FROM OPERATIONS         |                                     |                          | 18,012 |                                       |        |      | 3,991  |        |        |   | 3,992  |       
|OTHER INCOME (EXPENSE), net    |                                     |                          | (1,074 | )                                     |        |      | (86    | )      |        |   | 177    |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|INCOME BEFORE INCOME TAXES     |                                     |                          | 16,938 |                                       |        |      | 3,905  |        |        |   | 4,169  |       
|INCOME TAX BENEFIT             |                                     |                          | 199    |                                       |        |      |       |        |        |   |       |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|NET INCOME                     |                                     | $                        | 17,137 |                                       |        | $    | 3,905  |        |        | $ | 4,169  |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|NET INCOME PER SHARE  BASIC   |                                     | $                        | 1.79   |                                       |        | $    | .43    |        |        | $ | .47    |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       
|NET INCOME PER SHARE  DILUTED |                                     | $                        | 1.59   |                                       |        | $    | .38    |        |        | $ | .41    |       
|                               |                                     |                          |        |                                       |        |      |        |        |        |   |        |       

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, 2003, 2002 AND 2001

|                            |                                                        |  |              |     |            |   |             |   |          |   |              |       |       |   |                |        |  |   |      |      |   |   |        |        | 
|--------------------------- | ------------------------------------------------------ |  | ------------ | --- | ---------- | - | ----------- | - | -------- | - | ------------ | ----- | ----- | - | -------------- | ------ |  | - | ---- | ---- | - | - | ------ | ------ | 
|                            |                                                        |  | Common Stock |     | Additional |   |             |   |          |   |              |       |       |   |                |        | 
|                            |                                                        |  |              |     | Paid-In    |   | Accumulated |   | Deferred |   |              |       |      
|                            |                                                        |  | Shares       |     | Amount     |   | Capital     |   | Deficit  |   | Compensation |       | Total
|                            |                                                        |  |              |     |            |   |             |   |          |   |              |       |      
|                            |                                                        |  |              |     |            |   |             |   |          |   |              |       |       |   | (in thousands) |        |  |   |      |      |   |   |       
|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                               |  |              | 27  |            |   |             |  |          |   |              | 40    |       |   |                |       |  |   |      |     |   |   |        | 40     | 
|                            | Issuance of common
stock upon conversion
of debentures |  |              | 65  |            |   |             | 1 |          |   |              | 299   |       |   |                |       |  |   |      |     |   |   |        | 300    | 
|                            | 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  |       
|                            | Issuance of common stock                               |  |              | 172 |            |   |             | 2 |          |   |              | 597   |       |   |                |       |  |   |      |     |   |   |        | 599    | 
|                            | Issuance of common
stock upon conversion
of debentures |  |              | 948 |            |   |             | 9 |          |   |              | 4,391 |       |   |                |        |  |   |      |      |   |   |        | 4,400  | 
|                            | Tax benefit of employee
stock option exercises         |  |              |    |            |   |             |  |          |   |              | 176   |       |   |                |       |  |   |      |     |   |   |        | 176    | 
|                            | Amortization of
deferred compensation                  |  |              |    |            |   |             |  |          |   |              |      |       |   |                |       |  |   |      | 325  |   |   |        | 325    | 
|                            | Net income                                             |  |              |    |            |   |             |  |          |   |              |      |       |   |                | 17,137 |  |   |      |     |   |   |        | 17,137 | 
|                            |                                                        |  |              |     |            |   |             |   |          |   |              |       |       |   |                |        |  |   |      |      |   |   |        |       
|Balance as of June 30, 2003 |                                                        |  | 10,482       |     |            | $ | 105         |   |          | $ | 27,167       |       |       | $ | 4,158          |        |  | $ | (227 | )    |   | $ | 31,203 |       
|                            |                                                        |  |              |     |            |   |             |   |          |   |              |       |       |   |                |        |  |   |      |      |   |   |        |       

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, 2003, 2002 AND 2001

|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |       |   |       |        |  
|----------------------------------------------- | -------------------------------------------------------------------------- | - | ------------------------------------------------- | --------------------------------------------------- | - | ---- | ------ | ------ | - | -------------- | ------ | ----- | - | ----- | ------ | -
|                                                |                                                                            |   |                                                   |                                                     |   | 2003 |        | 2002   |   | 2001          
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |               
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   | (in thousands) |        |       |   |      
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                | Net income                                                                 |   | $                                                 | 17,137                                              |   |      | $      | 3,905  |   |                | $      | 4,169 |  
|                                                | Adjustments to reconcile net income to net cash from
operating activities: |   |                                                   |                                                     |   |      |        |        |   |                |        |       |  
|                                                |                                                                            |   | Depreciation and amortization                     |                                                     |   | 956  |        |        |   | 1,251          |        |       |   | 1,532 |       
|                                                |                                                                            |   | Amortization of debt issuance costs               |                                                     |   | 464  |        |        |   | 170            |        |       |   |      |       
|                                                |                                                                            |   | Amortization of debt discount                     |                                                     |   | 423  |        |        |   | 222            |        |       |   |      |       
|                                                |                                                                            |   | Amortization of deferred stock-based compensation |                                                     |   | 325  |        |        |   | 325            |        |       |   | 98    |       
|                                                |                                                                            |   | Provision for doubtful accounts                   |                                                     |   | 513  |        |        |   | 340            |        |       |   | 577   |       
|                                                |                                                                            |   | Tax benefit of employee stock option exercises    |                                                     |   | 176  |        |        |   |               |        |       |   |      |       
|                                                |                                                                            |   | Changes in assets and liabilities:                |                                                     |   |      |        |        |   |                |        |       |   |       |       
|                                                |                                                                            |   |                                                   | Receivables                                         |   |      | (2,487 | )      |   |                | (4,656 | )     |   |       | (302   | )
|                                                |                                                                            |   |                                                   | Inventories                                         |   |      | (87    | )      |   |                | 779    |       |   |       | (1,035 | )
|                                                |                                                                            |   |                                                   | Deferred income taxes                               |   |      | (3,558 | )      |   |                |       |       |   |       |       |  
|                                                |                                                                            |   |                                                   | Prepaid expenses                                    |   |      | (715   | )      |   |                | (272   | )     |   |       | (84    | )
|                                                |                                                                            |   |                                                   | Accounts payable and accrued expenses               |   |      | 631    |        |   |                | (1,653 | )     |   |       | 1,353  |  
|                                                |                                                                            |   |                                                   | Income taxes payable                                |   |      | 2,302  |        |   |                |       |       |   |       |       |  
|                                                |                                                                            |   |                                                   | Accrued litigation settlement obligation            |   |      |       |        |   |                | (2,010 | )     |   |       |       |  
|                                                |                                                                            |   |                                                   | Deferred revenue                                    |   |      | 1,581  |        |   |                | (2,288 | )     |   |       | 5,808  |  
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                |                                                                            |   |                                                   | Net cash provided by (used in)
operating activities |   |      | 17,661 |        |   |                | (3,887 | )     |   |       | 12,116 |  
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                | Purchase of property and equipment                                         |   |                                                   | (738                                                | ) |      |        | (445   | ) |                |        | (947  | )
|                                                | Other, net                                                                 |   |                                                   | 2                                                   |   |      |        | 104    |   |                |        | (69   | )
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                |                                                                            |   |                                                   | Net cash used in investing activities               |   |      | (736   | )      |   |                | (341   | )     |   |       | (1,016 | )
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                | Redemption of preferred stock                                              |   |                                                   |                                                    |   |      |        | (5,000 | ) |                |        |      |  
|                                                | Issuance of common stock, net                                              |   |                                                   | 599                                                 |   |      |        | 40     |   |                |        | 69    |  
|                                                | Proceeds from convertible subordinated debentures                          |   |                                                   |                                                    |   |      |        | 5,000  |   |                |        |      |  
|                                                | Payments for convertible subordinated debentures                           |   |                                                   | (300                                                | ) |      |        |       |   |                |        |      |  
|                                                | Debt issuance costs                                                        |   |                                                   |                                                    |   |      |        | (433   | ) |                |        |      |  
|                                                | Payments on note payable                                                   |   |                                                   | (469                                                | ) |      |        | (25    | ) |                |        |      |  
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|                                                |                                                                            |   |                                                   | Net cash provided by (used in)
financing activities |   |      | (170   | )      |   |                | (418   | )     |   |       | 69     |  
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS |                                                                            |   | 16,755                                            |                                                     |   |      | (4,646 | )      |   |                | 11,169 |      
|CASH AND EQUIVALENTS AT BEGINNING OF YEAR       |                                                                            |   | 7,312                                             |                                                     |   |      | 11,958 |        |   |                | 789    |      
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      
|CASH AND EQUIVALENTS AT END OF YEAR             |                                                                            | $ | 24,067                                            |                                                     |   | $    | 7,312  |        |   | $              | 11,958 |      
|                                                |                                                                            |   |                                                   |                                                     |   |      |        |        |   |                |        |      

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001

|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |     | 
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | -------------- | ---- | --- |  |  | - | --- | 
|                                                          |                                                                                                                                                |  | 2003 |       | 2002 |                | 2001
|                                                          |                                                                                                                                                |  |      |       |      |                |     
|Supplemental disclosure of cash flow information:         |                                                                                                                                                |  |      |       |      | (in thousands) |      |     |  | 
|                                                          | Cash paid for interest                                                                                                                         |  | $    | 250   |      |                | $    | 114 |  |  | $ |    | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Cash paid for income taxes                                                                                                                     |  | $    | 896   |      |                | $    | 164 |  |  | $ | 131 | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|Supplemental disclosure of non-cash financing activities: |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Common stock issued in satisfaction of principal
redemptions under convertible subordinated
debentures, based on election of debenture holders |  | $    | 4,400 |      |                | $    | 300 |  |  | $ |    | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Value of warrants issued in conjunction with
convertible subordinated debentures                                                               |  | $    |      |      |                | $    | 595 |  |  | $ |    | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Value of warrants issued as debt issuance costs                                                                                                |  | $    |      |      |                | $    | 125 |  |  | $ |    | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Promissory note issued to IGT in satisfaction of
amounts previously in dispute and recorded as an
other liability                              |  | $    |      |      |                | $    | 494 |  |  | $ |    | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    
|                                                          | Restricted stock issued to an executive as
deferred compensation and additional paid in
capital                                                |  | $    |      |      |                | $    |    |  |  | $ | 975 | 
|                                                          |                                                                                                                                                |  |      |       |      |                |      |     |  |  |   |    

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, South
Africa and South Korea.

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.

On June 29, 2003, IGT and the Company entered into a definitive agreement
pursuant to which Acres will merge with a subsidiary of IGT. Under the terms
of the agreement, IGT will pay $11.50 per share in an all cash transaction,
representing an aggregate purchase price of approximately $130 million. The
agreement was unanimously approved by the Boards of Directors of both
companies. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 applicable to the proposed acquisition of the Company
by IGT expired on August 25, 2003 and the merger was approved by Acres
stockholders on September 26, 2003. The merger is subject to gaming regulatory
approvals, and other conditions. The Company anticipates that the transaction
will be completed in the fourth calendar quarter of 2003.

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 deferred revenue until the
related revenue is recognized.

Revenue for hardware sales is recognized when hardware components and
primary application software have been installed and have been accepted by the
customer. 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, Software Revenue
Recognition with Respect to Certain Transactions (SOP 98-9), 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 (vendor-specific objective evidence or VSOE). The Company follows
the residual method under SOP 97-2 for software product sales with multiple
elements. Software license revenue is
31Table of Contents

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.

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 $1,031,000 and
$757,000 at June 30, 2003 and 2002, respectively. 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 are recoverable as billings
are made in accordance with the contract terms.

Major Customers

Prior to fiscal 2003, in any fiscal year, more than 50% of the Companys
net revenues were derived from sales to three or fewer customers in any given
fiscal year. In fiscal 2003, sales to five customers accounted for slightly
more than 50% of the Companys net revenues. 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.

|                                          |  |                          |      |      |  |      |      |  |  |  |      | 
|----------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                          |  | 2003                     |      | 2002 |  | 2001
|                                          |  |                          |      |      |  |     
|                                          |  | (as a % of net revenues)
|Agua Caliente                             |  |                          | 7.8  |      |  |      |     |  |  |  |     | 
|Big Jackpot Slots                         |  |                          | 5.1  |      |  |      |     |  |  |  |     | 
|IGT for properties operated by MGM MIRAGE |  |                          | 1.2  |      |  |      | 20.5 |  |  |  | 20.0 | 
|IGT                                       |  |                          | 19.0 |      |  |      |     |  |  |  | 0.9  | 
|Mandalay Resort Group                     |  |                          | 9.4  |      |  |      | 2.4  |  |  |  | 6.6  | 
|MGM MIRAGE                                |  |                          | 3.3  |      |  |      | 21.0 |  |  |  | 1.1  | 
|Paragon Casino Resort                     |  |                          | 2.3  |      |  |      | 12.3 |  |  |  |     | 
|Station Casinos Inc.                      |  |                          | 11.3 |      |  |      | 4.0  |  |  |  | 37.8 | 
|Tsogo Sun Holdings                        |  |                          | 7.1  |      |  |      | 6.7  |  |  |  | 7.1  | 

The Companys revenues from sales to customers in the United States
totaled $41.2 million, $23.0 million and $40.5 million for the years ended June
30, 2003, 2002 and 2001, respectively. Sales in Australia totaled $613,000,
$1.6 million and $426,000 million, for the years ended June 30, 2003, 2002 and
2001, respectively. Sales to South Africa totaled $3.3 million, $1.8 million
and $3.1 million for the years ended June 30, 2003, 2002 and 2001,
respectively. Sales to South Korea totaled $1.9 million, $0 and $0 for the
years ended June 30, 2003, 2002 and 2001, respectively. The Companys revenues
from sales to customers outside the United States totaled $5.9 million, $3.4
million and $3.5 million for the years ended June 30, 2003, 2002 and 2001,
respectively. 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, 2003, 2002 and 2001, respectively.

|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | 2003                     |       | 2002 |  | 2001
|                         |  |                          |       |      |  |     
|                         |  | (as a % of net revenues) |      
|Revenues  Australia     |  |                          | 1.3   |      |  |      | 6.1   |  |  |  | 0.9   | 
|Revenues  South Africa  |  |                          | 7.1   |      |  |      | 6.7   |  |  |  | 7.1   | 
|Revenues  South Korea   |  |                          | 4.0   |      |  |      |      |  |  |  |      | 
|Revenues  United States |  |                          | 87.6  |      |  |      | 87.2  |  |  |  | 92.0  | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 
|Total                    |  |                          | 100.0 |      |  |      | 100.0 |  |  |  | 100.0 | 
|                         |  |                          |       |      |  |      |       |  |  |  |       | 

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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 or loss of, or
delivery over an extended period of time required under any one order.

Related Party

The Company had sales transactions with IGT, the holder of the Series A
Preferred Stock, of $5.4 million and $9.3 million for the years ended June 30,
2002 and 2001, 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 as of June 30, 2002.
Effective 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. IGT was not a related party of
the Company during the fiscal year ended June 30, 2003.

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 at June 30, 2003 consist of
receivables, and at June 30, 2002 consist of receivables, 6% convertible
subordinated debentures, and a note payable. At June 30, 2003 and 2002, 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
|                                     |  |                |     |           |  |             |     |            
|Allowance for uncollectible accounts |  | (in thousands)
|2003                                 |  | $              | 932 |           |  | $           | 513 |             |  | $ |  |  |  | $ | 1,445 | 
|2002                                 |  |                | 592 |           |  |             | 340 |             |  |   |  |  |  |   | 932   | 
|2001                                 |  |                | 15  |           |  |             | 577 |             |  |   |  |  |  |   | 592   | 

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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,
|                  |  |                        
|                  |  | 2003                    |       | 2002
|                  |  |                         |       |     
|                  |  | (in thousands)         
|Raw materials     |  | $                       | 3,915 |      |  | $ | 3,823 | 
|Work-in-progress  |  |                         | 35    |      |  |   | 52    | 
|Finished goods    |  |                         | 122   |      |  |   | 110   | 
|                  |  |                         |       |      |  |   |       | 
|Total inventories |  | $                       | 4,072 |      |  | $ | 3,985 | 
|                  |  |                         |       |      |  |   |       | 

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed on the
straight-line basis over an assets estimated useful life of two to five years.
Leasehold improvements are amortized over the shorter of the useful life or
lease term. Expenditures for maintenance and repairs are charged to operations
when incurred. The Company recorded depreciation expense of $798,000, $932,000
and $1.1 million for the years ended June 30, 2003, 2002 and 2001,
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
$432,000 and $398,000, were $90,000 and $124,000 at June 30, 2003 and 2002,
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
$1,061,000 and $937,000, were $0 and $124,000 at June 30, 2003 and 2002,
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 $124,000,
$267,000 and $354,000 of amortization for the years ended June 30, 2003, 2002
and 2001, respectively. All research and development costs are expensed as
incurred.

Stock Options

The Financial Accounting Standards Board has issued Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123). This Statement defines
a fair market value based method of accounting for an employee stock option in
which companies account for stock options by recognizing, as compensation
expense in the statement of operations, the fair value of stock options granted
over the vesting period of the option. The statement also permits companies to
continue accounting for stock options under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25). The Company
has elected to account for stock options under APB 25 and to disclose the pro
forma impact on net income and earnings per share as if the Company had used
the fair value method recommended by SFAS 123, as amended by Statement No. 148,
Accounting for Stock-Based CompensationTransition and Disclosurean amendment
of FAS 123. The following table

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illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
principles of SFAS 123 to stock-based compensation:

|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                                                                      |  | For the years ended June 30,        
|                                                                                                                                      |  |                                     
|                                                                                                                                      |  | 2003                                 |        | 2002 |  | 2001
|                                                                                                                                      |  |                                      |        |      |  |     
|                                                                                                                                      |  | (in thousands except per share data)
|Net income as reported  basic                                                                                                        |  | $                                    | 17,137 |      |  | $    | 3,905 |  |  | $ | 4,169 | 
|Net income as reported  diluted                                                                                                      |  |                                      | 17,316 |      |  |      | 4,064 |  |  |   | 4,169 | 
|Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects |  |                                      | 608    |      |  |      | 421   |  |  |   | 396   | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Pro forma net income  basic                                                                                                          |  | $                                    | 16,529 |      |  | $    | 3,484 |  |  | $ | 3,773 | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Pro forma net income  diluted                                                                                                        |  | $                                    | 16,708 |      |  | $    | 3,643 |  |  | $ | 3,773 | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Earnings per share:                                                                                                                   |  |                                      |        |      |  |      |       |  |  |   |       | 
|Basicas reported                                                                                                                     |  | $                                    | 1.79   |      |  | $    | .43   |  |  | $ | .47   | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Basicpro forma                                                                                                                       |  | $                                    | 1.73   |      |  | $    | .38   |  |  | $ | .42   | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Dilutedas reported                                                                                                                   |  | $                                    | 1.59   |      |  | $    | .38   |  |  | $ | .41   | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 
|Dilutedpro forma                                                                                                                     |  | $                                    | 1.54   |      |  | $    | .34   |  |  | $ | .37   | 
|                                                                                                                                      |  |                                      |        |      |  |      |       |  |  |   |       | 

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.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45), which elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements concerning the guarantors obligations
under certain guarantees that it has issued. FIN 45 also clarifies (for
guarantees issued after January 1, 2003) that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligations undertaken in issuing the guarantee. The Company does not have
any outstanding guarantees and accordingly the adoption of FIN 45 had no effect
on its financial position, results of operations, or cash flows.

In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), which addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for variable interest entities
(VIEs) created after January 31, 2003. The Company has reviewed its major
relationships and its overall economic interests with other companies
consisting of related parties and other suppliers to determine the extent of
its variable economic interest in these parties. The adoption of FIN 46 did
not have an impact on the Companys financial position, results of
operations or cash flows.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables, which provides guidance on
accounting for arrangements involving the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of Issue 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company has not yet determined the impact that the
adoption of EITF 00-21 may have on the Companys financial position, results of
operations, or cash flows.

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In May 2003, the Financial Accounting Standards Board issued Statement
No. 150 Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company is currently evaluating the provisions of SFAS 150 and does not
anticipate that SFAS 150 will have a significant impact on the Companys
financial position, results of operations or cash flows.

Reclassifications

The financial statements and footnotes for prior years reflect certain
reclassifications to conform with the current year presentation, which have no
effect on previously reported net income.



|2. |  | INCOME TAXES:
|-- |  | -------------

The provision (benefit) for income taxes for the years ended June 30,
2003, 2002 and 2001 consisted of the following:

|          |         |   |        |        |      |                |      |   |  |   |   |   | 
|--------- | ------- | - | ------ | ------ | ---- | -------------- | ---- | - |  | - | - | - | 
|          |         |   | 2003   |        | 2002 |                | 2001
|          |         |   |        |        |      |                |     
|Current:  |         |   |        |        |      | (in thousands) |      |   |  |  
|          | Federal |   | $      | 3,035  |      |                | $    |  |  |   | $ |  | 
|          | State   |   |        | 324    |      |                |      |  |  |   |   |  | 
|          |         |   |        |        |      |                |      |   |  |   |   |  
|          |         |   | 3,359  |        |      |                |     |   |  |   |  |  
|Deferred: |         |   |        |        |      |                |      |   |  |   |   |  
|          | Federal |   |        | (3,374 | )    |                |      |  |  |   |   |  | 
|          | State   |   |        | (184   | )    |                |      |  |  |   |   |  | 
|          |         |   |        |        |      |                |      |   |  |   |   |  
|          |         |   | (3,558 | )      |      |                |     |   |  |   |  |  
|          |         |   |        |        |      |                |      |   |  |   |   |  
|Total     |         | $ | (199   | )      |      | $              |     |   |  | $ |  |  
|          |         |   |        |        |      |                |      |   |  |   |   |  

A reconciliation of the expected income tax provision (benefit) at the
U.S. federal statutory income tax rate to actual income tax provision (benefit)
for the years ended June 30, 2003, 2002 and 2001 is as follows:

|                                         |  |      |       |      |  |      |       |    |  |  |       |   
|---------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                         |  | 2003 |       | 2002 |  | 2001
|                                         |  |      |       |      |  |     
|Expected federal tax provision           |  |      | 35.0  | %    |  |      | 34.0  | %  |  |  | 34.0  | % 
|State income tax, net of federal benefit |  |      | .5    | %    |  |      | 4.0   | %  |  |  | 4.0   | % 
|Non-deductible items                     |  |      | 1.7   | %    |  |      | 1.7   | %  |  |  | .9    | % 
|Research credits                         |  |      | (1.6  | )%   |  |      | (.2   | )% |  |  | (3.8  | )%
|Valuation allowance                      |  |      | (36.3 | )%   |  |      | (39.5 | )% |  |  | (31.4 | )%
|Other                                    |  |      | (.5   | )%   |  |      |      | %  |  |  | (3.7  | )%
|                                         |  |      |       |      |  |      |       |    |  |  |       |   
|                                         |  |      | (1.2  | )%   |  |      |      | %  |  |  |      | % 
|                                         |  |      |       |      |  |      |       |    |  |  |       |   

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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, 2003
and 2002, are as follows:

|                                    |                           |   |                            |       |      |   |        |       | 
|----------------------------------- | ------------------------- | - | -------------------------- | ----- | ---- | - | ------ | ----- | 
|                                    |                           |   | Deferred income tax assets
|                                    |                           |   | and liabilities           
|                                    |                           |   | at June 30,               
|                                    |                           |   |                           
|                                    |                           |   | 2003                       |       | 2002
|                                    |                           |   |                            |       |     
|                                    |                           |   | (in thousands)            
|Operating loss carryforwards        |                           | $ |                           |       |      | $ | 3,051  |      
|Research and development tax credit |                           |   | 39                         |       |      |   | 1,337  |      
|Property and equipment              |                           |   | 207                        |       |      |   | 361    |      
|Accruals and reserves               |                           |   | 1,725                      |       |      |   | 438    |      
|Deferred revenue                    |                           |   | 1,342                      |       |      |   |       |      
|Intangible and other assets         |                           |   | 245                        |       |      |   | 227    |      
|                                    |                           |   |                            |       |      |   |        |      
|                                    | Total deferred tax assets |   |                            | 3,558 |      |   |        | 5,414 | 
|Less valuation allowance            |                           |   |                           |       |      |   | (5,414 | )    
|                                    |                           |   |                            |       |      |   |        |      
|Net deferred tax assets             |                           | $ | 3,558                      |       |      | $ |       |      
|                                    |                           |   |                            |       |      |   |        |      

At March 31, 2003, the Company performed an assessment of the
recoverability of its net deferred tax assets and determined that tax benefits
associated with previously reserved net deferred tax assets are more likely
than not realizable. The assessment was based on financial and taxable income
forecasts and most notably, the agreements the Company entered into to license
certain of its bonusing patents to IGT and to settle outstanding litigation
over the Wheel of Gold patents. The Companys assessment indicated that
income tax on forecast income would be sufficient to offset the previously
reserved net deferred tax assets. As a result, at March 31, 2003 the Company
recorded a tax benefit resulting from the reduction of previously recorded
valuation reserves against net deferred tax assets, totaling $4.2 million.

The Companys research and development tax credits of $39,000 at June 30,
2003, are available to offset future taxable income and begin to expire in
2022. The Companys alternative minimum tax credit carryforward as of June 30,
2003, is $54,000 and may be carried forward indefinitely.



|3. |  | COMMITMENTS AND CONTINGENCIES:
|-- |  | ------------------------------

Litigation

As of April 21, 2003, the Company and Anchor Gaming (Anchor) settled
both of the lawsuits filed in U.S. District Court for the District of Nevada
and U.S. District Court for the District of Oregon regarding ownership of the
Wheel of Gold (WOG) technology that is the subject of two patents that were
assigned to Anchor. The Company relinquished all claims to the WOG patents and
acknowledged the scope and validity of those patents. The parties stipulated
to the dismissal of their respective claims in U.S. District Court in Oregon
and their respective claims in U.S. District Court in Nevada other than the
Companys claim for joint inventorship of the WOG patents. The Company also
agreed to assign all rights it may have in the WOG patents to Anchor Coin, a
wholly-owned subsidiary of IGT.

The defense of the lawsuit with Anchor in the U.S. District Court for the
District of Nevada 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 for the District 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. Upon a motion for reconsideration, on March 5, 2003 the
court found that the insurance carrier has a duty to defend the Company against
the entire Anchor lawsuit, but is entitled to reimbursement from the Company
for the amount the insurance carrier paid for claims alleged by Anchor that are
not covered by the Companys policy. The Company cannot predict the outcome of
this suit

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In another insurance coverage suit, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of claims alleged by Casino Data Systems in a separate lawsuit
that has been settled. The suit against the insurance carrier 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, that if coverage is
provided it should be provided by the prior insurance carrier, and that the
Company must reimburse the insurance carrier for 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. At June 30, 2002, the Company recorded a liability in the
amount of $70,000 to provide for the contingency. Upon a motion for
reconsideration, on March 5, 2003 the court found that the insurance carrier
has a duty to defend the Company against the lawsuit. The insurance carrier
has filed a motion requesting leave to file an interlocutory appeal of the
trial courts ruling on the motion for reconsideration. 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 damages in excess of
$30,000,000, largely comprised of consequential damages (damages for lost
profits). On September 25, 2003, the Company filed a motion for partial
summary judgment to preclude Siena from seeking consequential damages, which
are not recoverable pursuant to the terms of the Equipment Sale Agreement. 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.

In June 2003, a putative class action lawsuit was filed in Clark County,
Nevada District Court against the Company and its directors, entitled Paul
Miller v. Acres Gaming Incorporated, et al., Case No. 470016. The complaint
alleges that the Companys directors breached their fiduciary duties to our
stockholders in connection with the approval of the merger transaction between
the Company and IGT and seeks to enjoin and/or void the merger agreement among
other forms of relief. On September 19, 2003, the judge presiding over the
case denied plaintiffs motion for a temporary restraining order (TRO) to
prevent Acres stockholders from voting on the merger. On
September 24, 2003, plaintiff petitioned the Nevada Supreme Court to vacate the
denial of the TRO and to enjoin the Company from holding its stockholder vote
on the merger. The Nevada Supreme Court denied the petition on September 25,
2003. The Company believes that the plaintiffs claims are without merit.

The Company from time to time is involved in various other 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, which was amended pursuant to Amendment No. 1
to Employment Agreement, dated as of June 29, 2003 (collectively, 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 $300,000 for the period from July 1, 2002 to June 30, 2003.
Half, or 150,000 shares, of the restricted stock became unrestricted on June 9,
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 $325,000 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.

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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. The Company recorded $325,000 of compensation
expense for each of the years ended June 30, 2003 and 2002, and $98,000 for the
year ended June 30, 2001 related to the vesting of the restricted shares.
$227,000 and $552,000 of deferred compensation has been recorded to reflect the
remaining restricted balance of the stock as of June 30, 2003 and 2002,
respectively.

Operating Leases

The Company leases its office facilities, certain office equipment and
service vehicles under operating leases that extend through June 30, 2008.
Future minimum lease payments under these non-cancelable operating leases as of
June 30, 2003 are $992,000, $815,000, $770,000, $748,000 and $716,000 in fiscal
years 2004, 2005, 2006, 2007 and 2008, respectively. Total lease expense was
$951,000, $969,000 and $832,000 for the years ended June 30, 2003, 2002 and
2001, respectively.

Note Payable

On February 21, 2002, to settle amounts previously in dispute, the Company
issued an unsecured promissory note to IGT in the amount of $494,000 bearing
interest at 4.75% payable monthly, with principal payments of $25,000 due
quarterly for three years, and the unpaid balance due at maturity. In May
2003, the Company paid in full the outstanding principal balance of the note.

Revolving Loan Agreement

In August 2002, the Company entered into a one-year revolving loan
agreement with a commercial bank to provide up to $3.0 million in financing
secured by inventory and accounts receivable. The agreement provides for
interest at a rate equal to Prime plus 1%. No amounts were outstanding under
the agreement during the fiscal year ended June 30, 2003. The agreement
contains certain financial covenants including minimum net worth, minimum cash
flow, net income and operating income requirements. Management believes that
the Company was in compliance with all covenants under the agreement through
its expiration in August 2003. The Company elected not to renew the loan
agreement.

Purchase Commitments

At June 30, 2003, the Company had $1.6 million 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 $5,000,000 principal amount of 6%
convertible subordinated debentures convertible into shares of the Companys
common stock at $4.6433 per share to three institutional investors. In June
2003, the debentures remaining principal balance of $1.4 million was converted
into shares of Acres common stock. 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% was payable
semi-annually starting in April 2002. Principal payments of $300,000 were due
monthly from June 2002 to August 2003 and principal payments of $500,000 were
due monthly from September 2003 until the principal was repaid no later than
December 21, 2003. 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.



|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.

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|6. |  | STOCKHOLDERS EQUITY:
|-- |  | ---------------------

The Company has two stock option and incentive plans (the Plans) that
permit, or permitted, the granting of awards to directors, employees and
consultants of the Company in the form of stock options, restricted stock and
other types of awards. The Companys 1993 Stock Option and Incentive Plan (the
1993 Plan) was terminated effective January 10, 2003. However, awards
granted under the 1993 Plan prior to its termination remain subject to the
terms and conditions of the 1993 Plan. Effective October 24, 2002, the Company
adopted a new plan, the 2002 Stock Incentive Plan (the 2002 Plan). 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.

A total of 2,450,000 shares of the Companys Common Stock have been
reserved for issuance pursuant to awards granted under the Plans. Under the
Plans, the Company has granted 1,543,600 options to purchase 1,543,600 shares
of the Companys Common Stock, net of cancellations, through June 30, 2003. In
addition to issuances under the Plans, the Company issued 185,000 options to
purchase Common Stock that were not subject to the provisions of the Plans.
Stock option activity under the Plans is summarized below:

|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|---------------------------------------------- |  | ------ | --------- | -------------- |  | ---------------- | ---- | -------------- |  | ---------------------------- | --------- | ---------------- |  | - | ---- |  |  | ---------------- | --------- | - |  | - | ---- | 
|                                               |  |        |           |                |  |                  |      |                |  | For the years ended June 30, |           |                  |  |   |      |  |  |                 
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                 
|                                               |  | 2003   |           | 2002           |  | 2001            
|                                               |  |        |           |                |  |                 
|                                               |  |        |           |                |  | Weighted Average |      |                |  |                              |           | Weighted Average |  |   |      |  |  | Weighted Average
|                                               |  | Shares |           | Exercise Price |  | Shares           |      | Exercise Price |  | Shares                       |           | Exercise Price  
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                 
|Outstanding at beginning of year               |  |        | 1,009,525 |                |  | $                | 4.17 |                |  |                              | 1,306,517 |                  |  | $ | 3.77 |  |  |                  | 1,354,242 |   |  | $ | 3.68 | 
|Granted                                        |  |        | 138,000   |                |  |                  | 6.24 |                |  |                              | 265,000   |                  |  |   | 4.73 |  |  |                  | 179,500   |   |  |   | 3.66 | 
|Exercised                                      |  |        | (173,625  | )              |  |                  | 3.45 |                |  |                              | (24,500   | )                |  |   | 1.48 |  |  |                  | (58,025   | ) |  |   | 1.26 | 
|Canceled                                       |  |        | (32,900   | )              |  |                  | 4.99 |                |  |                              | (537,492  | )                |  |   | 3.60 |  |  |                  | (169,200  | ) |  |   | 3.70 | 
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Outstanding at end of year                     |  |        | 941,000   |                |  |                  | 4.56 |                |  |                              | 1,009,525 |                  |  |   | 4.17 |  |  |                  | 1,306,517 |   |  |   | 3.77 | 
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Exercisable at end of year                     |  |        | 566,635   |                |  |                  | 4.29 |                |  |                              | 606,040   |                  |  |   | 4.15 |  |  |                  | 882,063   |   |  |   | 3.92 | 
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Weighted average fair value of
options granted |  | $      | 4.79      |                |  |                  |      |                |  | $                            | 3.71      |                  |  |   |      |  |  | $                | 2.94      |   |  |   |      | 
|                                               |  |        |           |                |  |                  |      |                |  |                              |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 

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:

|                        |  |         |      |         |  |         |     |   |  |  |     |  
|----------------------- |  | ------- | ---- | ------- |  | ------- | --- | - |  |  | --- | -
|                        |  | 2003    |      | 2002    |  | 2001   
|                        |  |         |      |         |  |        
|Risk free interest rate |  |         | 1.84 | %       |  |         | 3.8 | % |  |  | 5.3 | %
|Expected life of option |  | 5 years |      | 5 years |  | 5 years
|Expected volatility     |  |         | 105  | %       |  |         | 106 | % |  |  | 108 | %
|Dividends               |  | none    |      | none    |  | none   

The following table summarizes the options to purchase Common Stock
outstanding at June 30, 2003:

|                |                 |             |                    |                |                  |                  |                  |             |                    |             |                 |  |         |        |  |   |       |       |                  |  | 
|--------------- | --------------- | ----------- | ------------------ | -------------- | ---------------- | ---------------- | ---------------- | ----------- | ------------------ | ----------- | --------------- |  | ------- | ------ |  | - | ----- | ----- | ---------------- |  | 
|                |                 |             |                    |                |                  |                  |                  |             |                    |             |                 |  |         |        |  |   |       |       | Weighted        
|                |                 |             |                    |                |                  |                  |                  |             |                    |             |                 |  |         |        |  |   |       |       | Average Exercise
|                |                 |             | Options for Shares |                | Weighted Average |                  | Weighted Average |             | Options for Shares |             | Price of Shares
|Exercise Prices |                 | Outstanding |                    | Exercise Price |                  | Contractual Life |                  | Exercisable |                    | Exercisable
|                |                 |             |                    |                |                  |                  |                  |             |                    |            
|$0.94 - $1.76   |                 |             | 205,400            |                |                  | $                | 1.23             |             |                    | 6.6 years   |                 |  | 170,210 |        |  | $ | 1.18  |      
|$1.76 -  $3.53  |                 |             | 111,250            |                |                  |                  | 2.54             |             |                    | 7.1 years   |                 |  | 67,450  |        |  |   | 2.50  |      
|$3.53 - $5.29   |                 |             | 286,450            |                |                  |                  | 4.75             |             |                    | 6.5 years   |                 |  | 179,775 |        |  |   | 4.71  |      
|$5.29 - $7.05   |                 |             | 253,900            |                |                  |                  | 5.88             |             |                    | 7.4 years   |                 |  | 89,200  |        |  |   | 6.03  |      
|$7.05 - $8.81   |                 |             | 15,000             |                |                  |                  | 8.36             |             |                    | 5.0 years   |                 |  | 11,000  |        |  |   | 8.50  |      
|$8.81 - $10.58  |                 |             | 33,000             |                |                  |                  | 9.40             |             |                    | 7.5 years   |                 |  | 13,000  |        |  |   | 9.04  |      
|$10.58 - $12.34 |                 |             | 12,000             |                |                  |                  | 11.00            |             |                    | 4.0 years   |                 |  | 12,000  |        |  |   | 11.00 |      
|$12.34 - $14.10 |                 |             | 12,000             |                |                  |                  | 13.00            |             |                    | 4.0 years   |                 |  | 12,000  |        |  |   | 13.00 |      
|                | $14.10 - $15.86 |             |                    | 12,000         |                  |                  |                  | 15.00       |                    |             | 4.0 years       |  |         | 12,000 |  |   |       | 15.00 |                 
|                |                 |             |                    |                |                  |                  |                  |             |                    |             |                 |  |         |        |  |   |       |       |                  | 
|$0.94 - $15.86  |                 |             | 941,000            |                |                  | $                | 4.56             |             |                    | 6.7 years   |                 |  | 566,635 |        |  | $ | 4.29  |      
|                |                 |             |                    |                |                  |                  |                  |             |                    |             |                 |  |         |        |  |   |       |       |                  | 

As previously described in Note 1, the Company accounts for stock options
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.

40



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|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. Employer contributions were $83,000,
$0 and $0 during the years ended June 30, 2003, 2002 and 2001, respectively.



|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,         
|                                                                                            |                                                                                                        |   |                                     
|                                                                                            |                                                                                                        |   | 2003                                 |        | 2002 |   | 2001 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |      
|                                                                                            |                                                                                                        |   | (in thousands except per share data)
|Net income                                                                                  |                                                                                                        | $ | 17,137                               |        |      | $ | 3,905 |        |  | $ | 4,169 |       
|Dilutive effect of interest on convertible subordinated debentures                          |                                                                                                        |   | 179                                  |        |      |   | 159   |        |  |   |      |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|Net income allocable to common stockholders                                                 |                                                                                                        | $ | 17,316                               |        |      | $ | 4,064 |        |  | $ | 4,169 |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|Weighted average number of shares of common stock and common
stock equivalents outstanding: |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|                                                                                            | Weighted average number of common shares outstanding  basic                                           |   |                                      | 9,574  |      |   |       | 9,074  |  |   |       | 8,948  | 
|                                                                                            | Dilutive effect of warrants and employee stock options
after application of the treasury stock method  |   |                                      | 650    |      |   |       | 340    |  |   |       | 264    | 
|                                                                                            | Dilutive effect of convertible subordinated debentures
after application of the if-converted method    |   |                                      | 657    |      |   |       | 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                                         |   |                                      | 10,881 |      |   |       | 10,596 |  |   |       | 10,166 | 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|Income per share  basic                                                                    |                                                                                                        | $ | 1.79                                 |        |      | $ | .43   |        |  | $ | .47   |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       
|Income per share  diluted                                                                  |                                                                                                        | $ | 1.59                                 |        |      | $ | .38   |        |  | $ | .41   |       
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       |        |  |   |       |       

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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,
|                                    |  |                                   
|                                    |  | 2003                               |     | 2002 |  | 2001          
|                                    |  |                                    |     |      |  |               
|                                    |  |                                    |     |      |  | (in thousands) |     |  |  | 
|Warrants and employee stock options |  |                                    | 111 |      |  |                | 674 |  |  |  | 764 | 

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. |  | SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
|-- |  | ----------------------------------------------

|                                     |                                       |               |   |                |  |               |   |                |  |  |   |       |  |  |   |        | 
|------------------------------------ | ------------------------------------- | ------------- | - | -------------- |  | ------------- | - | -------------- |  |  | - | ----- |  |  | - | ------ | 
|Year ended June 30, 2003             |                                       | First Quarter |   | Second Quarter |  | Third Quarter |   | Fourth Quarter
|                                     |                                       |               |   |                |  |               |   |               
|(in thousands except per share data) |                                       |               |   |                |  |               |   |                |  |  |   |       |  |  |   |       
|                                     | Net revenues                          |               | $ | 5,945          |  |               | $ | 11,595         |  |  | $ | 9,487 |  |  | $ | 20,032 | 
|                                     | Gross profit                          |               |   | 4,067          |  |               |   | 6,791          |  |  |   | 7,215 |  |  |   | 16,419 | 
|                                     | Income from operations                |               |   | 650            |  |               |   | 2,582          |  |  |   | 3,284 |  |  |   | 11,496 | 
|                                     | Net income                            |               |   | 420            |  |               |   | 2,339          |  |  |   | 7,251 |  |  |   | 7,127  | 
|                                     | Net income per common share  basic   |               | $ | .05            |  |               | $ | .25            |  |  | $ | .75   |  |  | $ | .72    | 
|                                     | Net income per common share  diluted |               | $ | .04            |  |               | $ | .22            |  |  | $ | .67   |  |  | $ | .64    | 

|                                     |                                              |               |   |                |  |               |   |                |  |  |   |       |   |  |   |       | 
|------------------------------------ | -------------------------------------------- | ------------- | - | -------------- |  | ------------- | - | -------------- |  |  | - | ----- | - |  | - | ----- | 
|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   | 




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

None




ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we
have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14(c) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are
effective. There were no changes in our internal controls over
financial reporting during the quarter ended June 30, 2003 that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.

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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, 2003.




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, 2003.




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, 2003.

Disclosure Regarding the Companys Equity Compensation Plans

The Company maintains its 1993 Stock Option and Incentive Plan (the 1993
Plan) which governs outstanding equity awards that were granted under the 1993
Plan and its 2002 Stock Incentive Plan (the 2002 Plan), pursuant to which the
Company may grant equity awards to eligible persons. The Companys Board of
Directors adopted the 1993 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. The
Companys Board of Directors adopted the 2002 Plan in October 2002 and it was
approved by the shareholders in January 2003, on which date the 1993 Plan was
terminated with respect to new awards. In addition, the Company has issued
equity awards outside of its 1993 Plan and 2002 Plan to three of its officers,
Floyd W. Glisson, Richard J. Schneider and Reed M. Alewel. The material terms
of these awards are described below.

The following table summarizes information about equity awards under the
Companys 1993 and 2002 Plans and those issued outside of these Plans as of
June 30, 2003:

|                                                           |  |             |  |                   |           |                     |         |                     |  |                 |  |   |      |                 |      |                     |         |  |         |    
|---------------------------------------------------------- |  | ----------- |  | ----------------- | --------- | ------------------- | ------- | ------------------- |  | --------------- |  | - | ---- | --------------- | ---- | ------------------- | ------- |  | ------- | ---
|                                                           |  |             |  |                   |           | Number of shares of |         |                     |  |                 |  |   |      |                 |      | Number of Shares of
|                                                           |  |             |  |                   |           | Common Stock to be  |         |                     |  |                 |  |   |      |                 |      | Common Stock       
|                                                           |  |             |  |                   |           | issued upon         |         |                     |  |                 |  |   |      |                 |      | Available for      
|Plan Category                                              |  |             |  |                   |           | exercise of         |         | Weighted Average    |  |                 |  |   |      | Future Issuance
|Equity compensation                                        |  | Outstanding |  | Exercise Price of |           | (excluding shares  
|plans approved by                                          |  |             |  |                   |           | Options*            |         | Outstanding Options |  | reflected in *)
|                                                           |  |             |  |                   |           |                     |         |                     |  |                
|Equity compensation
plan not approved by
security holders: |  |             |  |                   |           |                     | 941,000 |                     |  |                 |  |   |      | $               | 4.56 |                     |         |  | 906,400 | (1)
|Richard J. Schneider(2)                                    |  |             |  |                   |           |                     | 25,000  |                     |  |                 |  |   |      | $               | 1.00 |                     |         |  | N/A     |    
|Reed M. Alewel(3)                                          |  |             |  |                   |           |                     | 25,000  |                     |  |                 |  |   |      | $               | 1.00 |                     |         |  | N/A     |    
|Floyd W. Glisson(4)                                        |  |             |  |                   |           |                     | 135,000 |                     |  |                 |  |   |      | $               | 1.00 |                     |         |  | N/A     |    
|                                                           |  |             |  |                   |           |                     |         |                     |  |                 |  |   |      |                 |      |                     |         |  |         |    
|                                                           |  | Total       |  |                   | 1,126,000 |                     |         |                     |  |                 |  | $ | 3.98 |                 |      |                     | 906,400 | 
|                                                           |  |             |  |                   |           |                     |         |                     |  |                 |  |   |      |                 |      |                     |         |  |         |    

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---

|(1) |  | Consists of shares reserved for issuance under the 2002 Plan. Up to an
additional 301,300 shares that are subject to outstanding options under the
1993 Plan may become available for issuance under the 2002 Plan if they cease
to be subject to such options (other than by reason of settlement or exercise).
The Company awards stock options to non-employee directors under the Companys
plans pursuant to a formula established by the Board of Directors as follows:
(1) an initial grant to purchase 7,500 shares of the Companys Common Stock as
of the date of the directors initial election or appointment to the Board and
(2) an annual grant to purchase 2,500 shares of Common Stock immediately
following each years annual shareholders meeting. Stock options granted under
this program will vest and become exercisable with respect to 25% of the shares
at grant and with respect to the remainder of the shares over the 3-year period
following the grant date (assuming continued Board service).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) |  | 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 Equity Compensation Awards Outside of the Plans

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 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.

44



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The Non-Plan Options are nonqualified stock options for tax purposes.
There are no tax consequences to the Company or the optionee upon the grant of
a non-qualified stock option (NSO). 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, which was amended pursuant to
Amendment No. 1 to Employment Agreement dated as of June 29, 2003. 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 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, 2003.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable.




PART IV




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



| | (a) |  | (1) Financial Statements
| | --- |  | ------------------------



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements are set forth under Item 8 of this Annual
Report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.



| |  |  | (2) Exhibits
| |  |  | ------------

See Index to Exhibits.



| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2003. We furnished to the SEC reports on Form 8-K on
April 24, 2003, to furnish the press release announcing, among other
things, the settlement of patent litigation, and May 5, 2003, to furnish
the press release announcing our financial results for the fiscal quarter
ended March 31, 2003.

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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 26, 2003 |  | 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 26, 2003 |  | /s/  Floyd W. Glisson                                                                                                         
|                        
|                         |  | Floyd W. Glisson
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)                              
|                        
|                         |  |                                                                                                                               
|                        
|Date: September 26, 2003 |  | /s/  Patrick W. Cavanaugh                                                                                                     
|                        
|                         |  | Patrick W. Cavanaugh
Senior Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
|                        
|                         |  |                                                                                                                               
|                        
|Date: September 26, 2003 |  | /s/  Ronald G. Bennett                                                                                                        
|                        
|                         |  | Ronald G. Bennett
Director                                                                                                    
|                        
|                         |  |                                                                                                                               
|                        
|Date: September 26, 2003 |  | /s/  Robert W. Brown                                                                                                          
|                        
|                         |  | Robert W. Brown
Director                                                                                                      
|                        
|                         |  |                                                                                                                               
|                        
|Date: September 26, 2003 |  | /s/  Richard D. Furash
Richard D. Furash
Director                                                                             

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|                         |  |                            
|------------------------ |  | ---------------------------
|                        
|                         |  |                            
|                        
|Date: September 26, 2003 |  | /s/  Roger  B. Hammock     
|                        
|                         |  | Roger  B. Hammock
Director 
|                        
|                         |  |                            
|                        
|Date: September 26, 2003 |  | /s/  David R. Willensky    
|                        
|                         |  | David R. Willensky
Director

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INDEX TO EXHIBITS

|        |        |             |  |                                                                                                                                                                                                                                                                                             
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|No.     |        | Description
|        |        |            
|        | 2.1    |             |  | Agreement and Plan of Merger dated as of June 29, 2003, by
and among Acres Gaming Incorporated, International Game Technology
and NWAC Corp.(1)                                                                                                                                             
|        | 3.1    |             |  | Articles of Incorporation of Acres Gaming Incorporated, as
amended (2)                                                                                                                                                                                                                      
|        | 3.2    |             |  | Bylaws of Acres Gaming Incorporated, as amended (3)                                                                                                                                                                                                                                         
|        | 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 (4)                                                          
|        | 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 (4)
|        |        |            
|        | 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 (4)                       
|        |        |            
|        | 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 (4)                                                                                      
|        |        |            
|        | 4.5    |             |  | Stock Purchase Warrant dated December 21, 2001, issued by
Acres Gaming Incorporated to Roth Capital Partners, LLC (4)                                                                                                                                                                       
|        |        |            
|        | +10.1  |             |  | Acres Gaming Incorporated 1993 Stock Option and Incentive Plan, as amended (2)                                                                                                                                                                                                              
|        |        |            
|        | +10.2  |             |  | Employment Agreement dated July 1, 1996 between the Company and John F. Acres (2)                                                                                                                                                                                                           
|        |        |            
|        | +10.3  |             |  | Amendment to Employment Agreement dated July 20, 1998 between the Company and John F. Acres (5)                                                                                                                                                                                             
|        |        |            
|        | 10.4   |             |  | Lease dated March 3, 1998 between the Company and #26 McCarran Center, LC(6)                                                                                                                                                                                                                
|        |        |            
|        | 10.5   |             |  | Lease dated August 5, 1999, between the Company and Avery Investments (7)                                                                                                                                                                                                                   
|        |        |            
|        | 10.6   |             |  | System Upgrade Agreement dated June 7, 1999 between Crown Limited and the Company (8)                                                                                                                                                                                                       
|        |        |            
|        | +10.7  |             |  | Nonqualified Stock Option Agreement between Acres Gaming Incorporated and Richard Schneider dated December 8, 1999.(9)                                                                                                                                                                      
|        |        |            
|        | +10.8  |             |  | Nonqualified Stock Option Agreement between Acres Gaming Incorporated and Reed Alewel dated December 8, 1999.(9)                                                                                                                                                                            
|        |        |            
|        | + 10.9 |             |  | Nonqualified Stock Option Agreement between Acres Gaming Incorporated and Floyd Glisson dated December 8, 1999.(9)                                                                                                                                                                          
|        |        |            
|        | 10.10  |             |  | Product Sales, Delivery and License Agreement dated December
8, 2000 between Acres Gaming Incorporated and IGT (10)                                                                                                                                                                         
|        |        |            
|        | 10.11  |             |  | Acres Software Maintenance Agreement dated December 8, 2000
between Acres Gaming Incorporated and IGT (10)                                                                                                                                                                                  
|        |        |            
|        | 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 (11)                                                                                                                        
|        |        |            
|        | +10.13 |             |  | Employment Agreement between Acres Gaming Incorporated and Floyd W. Glisson dated as of January 1, 2001 (12)                                                                                                                                                                                
|        |        |            
|        | 10.14  |             |  | Lease dated July 30, 2001 between the Company and URS Corporation (13)                                                                                                                                                                                                                      
|        |        |            
|        | 10.15  |             |  | First Amendment to Lease between the Company and URS Corporation dated as of February 21, 2003                                                                                                                                                                                              

48



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##### Table of Contents



|        |       |             |  |                                                                                                                         
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit
|No.     |       | Description
|        |       |            
|        | 10.16 |             |  | Amendment No. 1 to Employment Agreement between Acres Gaming
Incorporated and Floyd W. Glisson dated as of June 29, 2003
|        |       |            
|        | 10.17 |             |  | Employment Agreement between Acres Gaming Incorporated and
Richard J. Schneider dated as of June 29, 2003               
|        |       |            
|        | 21.1  |             |  | Subsidiaries of the Registrant                                                                                          
|        |       |            
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP, Independent Accountants                                                          
|        |       |            
|        | 31.1  |             |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002                      
|        |       |            
|        | 31.2  |             |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002                      
|        |       |            
|        | 32.1  |             |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                      
|        |       |            
|        | 32.2  |             |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                      



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|+    |  | Management contract or compensatory plan or arrangement.                                                                                                                         
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(1)  |  | Incorporated by reference to Appendix A to the Companys Definitive Proxy
Statement on Schedule 14A, previously filed with the Commission on August
15, 2003.                    
|    
|(2)  |  | 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. 
|    
|(3)  |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
|    
|(4)  |  | Incorporated by reference to the exhibits to the Companys Registration
Statement on Form S-3 (File No. 333-77050), previously filed with the
Commission on January 18, 2002.    
|    
|(5)  |  | 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.
|    
|(6)  |  | 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.                    
|    
|(7)  |  | 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.
|    
|(8)  |  | 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.                    
|    
|(9)  |  | 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.  
|    
|(10) |  | 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. 
|    
|(11) |  | 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.    
|    
|(12) |  | 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.
|    
|(13) |  | 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.                    

49