##### Table of Contents



---

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


---

FORM 10-K


|    |  |                                                                                                     | 
|--- |  | --------------------------------------------------------------------------------------------------- | 
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] | 

For the fiscal year ended June 30, 2001


(Commission File No.) 0-22498

---

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.)



---

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


Registrants telephone number, including area code:

(702) 263-7588

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

None

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

Common Stock, $.01 par value

(Title of class)

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

Yes   [X]   No  [   ]

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which
the common equity was sold, or the average bid and asked prices of such common
equity, as of August 31, 2001 was $24,961,894. 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, 2001 was 9,272,731 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the Companys Proxy Statement to be filed in
connection with the Companys 2001 Annual Meeting of Stockholders to be held
December 12, 2001.



---

TABLE OF CONTENTS



|                  |                                                                                               |                                                      |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I           
|                  | ITEM 1. BUSINESS                                                                             
|                  |                                                                                               | General                                             
|                  |                                                                                               | The Market                                          
|                  |                                                                                               | Products                                            
|                  |                                                                                               | Research and Development                            
|                  |                                                                                               | Customers                                           
|                  |                                                                                               | Marketing                                           
|                  |                                                                                               | Production and Manufacturing                        
|                  |                                                                                               | Patents                                             
|                  |                                                                                               | Competition                                         
|                  |                                                                                               | Government Regulation                               
|                  |                                                                                               | Employees                                           
|                  | ITEM 2. PROPERTIES                                                                           
|                  | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                  |                                                                                               | EXECUTIVE OFFICERS OF REGISTRANT                    
|PART II          
|                  | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                             
|                  | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                  | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                  |                                                                                               | FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
|                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                  | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III         
|                  | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                  | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                  | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                  | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV          
|                  | ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K                              
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 10.14    
|EXHIBIT 21.1     
|EXHIBIT 23.1     



---



##### 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                                                                             |  | 4   
|         |  | Production and Manufacturing                                                          |  | 5   
|         |  | Patents                                                                               |  | 5   
|         |  | Competition                                                                           |  | 6   
|         |  | Government Regulation                                                                 |  | 6   
|         |  | Employees                                                                             |  | 10  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 2.  |  | PROPERTIES                                                                            |  | 10  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 10  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 12  
|        
|        
|        
|        
|        
|        
|        
|        
|         |  | EXECUTIVE OFFICERS OF REGISTRANT                                                      |  | 12  
|        
|        
|        
|        
|        
|        
|        
|        
|PART II 
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 5.  |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                              |  | 13  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 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                            |  | 17  
|        
|        
|        
|        
|        
|        
|        
|        
|         |  | FACTORS THAT MAY AFFECT FUTURE RESULTS                                                |  | 17  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 21  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE  |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|PART III
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|PART IV 
|        
|        
|        
|        
|        
|        
|        
|        
|ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K                                |  | 38  
|        
|        
|        
|        
|        
|        
|        
|        
|         |  | SIGNATURES                                                                            |  | 40  



---



##### Table of Contents






PART I

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

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




ITEM 1. BUSINESS




General

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 sells its products primarily in the United States, Australia and South
Africa.




The Market

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

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

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



1



---



##### Table of Contents






Products

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



| | 1) |  | Casino-wide, fully integrated applications offered as the
Acres Advantage                                                                                                         
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | Bonus Games comprised of single or a linked group of
traditional slot machines that activate a secondary bonus game
when certain milestones are reached on the traditional games.

Acres Advantage

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

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

Hardware components and software included in the Acres Advantage and the
software used in many popular gaming machines that support the Acres Advantage
have been approved by the Nevada Gaming Control Board and regulatory
authorities for several other states, two states in Australia and the Gauteng
Province 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, network components, Wizard slot accounting, Merlin graphical
floor analysis, Prophet player tracking, Guardian cage, credit and pit
management, Coinless Transit cashless wagering and Acres Bonusing. The
Company also offers its own ticket-in, ticket-out solution for printed ticket
slot machine credit transfers as well as interfaces to its competitors ticket
products, whereby the ticket data gathered by the competitors system is
interfaced with Wizard slot accounting.

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

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



2



---



##### Table of Contents



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

Guardian Cage, Credit and Pit Management. This product provides the
ability to track and manage the casinos cash, chips and credit vouchers for
table games and the cashiers cage. Guardian 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 Prophet player tracking module.

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

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

Xtra Credit. This feature is used to award special incentive bonuses to
players club members. With just a few keystrokes, casino personnel can
establish Xtra Credit bonuses to provide incentives for players club members or
to celebrate the playersspecial events such as birthdays or anniversaries at
the casino. Xtra Credit bonus awards can dramatically reduce the casinos
existing cash voucher mailing and redemption costs and provide a wide variety
of marketing opportunities for the casino to retain customers.

Xtra Credit may also be used by other bonus applications as an award
mechanism to allow the players to redeem their points earned or bonus awards
won for free games on the gaming machines. In this application of the product,
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 gaming machines player tracking display. 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 earn points for slot
play in a manner consistent with a standard player tracking system where the
casino can configure the rates at which points are earned and values at which
they are redeemed. PointPlay allows players to redeem their points for free
games directly at the gaming machine.

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

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

Lucky Coin®. These progressive jackpot bonuses are granted to the player
inserting the nth coin where the frequency of n and the funding parameters
of the bonus are established by the casino. Awards can be created that vary
between small jackpots every few minutes and life-changing jackpots every few
weeks. These bonuses can



3



---



##### Table of Contents



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.

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 recently entered into a joint development agreement with Bally
Gaming, Inc. (Bally) 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
California, 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 54
full-time employees involved in research and development as of August 31, 2001.
Research and development expenses were $4.7 million, $5.1 million and $6.4
million in the years ended June 30, 2001, 2000 and 1999, 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.

Sales to Station Casinos Inc. amounted to 38 percent of the Companys net
revenues in fiscal 2001. Sales to IGT for properties operated by MGM MIRAGE
and others amounted to 20 percent and 3 percent of the Companys net revenues
in fiscal 2001 and 2000, respectively. Sales to MonteCasino amounted to 6
percent and 10 percent of the Companys net revenues in fiscal 2001 and 2000,
respectively. Sales to Crown Casino and Star City Casino amounted to 37
percent and 19 percent, respectively, of the Companys net revenues in fiscal
2000. Sales to Mandalay Resort Group and its affiliates accounted for 23
percent and 51 percent of the Companys net revenues in 2000 and 1999,
respectively. The Companys backlog of orders for its products were
approximately $21.1 million, $6.7 million and $9.6 million as of June 30, 2001,
2000 and 1999, respectively. Backlog, however, may not be a meaningful
indication of future sales. Sales to the Companys customers are made pursuant
to purchase orders or sales agreements for specific system installations and
products are often delivered after several months of receipt of the order. The
Company does not have any ongoing long-term sales contracts. The Companys
revenues and results of operations may be materially affected, in the near
term, by the receipt, loss or delivery over an extended period of time of any
one order.

The Companys revenues from sales to customers in the United States
totaled $40.5 million, $5.8 million and $13.3 million for the years ended June
30, 2001, 2000 and 1999, respectively. The Companys revenues from sales to
customers outside the United States totaled $3.5 million, $11.2 million and
$700,000 for the years ended June 30, 2001, 2000 and 1999, respectively. (See
note 1 to the consolidated financial statements.)




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.



4



---



##### Table of Contents






Production and Manufacturing

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




Patents

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

|                              |  |                           |  |                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------- |  | ------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Patent Number                 |  | Issue Date                |  | Brief Summary/Examples of Patented Features                                                                                                                                                                                                                                                                                                                            
|                              |  |                           |  |                                                                                                                                                                                                                                                                                                                                                                        
|6,257,981
5,741,183
5,702,304 |  | 7/10/01
4/21/98
12/30/97  |  | Method and apparatus for operating networked gaming devices connected
over a high-speed network whereby the gaming device reconfigures its
payout schedule responsive to commands to provide a variety of
promotional bonuses.                                                                                                                                         
|6,254,483                     |  | 7/3/01                    |  | Method for controlling the cost of playing a gaming device via
commands to change game speed, payback percentage or game appearance
issued in response to changes in variables such as rate of play,
player status and the time of the day, week or month.                                                                                                             
|6,244,958                     |  | 6/12/01                   |  | Method for providing non-cashable credits to a gaming device over a
networked computer system.                                                                                                                                                                                                                                                                         
|6,231,445                     |  | 5/15/01                   |  | Method of awarding bonuses over a network of gaming devices whereby
reel combinations are matched against a predetermined winning
combination and a bonus is paid for any matches. Additionally, the
bonus amount won may be decremented over the bonus period such that a
bonus won at the beginning of the period is greater than one won at
the end of the period.
|6,162,122
6,043,615
5,854,542 |  | 12/19/00
3/28/00
12/29/98 |  | Method and apparatus covering backlit bezels for card readers used in
gaming systems.
Method and apparatus for signaling promotional operation of a gaming
device by flashing and dimming existing fluorescent lamps.                                                                                                                                                  
|6,008,784                     |  | 12/28/99                  |  | Electronic display with a curved face.                                                                                                                                                                                                                                                                                                                                 
|5,876,284                     |  | 3/2/99                    |  | Method and apparatus for implementing a multiple jackpot time bonus.                                                                                                                                                                                                                                                                                                   
|5,836,817                     |  | 11/17/98                  |  | Method and apparatus covering a variety of networked bonusing systems.                                                                                                                                                                                                                                                                                                 
|5,820,459                     |  | 10/13/98                  |  |                                                                                                                                                                                                                                                                                                                                                                        
|5,752,882                     |  | 5/19/98                   |  |                                                                                                                                                                                                                                                                                                                                                                        
|5,655,961                     |  | 8/12/97                   |  |                                                                                                                                                                                                                                                                                                                                                                        

The Company has also been issued 13 foreign patents, related to method and
apparatus covering a variety of networked bonusing systems.

No assurance can be given that any patents that are applied for will be
issued or, if issued, will provide any significant competitive advantage to the
Company. In addition, the Company has a variety of other intellectual property
that it treats as trade secrets. The Company takes reasonable steps to protect
its intellectual property but it



5



---



##### Table of Contents



is possible that others may make unauthorized use of such intellectual
property and the Company may or may not be able to prevent such use. (See
Legal Proceedings).




Competition

The Company primarily competes in the market for casino management
systems. The Companys primary competitors in this market include IGT, Bally,
Casino Data Systems, Aristocrat and Advanced Casino Systems Corporation. Most,
if not all of these competitors have financial and other resources that are
greater than those of the Company, and most of them have the additional
competitive advantage of being able to sell their system products to their
existing gaming machine customers. In addition, most of these competitors
offer products that directly compete with the functionality of each of the
Companys Acres Advantage products. Bally competes with the Company primarily
on slot monitoring hardware and software. The Company has several additional
competitors, some of which have financial and other resources that are greater
than those of the Company, that sell products that compete with portions of the
Companys Acres Advantage product line.

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

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




Government Regulation

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

Regulation of Products

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

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



6



---



##### Table of Contents



Corporate Regulation

Nevada

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

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

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

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

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

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



7



---



##### Table of Contents



Commission. Substantially all material loans, leases, sales of securities
and similar financing transactions by AGID, must be reported to or approved by
the Nevada Commission.

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

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

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

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

The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable
to own such security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its approvals, if without
the



8



---



##### Table of Contents



prior approval of the Nevada Commission, it: (i) pays to the unsuitable
person any dividend, interest, or any distribution whatsoever; (ii) recognizes
any voting right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption, conversion,
exchange, liquidation, or similar transaction.

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

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

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

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

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



9



---



##### Table of Contents



Other Jurisdictions

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




Employees

At August 31, 2001, the Company had 121 full-time employees of whom 54
were involved in research and development, 35 in customer service and support,
8 in material control, 7 in sales and marketing and 17 in administration and
management. None of the Companys employees is represented by a labor union or
covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and believes that its employee relations are good.




ITEM 2. PROPERTIES

In July 1999, the Companys administrative headquarters was relocated and
combined with the Companys sales, marketing, customer service and new product
development office in Las Vegas, Nevada at 7115 Amigo Street, Suite 150, Las
Vegas, Nevada. This facility encompasses approximately 31,500 square feet.
The lease commenced on June 15, 1998 and will expire on June 15, 2003. The
base rent is approximately $39,000 per month, plus $7,000 per month for
property taxes, building insurance and common area maintenance. In July 2001,
the Company entered into an agreement increasing its office space by leasing
approximately 7,000 square feet contiguous to its existing office space. The
lease commenced on July 30, 2001 and will expire on April 26, 2003. The base
rent for the additional office space is approximately $10,000 per month, plus
$1,000 per month for property taxes, building insurance and common area
maintenance.

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

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




ITEM 3. LEGAL PROCEEDINGS

Two related lawsuits were filed in the U.S. District Court alleging
violation of the federal securities laws by the Company and its executive
officers. Those suits were consolidated into one combined action that received
class certification for a class consisting of the purchasers of the Companys
Common Stock during the period from March 26, 1997 to December 11, 1997. In
September 2000, the Company and the plaintiffs agreed to settle the litigation.
Under the terms of the settlement, the Company became obligated to pay
$435,000 and could elect to make additional cash payments aggregating $1.6
million by January 31, 2002 or issue warrants to purchase an aggregate of one
million shares of the Companys Common Stock at $2.50 per share, valued at $1.6
million. The Company recorded a one-time charge of $2.0 million in the year
ended June 30, 2000, to account for the settlement. In April 2001, the Company
selected the cash payment option.

Two lawsuits have been filed regarding ownership of the Wheel of Gold
(WOG) technology that is the subject of two patents that have been assigned
to Anchor Gaming (Anchor). In the first suit, now pending in U.S. District
Court for the District of Nevada, the WOG plaintiffs brought patent
infringement, breach of warranty and



10



---



##### Table of Contents



breach of contract actions against the Company based on the WOG patents
and the Companys supply agreement with Anchor. Plaintiffs seek to enjoin the
Company from infringing the WOG patents and from competing with it in the sale
of wheel styled bonus gaming devices. The plaintiffs also seek unspecified
compensatory damages, treble damages, costs of suit, and attorneys fees. The
Company has denied the allegations and has filed a counterclaim in that
proceeding for a declaration that the Company is the sole or joint owner of the
WOG patents. Discovery in the lawsuit is formally closed. Currently pending
before the Court are four summary judgment motions and one discovery-related
motion filed by Anchor, as well as one summary judgment motion filed by the
Company. No trial date has been set. The Company cannot predict the outcome,
nor estimate the range of possible loss, if any, related to this suit but
believes that an unfavorable outcome could have a material adverse effect on
the Companys financial condition and results of operations.

The defense of this suit with Anchor was accepted by the Companys former
professional errors and omissions insurance carrier. However, in April 2000,
the carrier denied coverage. The Company is involved in litigation, now
pending in the U.S. District Court of Nevada, with its former insurance carrier
regarding such coverage. Summary judgment motions have been filed by both
parties and are pending. 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 or results of operations.

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

A series of related lawsuits resulting from the Companys efforts to
enforce its patent rights or third parties efforts to challenge the Companys
patent rights, have been settled or adjudicated. The suits were consolidated
in the U.S. District Court for the District of Nevada under Acres Gaming
Incorporated v. Mikohn Gaming Corp., et al. In separate settlements, all
claims in that litigation between the Company and Casino Data Systems (CDS)
and Sunset Station Hotel and Casino, respectively, were dismissed with
prejudice. In March 2001 a jury validated four of the Companys patents and
found that Mikohn had infringed two of the Companys patents. The Company was
awarded damages against Mikohn by a jury in the amount of $1.5 million. The
Court denied Mikohns post-trial motions to overturn the jury verdict and ruled
that the Company is entitled to recover additional damages for Mikohns
infringement after June 1999. Mikohn has filed a notice of appeal.

In a separate but related action, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of the claims alleged by Mikohn. In January 2001, the Company
reached a settlement with the former insurance carrier and received a $200,000
reimbursement of defense costs. In May 2000, the Company filed suit, now
pending in U.S. District Court for the District of Nevada, against another
former general liability insurance carrier for breach of insurance contract
related to the cost of defense of the claims alleged by CDS. In June 2000,
this insurance carrier filed suit in U.S. District Court of Nevada for
declaratory relief requesting the Court find that: no coverage is provided for
the claim; if coverage is provided it should be provided by the prior insurance
carrier; and the Company must reimburse the insurance carrier for nominal
amounts paid under its insurance policy to defend the Company. Summary judgment
motions have been filed by both parties and are pending. 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 or
results of operations.

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



11



---



##### Table of Contents






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, 2001.




EXECUTIVE OFFICERS OF REGISTRANT

As of September 27, 2001, the executive officers of the Company were as
set forth below:

|                     |  |     |    |                       |  |                                                        |  |           |      | 
|-------------------- |  | --- | -- | --------------------- |  | ------------------------------------------------------ |  | --------- | ---- | 
|                     |  |     |    |                       |  |                                                        |  | Executive
|Name                 |  | Age |    | Positions and Offices |  | Officer Since                                         
|                     |  |     |    |                       |  |                                                       
|Floyd W. Glisson     |  |     | 54 |                       |  | Chairman and Chief
Executive Officer                   |  |           | 1998 | 
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|Richard J. Schneider |  |     | 44 |                       |  | President and Chief
Operating Officer                  |  |           | 1999 | 
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|Patrick W. Cavanaugh |  |     | 41 |                       |  | Senior Vice
President and Chief
Financial Officer      |  |           | 2001 | 
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|Reed M. Alewel       |  |     | 37 |                       |  | Senior Vice
President  Sales,
Treasurer and
Secretary |  |           | 1999 | 

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

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

Richard J. Schneiderhas served the Company as President since April 2000,
and as Chief Operating Officer since July 1999. Mr. Schneider served as Vice
President from July 1999 to April 2000 and as Vice President of Game
Development from December 1997 until July 1999. From September 1995 to
December 1997, Mr. Schneider was the vice president of game engineering for
Casino Data Systems, a designer and manufacturer of 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 the Company in September 2001 as Senior Vice
President and Chief Financial Officer. From January 1997 until joining the
Company, Mr. Cavanaugh was chief financial officer and treasurer of Oasis
Technologies, Inc., a company that produces networked gaming systems. From
1993 to 1996, Mr. Cavanaugh served as chief financial officer and treasurer of
Casino Data Systems, a designer and manufacturer of casino management
information systems. Prior to, Mr. Cavanaugh served in positions of
increasing responsibility with the international accounting firm of KPMG, most
recently as audit senior manager. Mr. Cavanaugh is a Certified Public
Accountant.

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



12



---



##### Table of Contents






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, 2001: |                |  |                        |      |      |  |               |      |  |  |   |     
|                                 | First quarter  |  | $                      | 1.38 |      |  | $             | 3.00 |  |  | $ | 1.69 | 
|                                 | Second quarter |  |                        | 1.13 |      |  |               | 2.38 |  |  |   | 2.13 | 
|                                 | Third quarter  |  |                        | 1.50 |      |  |               | 6.75 |  |  |   | 6.25 | 
|                                 | Fourth quarter |  |                        | 4.30 |      |  |               | 7.25 |  |  |   | 4.96 | 
|FISCAL YEAR ENDED JUNE 30, 2000: |                |  |                        |      |      |  |               |      |  |  |   |     
|                                 | First quarter  |  | $                      | 1.44 |      |  | $             | 2.19 |  |  | $ | 1.50 | 
|                                 | Second quarter |  |                        | .88  |      |  |               | 1.56 |  |  |   | .91  | 
|                                 | Third quarter  |  |                        | .91  |      |  |               | 2.88 |  |  |   | 1.63 | 
|                                 | Fourth quarter |  |                        | .88  |      |  |               | 1.94 |  |  |   | 1.75 | 

The Company estimates that there are approximately 3,084 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 the audited financial
statements and notes included in Financial Statements and Supplementary Data.

|                                           |  |                                      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        | 
|------------------------------------------ |  | ------------------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | 
|                                           |  | Years Ended June 30,                
|                                           |  |                                     
|                                           |  | 2001                                 |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                           |  |                                      |        |      |  |      |        |      |  |     
|                                           |  | (in thousands except per share data)
|Statements of Operations Data:             |  |                                      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        | 
|Net revenues                               |  | $                                    | 44,053 |      |  | $    | 17,002 |      |  | $    | 13,972 |      |  | $ | 17,573 |      |  | $ | 20,455 | 
|Gross profit                               |  |                                      | 15,811 |      |  |      | 8,593  |      |  |      | 5,719  |      |  |   | 6,623  |      |  |   | 10,902 | 
|Income (loss) from operations              |  |                                      | 3,992  |      |  |      | (2,231 | )    |  |      | (7,248 | )(2) |  |   | (4,660 | )(3) |  |   | 1,425  | 
|Net income (loss)                          |  |                                      | 4,169  |      |  |      | (4,159 | )(1) |  |      | (6,988 | )(2) |  |   | (4,177 | )(3) |  |   | 1,798  | 
|Net income (loss) per common share-basic   |  | $                                    | .47    |      |  | $    | (.47   | )(1) |  | $    | (.79   | )(2) |  | $ | (.48   | )(3) |  | $ | .21    | 
|Net income (loss) per common
share-diluted |  | $                                    | .41    |      |  | $    | (.47   | )(1) |  | $    | (.79   | )(2) |  | $ | (.48   | )(3) |  | $ | .20    | 



|(1) |  | During 2000, the Company recorded a charge of $2.0 million ($.23 per share) for the settlement of the shareholder litigation.                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | During 1999, the Company recorded a non-recurring charge of $400,000 ($.04 per share) for the costs of the Companys relocation of its headquarters to Las Vegas, Nevada.                        
|   
|   
|   
|   
|(3) |  | During 1998, the Company recorded a non-recurring charge of $745,000 ($.08 per share) for the costs of the Companys change in business focus to the Acres Bonusing and bonus game product lines.



13



---



##### Table of Contents



|                                       |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                       |  | As of June 30,
|                                       |  |               
|                                       |  | 2001           |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                       |  |                |        |      |  |      |        |      |  |     
|                                       |  | (in thousands)
|Balance Sheet Data:                    |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Working capital                        |  | $              | 6,150  |      |  | $    | 3,308  |      |  | $    | 4,649  |  |  | $ | 12,091 |  |  | $ | 16,474 | 
|Total assets                           |  |                | 22,229 |      |  |      | 10,732 |      |  |      | 16,097 |  |  |   | 17,194 |  |  |   | 21,323 | 
|Current liabilities                    |  |                | 14,005 |      |  |      | 4,834  |      |  |      | 8,050  |  |  |   | 2,435  |  |  |   | 2,545  | 
|Long-term debt                         |  |                |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Redeemable convertible preferred stock |  |                | 4,948  |      |  |      | 4,948  |      |  |      | 4,948  |  |  |   | 4,948  |  |  |   | 4,948  | 
|Stockholders equity (deficit)         |  |                | 3,276  |      |  |      | (1,060 | )    |  |      | 3,099  |  |  |   | 9,811  |  |  |   | 13,830 | 




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

Overview

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

The Companys financial position and operating results may be materially
affected by a number of factors, including the timing of receipt, installation
and regulatory approval of any one order, availability of additional capital,
competition and technological change. Historically, three or fewer customers
have accounted for more than 65 percent of annual revenues. (See Business 
Customers and Factors That May Affect Our Future Operating Results).

Results of Operations

Comparison of the Years Ended June 30, 2001 and 2000

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

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

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



14



---



##### Table of Contents



The Companys research and development expenses decreased to $4.7 million
in fiscal 2001, from $5.1 million in fiscal 2000. This decrease resulted
primarily from a reduction in depreciation and amortization and the
reallocation of engineering resources between research and development and
installation and service, which are classified as cost of goods sold. The
Company expects to continue to spend a significant portion of its revenue on
research and development in order to enhance and expand the capabilities of
Acres Advantage and develop additional bonus games.

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

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

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

The Company has cumulative net operating losses of approximately $12.8
million available to offset future taxable income through 2020. The full
realizability of these net operating loss carryforwards is uncertain and the
Company has provided a valuation allowance for the entire amount.
Accordingly, no income tax benefit was recorded for the year ended June 30,
2000. Net operating loss carryforwards are expected to be utilized to reduce
any taxable income in fiscal 2001, and therefore no income tax provision has
been recorded for the year ended June 30, 2001. Net income for the year ended
June 30, 2001 was $4.2 million ($0.41 per share) compared to a net loss of $4.2
million ($0.47 per share) for the year ended June 30, 2000.

Comparison of the Years Ended June 30, 2000 and 1999

The Companys net revenues during the year ended June 30, 2000 were $17.0
million, an increase of $3.0 million over the prior years revenues of $14.0
million. The Companys revenues fluctuate significantly based on the timing of
the delivery of any large order. Revenues in fiscal 2000 were primarily
comprised of Acres Advantage sales to one domestic casino and three
international casinos. Revenues in fiscal 1999 were primarily comprised of
sales of hardware and software components to IGT and sales of Acres Advantage
to one domestic casino.

Component materials purchased primarily from computer and electronics
vendors comprised 50 percent of the cost of revenues in fiscal 2000 and 55
percent in fiscal 1999. Manufacturing, procurement, software customization,
service and installation labor and expenses accounted for the remaining cost of
revenues. Changes in the components of the cost of revenues result from
changes in the mix of products sold.

Gross profit margin improved to 51% in fiscal 2000 from 41% in fiscal
1999. This increase was primarily the result of changes in the mix of products
sold and the absorption of certain fixed manufacturing and service costs over a
higher sales volume.

The Companys research and development expenses decreased to $5.1 million
in fiscal 2000, from $6.4 million in fiscal 1999. Reductions in staffing
generated $1.4 million in research and development expense savings. These
savings were partially offset by a $408,000 reduction in amounts capitalized as
software development costs. The Company expects to continue to spend a
significant portion of its revenue on research and development in order to
enhance and expand the capabilities of Acres Advantage and develop additional
bonus games.



15



---



##### Table of Contents



Selling, general and administrative costs decreased to $5.7 million in
fiscal 2000 from $6.1 million in fiscal 1999. Reductions in staffing generated
$808,000 in selling, general and administrative expense savings. These savings
were partially offset by a $212,000 increase in legal costs.

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

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

Other income, primarily comprised of interest income, decreased by
$178,000 as a result of reduced balances of invested cash and equivalents.

The Company has cumulative net operating losses of approximately $17.6
million available to offset future taxable income through 2020. As the
realizability of these net operating loss carryforwards is uncertain, the
Company has provided a valuation allowance for the entire amount and did not
record an income tax benefit for the years ended June 30, 2000 or 1999. The
net loss for the year ended June 30, 2000 was $4.2 million ($0.47 per share)
compared to a net loss of $7.0 million ($0.79 per share) in the prior year.

Liquidity and Capital Resources

As of June 30, 2001, the Company had cash and equivalents of $12.0
million, compared to $789,000 as of June 30, 2000. The Company invests its
cash in highly liquid marketable securities with maturities of three months or
less at date of purchase.

IGT owns 519,481 shares of the Companys Series A Convertible Preferred
Stock. IGT and the Company each has the right to cause the Company to redeem
such shares for a price equal to the original purchase price of the shares,
which was approximately $5.0 million, plus any declared but unpaid dividends on
or after the earlier of January 28, 2002 or when the Companys major common
stockholder reduces his ownership to fewer than 1 million shares of the
Companys common stock. If the Company redeems the Series A Stock, such
redemption could have a material adverse effect on the Companys liquidity.
The Company has no present intention to call the Series A Stock for redemption,
nor does the Company have any information concerning whether or when IGT
intends to cause the Company to redeem the Series A Stock.

The Company has no debt outstanding but has secured a revolving credit
facility to provide up to $3.5 million in financing secured by inventory and
accounts receivable. The revolving credit facility contains certain financial
covenants including minimum net worth, minimum cash flow, net income and
operating income requirements. As of June 30, 2001, the Company had no
borrowings outstanding and was in compliance with all financial covenants.

At June 30, 2001, the Company had collected $6.7 million in advance
deposits against its order backlog of approximately $21.1 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 several months after the 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.

Under the settlement agreement with respect to its shareholder litigation,
the Company is obligated to pay $2.3 million in cash, of which $225,000 has
already been paid as of June 30, 2001. The remaining $2.0 million is



16



---



##### Table of Contents



payable by January 31, 2002. The company believes that these payments
will not have a material adverse effect on the Companys liquidity.

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 2002. 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 has the ability to reduce operating expenses to improve liquidity, by
reducing personnel and other expenses.

During the year ended June 30, 2001, the Companys operating activities
generated $12.1 million of cash. During the years ended June 30, 2000 and
1999, the Companys operating activities used $4.1 million and $1.7 million of
cash, respectively. The Company generated significantly more cash from its
operating activities in fiscal 2001 as compared to the prior years primarily
because the Companys operations generated a profit in fiscal 2001 and the
Company received $5.8 million in additional customer deposits for fiscal
2001.The Companys operations have historically used cash. The Companys other
principal sources of liquidity prior to 1997 have been the net proceeds of
$18.4 million from its initial public offering, the exercise of warrants and
the issuance of Preferred Stock.

The Company made capital expenditures of $947,000, $731,000 and $1.8
million in 2001, 2000 and 1999, respectively, primarily for computers and
equipment to support research and development efforts. During fiscal 2001, the
Company incurred no capitalizable software development costs. During fiscal
2000 and fiscal 1999, the Company capitalized $326,000 and $734,000,
respectively, of software development costs incurred in the creation of
additional modules of the Acres Advantage product line.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

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

Changes in Business and Economic Conditions Generally and in the Gaming
Industry; Economic Impact of Recent 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 more rapidly in relation to the condition of the overall economy.
In a period of reduced demand, such as may result 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.



17



---



##### Table of Contents



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 significant portion of their business. Although we cannot accurately
estimate the full economic impact of the recent terrorist attacks at this time,
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.

Effect of Series A Stock Redemption

IGT owns 519,481 shares of the Companys Series A Convertible Preferred
Stock. IGT and the Company each has the right to cause the Company to redeem
such shares for a price equal to the original purchase price of the shares,
which was approximately $5.0 million, plus any declared but unpaid dividends on
or after the earlier of January 28, 2002 or when the Companys major common
stock holder reduces his ownership to fewer than 1 million shares of the
Companys common stock. The Company has no present intention to call the
Series A Stock for redemption, nor does the Company have any information as to
whether or when IGT intends to cause the Company to redeem the Series A Stock.
If the Company cannot generate sufficient cash from operations or other sources
of liquidity, the Company may not be able to redeem such shares. If the
Company redeems the Series A Stock, such redemption could have a material
adverse effect on the Companys liquidity.

Liquidity

Historically, the Companys operations have used cash. Although
management believes that sufficient revenues will be generated during fiscal
2002 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. In addition, if the Company redeems the Series A Stock, such
redemption could have a material adverse effect on the Companys liquidity.

The Company has no debt outstanding but has secured a revolving credit
facility to provide up to $3.5 million in financing secured by inventory and
accounts receivable. The revolving credit facility contains certain financial
covenants including minimum net worth, minimum cash flow, net income and
operating income requirements. As of June 30, 2001, the Company had no
borrowings outstanding and was in compliance with all financial covenants.

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

Reliance on a Few Major Customers

The Company is dependent on sales of its products to a limited number of
casino operators for a substantial portion of its revenues in any given fiscal
year. Historically, three or fewer customers have accounted for more than 65%
of annual revenues. As a result of this customer concentration, any one of 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 manufactured by a competitor.   

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



18



---



##### Table of Contents



Other Risks

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

Product Concentration; Competition; Risks of Technological Change. The
Company expects to derive most of its revenues from the sale of Acres Advantage
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
frequent 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



19



---



##### Table of Contents



may also file for patents on certain features of products that the Company
may develop in the future. Notwithstanding these safeguards, it is possible
for competitors of the Company to obtain its trade secrets and to imitate its
products. Furthermore, others may independently develop products similar or
superior to those developed or planned by the Company. While the Company may
obtain patents with respect to certain of its products, the Company may not
have sufficient resources to defend such patents, such patents may not afford
all necessary protection and competitors may develop equivalent or superior
products which may not infringe such patents.

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

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

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



20



---



##### Table of Contents






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                |  |      |    | 
|----------------------------------------------- |  | ---- | -- | 
|                                                |  | Page
|                                                |  |     
|Report of Independent Public Accountants        |  |      | 22 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Consolidated Balance Sheets                     |  |      | 23 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Operations           |  |      | 24 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Stockholders Equity |  |      | 25 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Consolidated Statements of Cash Flows           |  |      | 26 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Notes to Consolidated Financial Statements      |  |      | 27 | 



21



---



##### Table of Contents



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



22



---



##### Table of Contents



ACRES GAMING INCORPORATED

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2001 AND 2000

ASSETS

|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |        |   | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | ------- | -------------- | - | ------ | ------- | ------ | - | 
|                                           |                                                                                                                                     |                                      |        |         | 2001           |   | 2000  
|                                           |                                                                                                                                     |                                      |        |         |                |   |       
|                                           |                                                                                                                                     |                                      |        |         | (in thousands)
|CURRENT ASSETS:                            |                                                                                                                                     |                                      |        |         |                |   |        |        
|                                           | Cash and equivalents                                                                                                                |                                      | $      | 11,958  |                |   | $      | 789     |       
|                                           | Receivables, net of allowance of $592 and $15, respectively                                                                         |                                      |        | 3,266   |                |   |        | 3,541   |       
|                                           | Inventories                                                                                                                         |                                      |        | 4,764   |                |   |        | 3,729   |       
|                                           | Prepaid expenses                                                                                                                    |                                      |        | 167     |                |   |        | 83      |       
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|                                           |                                                                                                                                     | Total current assets                 |        |         | 20,155         |   |        |         | 8,142  |  
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|PROPERTY AND EQUIPMENT:                    |                                                                                                                                     |                                      |        |         |                |   |        |        
|                                           | Furniture and fixtures                                                                                                              |                                      |        | 2,006   |                |   |        | 1,562   |       
|                                           | Equipment                                                                                                                           |                                      |        | 4,278   |                |   |        | 3,935   |       
|                                           | Leasehold improvements                                                                                                              |                                      |        | 439     |                |   |        | 421     |       
|                                           | Accumulated depreciation                                                                                                            |                                      |        | (5,422  | )              |   |        | (4,446  | )     
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|                                           |                                                                                                                                     | Property and equipment, net          |        |         | 1,301          |   |        |         | 1,472  |  
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|OTHER ASSETS, NET                          |                                                                                                                                     |                                      | 773    |         |                |   | 1,118  |        
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|TOTAL ASSETS                               |                                                                                                                                     | $                                    | 22,229 |         |                | $ | 10,732 |        
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|CURRENT LIABILITIES:                       |                                                                                                                                     |                                      |        |         |                |   |        |        
|                                           | Accounts payable                                                                                                                    |                                      | $      | 3,104   |                |   | $      | 2,785   |       
|                                           | Accrued compensation                                                                                                                |                                      |        | 1,270   |                |   |        | 420     |       
|                                           | Accrued other expenses                                                                                                              |                                      |        | 958     |                |   |        | 774     |       
|                                           | Customer deposits                                                                                                                   |                                      |        | 6,663   |                |   |        | 855     |       
|                                           | Litigation settlement obligation                                                                                                    |                                      |        | 2,010   |                |   |        |        |       
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|                                           |                                                                                                                                     | Total current liabilities            |        |         | 14,005         |   |        |         | 4,834  |  
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|LITIGATION SETTLEMENT OBLIGATION           |                                                                                                                                     |                                      |       |         |                |   | 2,010  |        
|REDEEMABLE CONVERTIBLE PREFERRED STOCK     |                                                                                                                                     |                                      | 4,948  |         |                |   | 4,948  |        
|STOCKHOLDERS EQUITY (DEFICIT):            |                                                                                                                                     |                                      |        |         |                |   |        |        
|                                           | Common Stock, $.01 par value, 50 million shares authorized,
9.3 million and 8.9 million shares issued and
outstanding, respectively |                                      |        | 93      |                |   |        | 89      |       
|                                           | Additional paid-in capital                                                                                                          |                                      |        | 20,944  |                |   |        | 19,904  |       
|                                           | Deferred stock-based compensation                                                                                                   |                                      |        | (877    | )              |   |        |        |       
|                                           | Accumulated deficit                                                                                                                 |                                      |        | (16,884 | )              |   |        | (21,053 | )     
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|                                           |                                                                                                                                     | Total stockholders equity (deficit) |        |         | 3,276          |   |        |         | (1,060 | )
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                     | $                                    | 22,229 |         |                | $ | 10,732 |        
|                                           |                                                                                                                                     |                                      |        |         |                |   |        |         |       

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



23



---



##### Table of Contents



ACRES GAMING INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |       |        | 
|------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------------------------- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                      |                                     |                          |        | 2001                                  |        | 2000 |        | 1999 
|                                      |                                     |                          |        |                                       |        |      |        |      
|                                      |                                     |                          |        | (in thousands, except per share data)
|NET REVENUES                          |                                     | $                        | 44,053 |                                       |        | $    | 17,002 |       |        | $ | 13,972 |      
|COST OF REVENUES                      |                                     |                          | 28,242 |                                       |        |      | 8,409  |       |        |   | 8,253  |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|GROSS PROFIT                          |                                     |                          | 15,811 |                                       |        |      | 8,593  |       |        |   | 5,719  |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|OPERATING EXPENSES:                   |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|                                      | Research and development            |                          |        | 4,739                                 |        |      |        | 5,097 |        |   |        | 6,440 |       
|                                      | Selling, general and administrative |                          |        | 7,080                                 |        |      |        | 5,727 |        |   |        | 6,127 |       
|                                      | Non-recurring charge                |                          |        |                                      |        |      |        |      |        |   |        | 400   |       
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|                                      |                                     | Total operating expenses |        |                                       | 11,819 |      |        |       | 10,824 |   |        |       | 12,967 | 
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|INCOME (LOSS) FROM OPERATIONS         |                                     |                          | 3,992  |                                       |        |      | (2,231 | )     |        |   | (7,248 | )    
|SETTLEMENT OF LITIGATION              |                                     |                          |       |                                       |        |      | (2,010 | )     |        |   |       |      
|OTHER INCOME                          |                                     |                          | 177    |                                       |        |      | 82     |       |        |   | 260    |      
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS)                     |                                     | $                        | 4,169  |                                       |        | $    | (4,159 | )     |        | $ | (6,988 | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS) PER SHARE  BASIC   |                                     | $                        | .47    |                                       |        | $    | (.47   | )     |        | $ | (.79   | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      
|NET INCOME (LOSS) PER SHARE  DILUTED |                                     | $                        | .41    |                                       |        | $    | (.47   | )     |        | $ | (.79   | )    
|                                      |                                     |                          |        |                                       |        |      |        |       |        |   |        |      

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



24



---



##### Table of Contents



ACRES GAMING INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |        |  
|--------------------------- | ------------------------------------- |  | -------------- | --- | ---------- | - | ----------- | - | -------- | - | ------------ | --- | ----- | - | ------- | ------ | - | - | ---- | ---- | - | - | ------ | ------ | -
|                            |                                       |  | Common Stock   |     | Additional |   |             |   |          |   |              |     |       |   |         |        |  
|                            |                                       |  |                |     | Paid-In    |   | Accumulated |   | Deferred |   |              |     |      
|                            |                                       |  | Shares         |     | Amount     |   | Capital     |   | Deficit  |   | Compensation |     | Total
|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |      
|                            |                                       |  | (in thousands)
|Balance as of June 30, 1998 |                                       |  | 8,820          |     |            | $ | 88          |   |          | $ | 19,554       |     |       | $ | (9,831  | )      |   | $ |     |      |   | $ | 9,811  |       
|                            | Issuance of common stock              |  |                | 93  |            |   |             | 1 |          |   |              | 350 |       |   |         |       |   |   |      |     |   |   |        | 351    |  
|                            | Net loss                              |  |                |    |            |   |             |  |          |   |              |    |       |   |         | (6,988 | ) |   |      |     |   |   |        | (6,988 | )
|                            | Preferred stock dividends             |  |                |    |            |   |             |  |          |   |              |    |       |   |         | (75    | ) |   |      |     |   |   |        | (75    | )
|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 1999 |                                       |  | 8,913          |     |            |   | 89          |   |          |   | 19,904       |     |       |   | (16,894 | )      |   |   |     |      |   |   | 3,099  |       
|                            | Net loss                              |  |                |    |            |   |             |  |          |   |              |    |       |   |         | (4,159 | ) |   |      |     |   |   |        | (4,159 | )
|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 2000 |                                       |  | 8,913          |     |            |   | 89          |   |          |   | 19,904       |     |       |   | (21,053 | )      |   |   |     |      |   |   | (1,060 | )     
|                            | Issuance of common stock              |  |                | 57  |            |   |             | 1 |          |   |              | 68  |       |   |         |       |   |   |      |     |   |   |        | 69     |  
|                            | Issuance of restricted
common stock   |  |                | 300 |            |   |             | 3 |          |   |              | 972 |       |   |         |       |   |   |      | (975 | ) |   |        |       |  
|                            | Amortization of deferred
compensation |  |                |    |            |   |             |  |          |   |              |    |       |   |         |       |   |   |      | 98   |   |   |        | 98     |  
|                            | Net income                            |  |                |    |            |   |             |  |          |   |              |    |       |   |         | 4,169  |   |   |      |     |   |   |        | 4,169  |  
|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       
|Balance as of June 30, 2001 |                                       |  | 9,270          |     |            | $ | 93          |   |          | $ | 20,944       |     |       | $ | (16,884 | )      |   | $ | (877 | )    |   | $ | 3,276  |       
|                            |                                       |  |                |     |            |   |             |   |          |   |              |     |       |   |         |        |   |   |      |      |   |   |        |       

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



25



---



##### Table of Contents



ACRES GAMING INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |       |        |        |  
|----------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------- | ---------------------------------- | ----- | -------------- | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                |                                                                                   |                                                   |                                       |                                    |       | 2001           |        | 2000   |       | 1999  
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |       
|                                                |                                                                                   |                                                   |                                       |                                    |       | (in thousands)
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |       
|                                                | Net income (loss)                                                                 |                                                   | $                                     | 4,169                              |       |                | $      | (4,159 | )     |        | $      | (6,988 | )    
|                                                | Adjustments to reconcile net income (loss) to net cash
from operating activities: |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|                                                |                                                                                   | Depreciation and amortization                     |                                       |                                    | 1,532 |                |        |        | 1,891 |        |        |        | 1,806 |       
|                                                |                                                                                   | Amortization of deferred stock-based compensation |                                       |                                    | 98    |                |        |        |      |        |        |        |      |       
|                                                |                                                                                   | Non-recurring charge                              |                                       |                                    |      |                |        |        |      |        |        |        | 400   |       
|                                                |                                                                                   | Settlement of litigation                          |                                       |                                    |      |                |        |        | 2,010 |        |        |        |      |       
|                                                |                                                                                   | Provision for doubtful accounts                   |                                       |                                    | 577   |                |        |        |      |        |        |        |      |       
|                                                |                                                                                   | Changes in assets and liabilities:                |                                       |                                    |       |                |        |        |       |        |        |        |       |       
|                                                |                                                                                   |                                                   | Receivables, net                      |                                    |       | (302           | )      |        |       | (1,965 | )      |        |       | 353    |       
|                                                |                                                                                   |                                                   | Inventories                           |                                    |       | (1,035         | )      |        |       | 1,180  |        |        |       | (2,302 | )     
|                                                |                                                                                   |                                                   | Prepaid expenses                      |                                    |       | (84            | )      |        |       | 182    |        |        |       | (162   | )     
|                                                |                                                                                   |                                                   | Accounts payable and accrued expenses |                                    |       | 1,353          |        |        |       | 81     |        |        |       | 2,078  |       
|                                                |                                                                                   |                                                   | Customer deposits                     |                                    |       | 5,808          |        |        |       | (3,297 | )      |        |       | 3,137  |       
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|                                                |                                                                                   |                                                   |                                       | Net cash from operating activities |       |                | 12,116 |        |       |        | (4,077 | )      |       |        | (1,678 | )
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |       
|                                                | Purchase of property and equipment                                                |                                                   |                                       | (947                               | )     |                |        | (731   | )     |        |        | (1,815 | )    
|                                                | Capitalized software costs                                                        |                                                   |                                       |                                   |       |                |        | (326   | )     |        |        | (734   | )    
|                                                | Other, net                                                                        |                                                   |                                       | (69                                | )     |                |        | (26    | )     |        |        | 13     |      
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|                                                |                                                                                   |                                                   |                                       | Net cash from investing activities |       |                | (1,016 | )      |       |        | (1,083 | )      |       |        | (2,536 | )
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |       
|                                                | Issuance of common stock, net                                                     |                                                   |                                       | 69                                 |       |                |        |       |       |        |        | 351    |      
|                                                | Preferred stock dividends                                                         |                                                   |                                       |                                   |       |                |        |       |       |        |        | (75    | )    
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|                                                |                                                                                   |                                                   |                                       | Net cash from financing activities |       |                | 69     |        |       |        |       |        |       |        | 276    |  
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS |                                                                                   |                                                   | 11,169                                |                                    |       |                | (5,160 | )      |       |        | (3,938 | )     
|CASH AND EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                   |                                                   | 789                                   |                                    |       |                | 5,949  |        |       |        | 9,887  |       
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      
|CASH AND EQUIVALENTS AT END OF YEAR             |                                                                                   | $                                                 | 11,958                                |                                    |       | $              | 789    |        |       | $      | 5,949  |       
|                                                |                                                                                   |                                                   |                                       |                                    |       |                |        |        |       |        |        |        |      

Supplemental Disclosure of Non-cash Activities:

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

In fiscal year 2000, the Company recorded a $2.0 million charge for settlement
of shareholder litigation that was expected to result in a cash payment of
$435,000 and a non-cash payment consisting of warrants to purchase shares of
the Companys common stock valued at $1.6 million. In fiscal year 2001, the
Company agreed to settle the litigation for all cash in lieu of issuing
warrants. See note 3.

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



26



---



##### Table of Contents



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. (the Company). All intercompany accounts and transactions
have been eliminated.

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

Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the
Company also offers slot accounting, player tracking, table game management and
visual analysis modules that may be purchased and installed individually or as
components of an integrated system marketed as the Acres Advantage. The
Company primarily sells its products in the United States, Australia and South
Africa. Sales in Australia totaled $426,000, $9.5 million and $384,000, for
the years ended June 30, 2001, 2000 and 1999, respectively. Sales to South
Africa totaled $3.1 million, $1.7 million and $316,000 for the years ended June
30, 2001, 2000 and 1999 respectively.

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

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

Revenue Recognition

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

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



27



---



##### Table of Contents



recognition for software is generally support and maintenance services.
The Company uses renewal rates to establish VSOE for support and maintenance
services. Revenue allocated to support and maintenance is recognized ratably
over the maintenance term.

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

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

Included in accounts receivable are unbilled receivables of $1.0 million
at June 30, 2000. The Company had no unbilled receivables at June 30, 2001.
Unbilled receivables represent revenues recognized in excess of billings on
certain contracts accounted for under the percentage of completion method.
Unbilled receivables were not billable at the balance sheet date, but were
recoverable as billings were made in accordance with the contract terms.

Major Customers

Sales to Station Casinos Inc. and IGT for properties operated by MGM
MIRAGE amounted to 38 percent and 20 percent of the Companys net revenues in
2001, respectively. Sales to MonteCasino amounted to 6 percent and 10 percent
of the Companys net revenues in 2001 and 2000, respectively. Sales to Crown
Casino, MotorCity Casino and Star City Casino amounted to 37 percent, 23
percent and 19 percent of the Companys net revenues in 2000, respectively.
Sales to Mandalay Resort Group and IGT accounted for 51 percent and 23 percent
of the Companys net revenues in 1999, respectively.

Related Party

The Company had sales transactions with the holder of the Series A
Preferred Stock of $9.3 million, $473,000 and $3.2 million for the years ended
June 30, 2001, 2000 and 1999, respectively. The Company had $487,000 and
$607,000 in related party receivables as of June 30, 2001 and 2000,
respectively. Additionally, the Company had related party payables of $317,000
and $316,000 as of June 30, 2001 and 2000, respectively.

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.

Revolving Credit Facility

The Company has no debt outstanding but has secured a revolving credit
facility to provide up to $3.5 million in financing secured by inventory and
accounts receivable. The revolving credit facility contains certain financial
covenants including minimum net worth, minimum cash flow, net income and
operating income



28



---



##### Table of Contents



requirements. As of June 30, 2001, the Company had no borrowings
outstanding and was in compliance with all financial covenants.

Fair Value of Financial Instruments

The Companys financial instruments consist of receivables. At June 30,
2001 and 2000, the fair value of the Companys receivables approximated their
carrying value.

Inventories

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

|                  |  |                         |       |      |  |   |       | 
|----------------- |  | ----------------------- | ----- | ---- |  | - | ----- | 
|                  |  | Inventories at June 30,
|                  |  |                        
|                  |  | 2001                    |       | 2000
|                  |  |                         |       |     
|                  |  | (in thousands)         
|Raw materials     |  | $                       | 2,792 |      |  | $ | 1,809 | 
|Work-in-progress  |  |                         | 47    |      |  |   | 110   | 
|Finished goods    |  |                         | 1,925 |      |  |   | 1,810 | 
|                  |  |                         |       |      |  |   |       | 
|Total inventories |  | $                       | 4,764 |      |  | $ | 3,729 | 
|                  |  |                         |       |      |  |   |       | 

Property and Equipment

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

Intangible Assets

Intangible assets consist of costs associated with the establishment of
patents, gaming licenses and gaming product approvals in various jurisdictions.
Amortization of patents is calculated using the straight-line method over the
estimated life of the patent. Gaming licenses and product approvals are
amortized using the straight-line basis over periods of five years and two
years, respectively. Intangible assets, net of accumulated amortization of
$344,000 and $270,000 were $178,000 and $252,000 at June 30, 2001 and 2000,
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 $670,000
and $316,000, were $391,000 and $745,000 at June 30, 2001 and 2000,
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 $354,000,
$229,000 and $87,000 of amortization for the years ended June 30, 2001, 2000
and 1999, respectively. All research and development costs are expensed as
incurred.

Non-Recurring Charges

During fiscal 1999, the Company elected to outsource almost all of its
manufacturing functions and initiated a relocation of its headquarters from
Corvallis, Oregon to Las Vegas, Nevada. The Company terminated 63 employees and
added 28 employees across all functional departments in the summer of 1999 in
connection with the relocation and reorganization of the Company. The Company
recorded a $400,000 non-recurring charge to



29



---



##### Table of Contents



recognize the related severance, recruiting and moving expenses of
$292,000, $29,000 and $79,000, respectively. The Company estimates that the
reduced payroll and overhead costs, net of increases in product costs related
to outsourced functions, amounted to an annual savings of approximately $1.2
million.

Use of Estimates

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

Foreign Currency Transactions

The Company only enters into derivative instruments to manage well-defined
foreign currency risks. The Company previously entered into forward exchange
contracts to hedge the value of sales contracts and accounts receivable
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts are substantially offset by the impact
of such changes on the value of the related sales contracts and accounts
receivable. At June 30, 2000, the Company held a foreign exchange contract
totaling $945,000 and maturing in July 2000. The fair market value of that
foreign exchange contract approximated its carrying value at June 30, 2000.
The Companys results of operations were not affected by the foreign exchange
contract. The counterparty to the foreign exchange contract was a large,
widely recognized bank resulting in minimal risk of credit loss due to
non-performance by the bank. As of June 30, 2001, the Company had no
outstanding foreign exchange contracts.

Recent Accounting Pronouncements

The Company adopted Statement of Financial Accounting Standards No. 133
Accounting for Derivative Instruments and Hedging Activities (SFAS 133)
effective July 1, 2000. SFAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. The Company only enters into
derivative instruments for hedging sales contracts and receivables denominated
in international currencies. Changes in the fair value of the derivatives are
offset against the change in fair value of the receivable. The change in the
derivatives fair value related to the ineffective portion of a hedge, if any,
is immediately recognized in earnings. The effect of adopting this standard
did not have a material effect on the Companys financial condition or results
of operations.

2. INCOME TAXES:

At June 30, 2001, the Company had cumulative net operating losses totaling
approximately $12.8 million that are available to offset future taxable income
through 2020. The Company has provided a valuation allowance for the remaining
amount of the benefit related to these net operating loss carryforwards as
realizability is uncertain.



30



---



##### Table of Contents



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, 2001
and 2000, along with the income tax effects (at a blended tax rate of 38% for
Federal and State taxes) of each, are as follows:

|                                                          |                           |   |                        |       |      |   |        |       | 
|--------------------------------------------------------- | ------------------------- | - | ---------------------- | ----- | ---- | - | ------ | ----- | 
|                                                          |                           |   | Deferred income tax   
|                                                          |                           |   | assets and liabilities
|                                                          |                           |   | at June 30,           
|                                                          |                           |   |                       
|                                                          |                           |   | 2001                   |       | 2000
|                                                          |                           |   |                        |       |     
|                                                          |                           |   | (in thousands)        
|Operating loss carryforwards                              |                           | $ | 4,856                  |       |      | $ | 6,712  |      
|Research and development tax credit                       |                           |   | 1,317                  |       |      |   | 1,158  |      
|Property and equipment                                    |                           |   | 384                    |       |      |   | 363    |      
|Accruals and reserves                                     |                           |   | 1,091                  |       |      |   | 1,014  |      
|Intangible and other assets                               |                           |   | 259                    |       |      |   | 54     |      
|                                                          |                           |   |                        |       |      |   |        |      
|                                                          | Total deferred tax assets |   |                        | 7,907 |      |   |        | 9,301 | 
|Deferred tax liabilities resulting from intangible assets |                           |   |                       |       |      |   | (83    | )    
|                                                          |                           |   |                        |       |      |   |        |      
|                                                          |                           |   | 7,907                  |       |      |   | 9,218  |      
|                                                          |                           |   |                        |       |      |   |        |      
|Less valuation allowance                                  |                           |   | (7,907                 | )     |      |   | (9,218 | )    
|                                                          |                           |   |                        |       |      |   |        |      
|Net deferred tax assets                                   |                           | $ |                       |       |      | $ |       |      
|                                                          |                           |   |                        |       |      |   |        |      

The Companys research and development tax credits are available to offset
future taxable income through 2020. The valuation allowance related to
deferred tax assets decreased by $1.3 million and increased by $1.7 million in
2001 and 2000, respectively.

A reconciliation of the expected income tax provision (benefit) assuming a
34% federal statutory rate to the financial statement income tax provision for
the years ended June 30, 2001, 2000 and 1999 is as follows:

|                                     |  |      |       |      |  |      |       |    |  |  |       |   
|------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                     |  | 2001 |       | 2000 |  | 1999
|                                     |  |      |       |      |  |     
|Expected tax provision (benefit)     |  |      | 34.0  | %    |  |      | (34.0 | )% |  |  | (34.0 | )%
|State income tax provision (benefit) |  |      | 4.0   | %    |  |      | (4.0  | )% |  |  | (4.0  | )%
|Non-deductible items                 |  |      | .9    | %    |  |      | .4    | %  |  |  | .3    | % 
|Valuation allowance                  |  |      | (31.4 | )%   |  |      | 39.9  | %  |  |  | 36.6  | % 
|Other                                |  |      | (7.5  | )%   |  |      | (2.3  | )% |  |  | 1.1   | % 
|                                     |  |      |       |      |  |      |       |    |  |  |       |   
|                                     |  |      |      | %    |  |      |      | %  |  |  |      | % 

3. COMMITMENTS AND CONTINGENCIES:

Litigation

Two related lawsuits were filed in the U.S. District Court alleging
violation of the federal securities laws by the Company and its executive
officers. Those suits were consolidated into one combined action that received
class certification for a class consisting of the purchasers of the Companys
Common Stock during the period from March 26, 1997 to December 11, 1997. In
September 2000, the Company and the plaintiffs agreed to settle the litigation.
Under the terms of the settlement, the Company became obligated to pay
$435,000 and could elect to make additional cash payments aggregating $1.6
million by January 31, 2002 or issue warrants to purchase an aggregate of one
million shares of the Companys Common Stock at $2.50 per share, valued at $1.6
million. The Company recorded a one-time charge of $2.0 million in the year
ended June 30, 2000, to account for the settlement. In April 2001, the Company
selected the cash payment option.

Two lawsuits have been filed regarding ownership of the Wheel of Gold
(WOG) technology that is the subject of two patents that have been assigned
to Anchor Gaming (Anchor). In the first suit, now pending in U.S. District
Court for the District of Nevada, the WOG plaintiffs brought patent
infringement, breach of warranty and



31



---



##### Table of Contents



breach of contract actions against the Company based on the WOG patents
and the Companys supply agreement with Anchor. Plaintiffs seek to enjoin the
Company from infringing the WOG patents and from competing with it in the sale
of wheel styled bonus gaming devices. The plaintiffs also seek unspecified
compensatory damages, treble damages, costs of suit, and attorneys fees. The
Company has denied the allegations and has filed a counterclaim in that
proceeding for a declaration that the Company is the sole or joint owner of the
WOG patents. Discovery in the lawsuit is formally closed. Currently pending
before the Court are four summary judgment motions and one discovery-related
motion filed by Anchor, as well as one summary judgment motion filed by the
Company. No trial date has been set. The Company cannot predict the outcome,
nor estimate the range of possible loss, if any, related to this suit but
believes that an unfavorable outcome could have a material adverse effect on
the Companys financial condition and results of operations.

The defense of this suit with Anchor was accepted by the Companys former
professional errors and omissions insurance carrier. However, in April 2000,
the carrier denied coverage. The Company is involved in litigation, now
pending in the U.S. District Court of Nevada, with its former insurance carrier
regarding such coverage. Summary judgment motions have been filed by both
parties and are pending. 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 or results of operations.

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

A series of related lawsuits resulting from the Companys efforts to
enforce its patent rights or third parties efforts to challenge the Companys
patent rights, have been settled or adjudicated. The suits were consolidated
in the U.S. District Court for the District of Nevada under Acres Gaming
Incorporated v. Mikohn Gaming Corp., et al. In separate settlements, all
claims in that litigation between the Company and Casino Data Systems (CDS),
Sunset Station Hotel and Casino, respectively, were dismissed with prejudice.
In March 2001 a jury validated four of the Companys patents and found that
Mikohn had infringed two of the Companys patents. The Company was awarded
damages against Mikohn by a jury in the amount of $1.5 million. The Court
denied Mikohns post-trial motions to overturn the jury verdict and ruled that
the Company is entitled to recover additional damages for Mikohns infringement
after June 1999. Mikohn has filed a notice of appeal.

In a separate but related action, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the
cost of defense of the claims alleged by Mikohn. In January 2001, the Company
reached a settlement with the former insurance carrier and received a $200,000
reimbursement of defense costs. In May 2000, the Company filed suit, now
pending in U.S. District Court for the District of Nevada, against another
former general liability insurance carrier for breach of insurance contract
related to the cost of defense of the claims alleged by CDS. In June 2000,
this insurance carrier filed suit in U.S. District Court of Nevada for
declaratory relief requesting the Court find that: no coverage is provided for
the claim; if coverage is provided it should be provided by the prior insurance
carrier; and the Company must reimburse the insurance carrier for nominal
amounts paid under its insurance policy to defend the Company. Summary judgment
motions have been filed by both parties and are pending. 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 or
results of operations.

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



32



---



##### Table of Contents



Employment Arrangement

On March 12, 2001, the Company entered into an oral employment arrangement
with its Chief Executive Officer, Mr. Glisson, that sets forth certain
employment terms through June 30, 2005 that include base salary and bonus
targets, severance pay, a restricted stock grant and the cancellation of
options to purchase the Companys Common Stock. The Company expects to enter
into a definitive written employment agreement with Mr. Glisson.

The Company issued Mr. Glisson 300,000 restricted shares of the Companys
Common Stock. 150,000 shares of the restricted stock become unrestricted on
June 30, 2003 and the remaining 150,000 shares become unrestricted on June 30,
2005, subject to acceleration of a ratable portion of the remaining restricted
shares in the applicable period if Mr. Glissons employment is terminated by
the Company. The 300,000 shares have been included in the Common Stock issued
and outstanding presented in the Companys balance sheet. As of June 30, 2001,
approximately 33,000 would become unrestricted if Mr. Glissons employment is
terminated by the Company. For the year ended June 30, 2001, the Company
recorded approximately $98,000 of compensation expense. Approximately $877,000
of deferred compensation has been recorded to reflect the remaining restricted
balance of the stock as of June 30, 2001.

Operating Leases

The Company leases its office facilities, certain office equipment and
service vehicles under operating leases that extend through June 30, 2006.
Future minimum lease payments under these non-cancelable operating leases as of
June 30, 2001 are $761,000, $563,000, $12,000, $8,000 and $5,000 in 2002, 2003,
2004, 2005 and 2006 respectively. Total lease expense was $832,000, $786,000
and $822,000 for the years ended June 30, 2001, 2000 and 1999, respectively.

4. REDEEMABLE PREFERRED STOCK:

In January 1997, the Company created an initial series of preferred stock,
consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock (the Series A Stock) and issued 519,481 shares for net
proceeds of approximately $4.9 million. The Series A Stock is entitled to
receive non-cumulative dividends at a rate per share equal to 3 percent of
$9.625, the initial per share purchase price, when and if declared by the
Companys Board of Directors. Holders of the Series A Stock have the option,
upon notice to the Company, to convert shares of Series A Stock into shares of
Common Stock based upon the applicable conversion price in effect at the time
of conversion. The initial conversion price for each share of Series A Stock
is the lesser of the price at which the Series A Stock was initially issued and
the average closing price of the Companys Common Stock for the period of
thirty trading days prior to the date of conversion of shares of Series A
Stock. The conversion price is subject to adjustments for certain events
relating to the Common Stock including stock splits and combinations, dividends
and distributions, reclassification, exchange, substitution, reorganization,
merger or sale of assets. The Series A Stock is subject to redemption at the
option of either the Company or holders of the Series A Stock, on or after
January 28, 2002 or upon the Companys primary shareholder reducing his
ownership to fewer than one million shares of Common Stock. The redemption
price would be equal to the purchase price plus any declared but unpaid
dividends. No dividends related to the years ended June 30, 2001 or 2000 were
declared or paid. The Company declared and paid dividends of $75,000 in fiscal
1999 related to the six-month period ended June 30, 1998.

So long as at least 130,000 of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director and must approve any amendments to
the Companys articles of incorporation including, among other things,
amendments to facilitate the sale or merger of the Company. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Series A Stock will be entitled to receive a
liquidation preference of $9.625 per share, plus any declared but unpaid
dividends, prior to the distribution of any of the Companys assets to holders
of the Common Stock. Any assets remaining after the distribution to holders of
the Series A Stock will be distributed to holders of the Common Stock.



33



---



##### Table of Contents



5. STOCKHOLDERS EQUITY:

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

|                                   |  |             |  |   |       |                                      |  |      |        |      |  |   |        |   |  | 
|---------------------------------- |  | ----------- |  | - | ----- | ------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | - |  | 
|                                   |  |             |  |   |       | For the years ended June 30,        
|                                   |  |             |  |   |       |                                     
|                                   |  |             |  |   |       | 2001                                 |  | 2000 |        | 1999
|                                   |  |             |  |   |       |                                      |  |      |        |     
|                                   |  |             |  |   |       | (in thousands except per share data)
|Net income (loss):                 |  | As reported |  | $ | 4,169 |                                      |  | $    | (4,159 | )    |  | $ | (6,988 | )
|                                   |  | Pro forma   |  |   | 3,773 |                                      |  |      | (4,700 | )    |  |   | (8,226 | )
|Income (loss) per share  basic:   |  | As reported |  | $ | .47   |                                      |  | $    | (.47   | )    |  | $ | (.79   | )
|                                   |  | Pro forma   |  |   | .42   |                                      |  |      | (.53   | )    |  |   | (.92   | )
|Income (loss) per share  diluted: |  | As reported |  | $ | .41   |                                      |  | $    | (.47   | )    |  | $ | (.79   | )
|                                   |  | Pro forma   |  |   | .37   |                                      |  |      | (.53   | )    |  |   | (.92   | )

A total of 1,750,000 shares of the Companys Common Stock have been
reserved for issuance pursuant to awards granted under the Plan. Under the
Plan, the Company has granted 1,525,992 options, net of cancellations, through
June 30, 2001. In addition to issuances under the Plan, the Company issued
185,000 options to purchase Common Stock that were not subject to the
provisions of the Plan. Stock option activity is summarized below:

|                                                  |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|------------------------------------------------- |  | ---------------------------- | --------- | ----- |  | -------- | ---- | ----- |  | ------ | --------- | -------- |  | - | ---- |  |  | -------- | --------- | - |  | - | ---- | 
|                                                  |  | For the years ended June 30,
|                                                  |  |                             
|                                                  |  | 2001                         |           | 2000  |  | 1999    
|                                                  |  |                              |           |       |  |         
|                                                  |  |                              |           |       |  | Weighted |      |       |  |        |           | Weighted |  |   |      |  |  | Weighted
|                                                  |  |                              |           |       |  | Average  |      |       |  |        |           | Average  |  |   |      |  |  | Average 
|                                                  |  |                              |           |       |  | Exercise |      |       |  |        |           | Exercise |  |   |      |  |  | Exercise
|                                                  |  | Shares                       |           | Price |  | Shares   |      | Price |  | Shares |           | Price   
|                                                  |  |                              |           |       |  |          |      |       |  |        |           |         
|Outstanding at beginning of year                  |  |                              | 1,354,242 |       |  | $        | 3.68 |       |  |        | 1,196,925 |          |  | $ | 5.05 |  |  |          | 1,041,175 |   |  | $ | 5.34 | 
|Granted at exercise prices
equal to market prices |  |                              | 179,500   |       |  |          | 3.66 |       |  |        | 556,300   |          |  |   | 1.14 |  |  |          | 422,500   |   |  |   | 4.40 | 
|Exercised                                         |  |                              | (58,025   | )     |  |          | 1.26 |       |  |        |          |          |  |   |     |  |  |          | (93,300   | ) |  |   | 3.75 | 
|Canceled                                          |  |                              | (169,200  | )     |  |          | 3.70 |       |  |        | (398,983  | )        |  |   | 4.23 |  |  |          | (173,450  | ) |  |   | 5.94 | 
|                                                  |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Outstanding at end of year                        |  |                              | 1,306,517 |       |  |          | 3.77 |       |  |        | 1,354,242 |          |  |   | 3.68 |  |  |          | 1,196,925 |   |  |   | 5.05 | 
|                                                  |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Exercisable at end of year                        |  |                              | 882,063   |       |  |          | 3.92 |       |  |        | 847,444   |          |  |   | 3.93 |  |  |          | 702,991   |   |  |   | 4.81 | 
|                                                  |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|Weighted average fair value of
options granted    |  | $                            | 2.94      |       |  |          |      |       |  | $      | .88       |          |  |   |      |  |  | $        | 3.28      |   |  |   |      | 
|                                                  |  |                              |           |       |  |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 



34



---



##### Table of Contents



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:

|                        |  |         |     |         |  |         |     |   |  |  |     |  
|----------------------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | --- | -
|                        |  | 2001    |     | 2000    |  | 1999   
|                        |  |         |     |         |  |        
|Risk free interest rate |  |         | 5.3 | %       |  |         | 6.3 | % |  |  | 5.0 | %
|Expected life of option |  | 5 years |     | 5 years |  | 5 years
|Expected volatility     |  |         | 108 | %       |  |         | 99  | % |  |  | 93  | %
|Dividends               |  | none    |     | none    |  | none   

The following table summarizes the options to purchase Common Stock
outstanding at June 30, 2001:

|                |  |             |           |          |  |                  |       |             |  |                  |  |  |         |  |  |          |       |  |  | 
|--------------- |  | ----------- | --------- | -------- |  | ---------------- | ----- | ----------- |  | ---------------- |  |  | ------- |  |  | -------- | ----- |  |  | 
|                |  |             |           |          |  | Weighted         |       |             |  |                  |  |  |         |  |  | Weighted
|                |  | Options for |           | Average  |  | Weighted         |       | Options for |  | Average Exercise
|                |  | Shares      |           | Exercise |  | Average          |       | Shares      |  | Price of Shares 
|Exercise Prices |  | Outstanding |           | Price    |  | Contractual Life |       | Exercisable |  | Exercisable     
|                |  |             |           |          |  |                  |       |             |  |                 
|$0.94-$1.00     |  |             | 317,150   |          |  | $                | 1.00  |             |  | 8.44 years       |  |  | 267,401 |  |  | $        | 1.00  | 
|$1.13 - $1.94   |  |             | 148,900   |          |  |                  | 1.52  |             |  | 8.88 years       |  |  | 37,920  |  |  |          | 1.45  | 
|$1.97 - $3.00   |  |             | 151,050   |          |  |                  | 2.68  |             |  | 5.31 years       |  |  | 105,300 |  |  |          | 2.85  | 
|$3.31 - $4.82   |  |             | 153,250   |          |  |                  | 4.65  |             |  | 6.29 years       |  |  | 108,700 |  |  |          | 4.66  | 
|$4.88 - $4.88   |  |             | 302,000   |          |  |                  | 4.88  |             |  | 7.06 years       |  |  | 201,000 |  |  |          | 4.88  | 
|$4.90 - $6.50   |  |             | 135,750   |          |  |                  | 5.91  |             |  | 7.51 years       |  |  | 66,175  |  |  |          | 5.79  | 
|$6.78 - $11.00  |  |             | 74,417    |          |  |                  | 8.81  |             |  | 5.76 years       |  |  | 71,567  |  |  |          | 8.82  | 
|$13.00-$15.00   |  |             | 24,000    |          |  |                  | 14.00 |             |  | 5.97 years       |  |  | 24,000  |  |  |          | 14.00 | 
|                |  |             |           |          |  |                  |       |             |  |                  |  |  |         |  |  |          |       |  |  | 
|$0.94-$15.00    |  |             | 1,306,517 |          |  |                  | 3.77  |             |  | 7.26 years       |  |  | 882,063 |  |  |          | 3.92  | 
|                |  |             |           |          |  |                  |       |             |  |                  |  |  |         |  |  |          |       |  |  | 

6. EMPLOYEE BENEFIT PLAN:

The Company has a profit sharing plan that operates under the provisions
of Section 401(k) of the Internal Revenue Code and covers substantially all
full-time employees. Employer contributions may be made at the discretion of
the Board of Directors. There were no employer contributions during the years
ended June 30, 2001, 2000 and 1999.



35



---



##### Table of Contents



7. 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 and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year
amounts have been restated.

|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |       | 
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | - | ------------------------------------ | ------ | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                                            |                                                                                                        |   | For the year ended June 30,         
|                                                                                            |                                                                                                        |   |                                     
|                                                                                            |                                                                                                        |   | 2001                                 |        | 2000 |   | 1999  
|                                                                                            |                                                                                                        |   |                                      |        |      |   |       
|                                                                                            |                                                                                                        |   | (in thousands except per share data)
|Net income (loss)                                                                           |                                                                                                        | $ | 4,169                                |        |      | $ | (4,159 | )     |  | $ | (6,988 | )    
|Preferred stock dividends                                                                   |                                                                                                        |   |                                     |        |      |   |       |       |  |   | (75    | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|Net income (loss) allocable to common stockholders                                          |                                                                                                        | $ | 4,169                                |        |      | $ | (4,159 | )     |  | $ | (7,063 | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|Weighted average number of shares of common stock
and common stock equivalents outstanding: |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|                                                                                            | Weighted average number of common shares
outstanding  basic                                           |   |                                      | 8,948  |      |   |        | 8,913 |  |   |        | 8,897 | 
|                                                                                            | Dilutive effect of warrants and employee
stock options after application of the
treasury stock method  |   |                                      | 264    |      |   |        |      |  |   |        |      | 
|                                                                                            | Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method |   |                                      | 954    |      |   |        |      |  |   |        |      | 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|                                                                                            | Weighted average number of common shares
outstanding   diluted                                        |   |                                      | 10,166 |      |   |        | 8,913 |  |   |        | 8,897 | 
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|Income (loss) per share  basic                                                             |                                                                                                        | $ | .47                                  |        |      | $ | (.47   | )     |  | $ | (.79   | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      
|Income (loss) per share  diluted                                                           |                                                                                                        | $ | .41                                  |        |      | $ | (.47   | )     |  | $ | (.79   | )    
|                                                                                            |                                                                                                        |   |                                      |        |      |   |        |       |  |   |        |      

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,
|                                                                                                                         |  |                                   
|                                                                                                                         |  | 2001                               |     | 2000 |  | 1999
|                                                                                                                         |  |                                    |     |      |  |     
|                                                                                                                         |  | (in thousands)                    
|Warrants and employee stock options                                                                                      |  |                                    | 764 |      |  |      | 1,479 |  |  |  | 1,361 | 
|Redeemable convertible preferred
stock, if converted, assuming
conversion at rates in effect at
each respective year end |  |                                    |    |      |  |      | 2,228 |  |  |  | 2,228 | 

The Stock Purchase Agreement between IGT and the Company pursuant to which
IGT purchased 519,481 shares of Series A Stock restricts IGTs ownership of the
Companys Common Stock. Without the consent of the Company, IGT may not own
more than 20% of the outstanding Common Stock, including, for purposes of the
calculation, the shares of Common Stock into which the Series A Stock owned by
IGT is convertible. The Company believes that this provision operates to limit
IGTs right to convert shares of Series A Stock as well as limiting IGTs
rights to purchase additional shares of Common Stock. IGT has asserted that
the agreement does not limit the number of shares into which the Series A Stock
may be converted. As of June 30, 2001, the Series A Stock could have been
converted into 953,653 shares of Common Stock, or 9.3% of the then outstanding
Common Stock.



36



---



##### Table of Contents



8. SUBSEQUENT EVENT

In July 2001, the Company entered into an agreement increasing its office
space by leasing approximately 7,000 square feet contiguous to its existing
office space. The lease commenced on July 30, 2001 and will expire on April
26, 2003. The base rent for the additional office space is approximately
$10,000 per month, plus $1,000 per month for property taxes, building insurance
and common area maintenance.

9. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

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

|                                             |  |               |       |                |  |               |       |                |  |   |        |   |  |   |        |   
|-------------------------------------------- |  | ------------- | ----- | -------------- |  | ------------- | ----- | -------------- |  | - | ------ | - |  | - | ------ | --
|Year ended June 30, 2000                     |  | First Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                             |  |               |       |                |  |               |       |               
|(in thousands except per share data)         |  |               |       |                |  |               |       |                |  |   |        |   |  |   |        |   
|Net revenues                                 |  | $             | 6,224 |                |  | $             | 5,367 |                |  | $ | 2,202  |   |  | $ | 3,209  |   
|Gross profit                                 |  |               | 3,160 |                |  |               | 2,861 |                |  |   | 1,391  |   |  |   | 1,181  |   
|Income (loss) from operations                |  |               | 372   |                |  |               | 390   |                |  |   | (1,166 | ) |  |   | (1,827 | ) 
|Net income (loss)                            |  |               | 394   |                |  |               | 420   |                |  |   | (1,141 | ) |  |   | (3,832 | )*
|Net income (loss) per common
share  basic   |  | $             | .04   |                |  | $             | .05   |                |  | $ | (.13   | ) |  | $ | (.43   | )*
|Net income (loss) per common
share  diluted |  | $             | .04   |                |  | $             | .04   |                |  | $ | (.13   | ) |  | $ | (.43   | )*

|                                                     |  |               |       |                |  |               |        |                |  |   |       |  |  |   |        |    
|---------------------------------------------------- |  | ------------- | ----- | -------------- |  | ------------- | ------ | -------------- |  | - | ----- |  |  | - | ------ | ---
|Year ended June 30, 1999                             |  | First Quarter |       | Second Quarter |  | Third Quarter |        | Fourth Quarter
|                                                     |  |               |       |                |  |               |        |               
|(in thousands except per share data)                 |  |               |       |                |  |               |        |                |  |   |       |  |  |   |        |    
|Net revenues                                         |  | $             | 3,288 |                |  | $             | 3,059  |                |  | $ | 6,414 |  |  | $ | 1,211  |    
|Gross profit                                         |  |               | 1,958 |                |  |               | 999    |                |  |   | 2,929 |  |  |   | (167   | )  
|Income (loss) from operations                        |  |               | (965  | )              |  |               | (2,210 | )              |  |   | 67    |  |  |   | (4,140 | )  
|Net income (loss)                                    |  |               | (846  | )              |  |               | (2,140 | )              |  |   | 83    |  |  |   | (4,085 | )**
|Net income (loss) per common
share  basic & diluted |  | $             | (.10  | )              |  | $             | (.24   | )              |  | $ | .01   |  |  | $ | (.46   | )**



|*  |  | During the Fourth Quarter of 2000, the Company recorded a one-time
charge of $2.0 million
($.23 per share) for the settlement of the shareholder litigation.                                
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | During the Fourth Quarter of 1999 the Company recorded a non-recurring
charge of $400,000 ($.04 per share) for the cost of the Companys relocation of its
headquarters to Las Vegas, Nevada



37



---



##### Table of Contents






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

No changes in, or disagreements with, accountants which required reporting
on Form 8-K have occurred within the three-year period ended June 30, 2001.




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, 2001.




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, 2001.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Companys
Proxy Statement that will be filed pursuant to Regulation 14A within 120 days
of June 30, 2001.




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, 2001.




PART IV




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

|    |  |     |  |                                                                               
|--- |  | --- |  | ------------------------------------------------------------------------------
|(a) |  | (1) |  | Financial
Statements
See Item 8. Financial Statements and Supplementary Data
|    |  | (2) |  | Financial Statement Schedules                                                 

Acres Gaming Incorporated
Schedule of Valuation and Qualifying Accounts
For the Years Ended June 30, 2001, 2000 and 1999

|                                     |      |  |                |    |           |  |             |     |             |  |   |     |   |  |   |     | 
|------------------------------------ | ---- |  | -------------- | -- | --------- |  | ----------- | --- | ----------- |  | - | --- | - |  | - | --- | 
|                                     |      |  | Balances       |    |           |  |             |     | Amounts     |  |   |     |  
|                                     |      |  | at             |    | Additions |  | charged     |     | Balances at
|                                     |      |  | beginning of   |    | charged   |  | off, net of |     | end of     
|                                     |      |  | year           |    | to income |  | collections |     | year       
|                                     |      |  |                |    |           |  |             |     |            
|                                     |      |  | (in thousands)
|Allowance for uncollectible accounts |      |  |                |    |           |  |             |     |             |  |   |     |   |  |   |    
|                                     | 2001 |  | $              | 15 |           |  | $           | 577 |             |  | $ |    |   |  | $ | 592 | 
|                                     | 2000 |  |                | 15 |           |  |             |    |             |  |   |    |   |  |   | 15  | 
|                                     | 1999 |  |                | 50 |           |  |             |    |             |  |   | (35 | ) |  |   | 15  | 



38



---



##### Table of Contents



|                                                                 |      |  |   |       |  |  |   |       |  |  |   |      |   |  |   |       | 
|---------------------------------------------------------------- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ---- | - |  | - | ----- | 
|Allowance for non-recurring
charges and settlement of
litigation |      |  |   |       |  |  |   |       |  |  |   |      |   |  |   |      
|                                                                 | 2001 |  | $ | 2,010 |  |  | $ |      |  |  | $ |     |   |  | $ | 2,010 | 
|                                                                 | 2000 |  |   | 386   |  |  |   | 2,010 |  |  |   | (386 | ) |  |   | 2,010 | 
|                                                                 | 1999 |  |   | 475   |  |  |   | 400   |  |  |   | (489 | ) |  |   | 386   | 

|    |  |                        
|--- |  | -----------------------
|(3) |  | Exhibits               
|    |  | See Index to Exhibits



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



39



---



##### Table of Contents






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 27, 2001 | 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 27, 2001 |  | /s/   Floyd W. Glisson                                                                                                             
|                         |  |                                                                                                                                    
|                         |  | Floyd W. Glisson
        Chairman of the Board and Chief Executive Officer
        (Principal Executive Officer)                   
|                        
|Date: September 27, 2001 |  | /s/   Patrick W. Cavanaugh                                                                                                         
|                         |  |                                                                                                                                    
|                         |  | Patrick W. Cavanaugh
        Senior Vice President and Chief Financial Officer
        (Principal Financial and Accounting Officer)
|                        
|Date: September 27, 2001 |  | /s/   Ronald G. Bennett                                                                                                            
|                         |  |                                                                                                                                    
|                         |  | Ronald G. Bennett
        Director                                                                                                 
|                        
|Date: September 27, 2001 |  | /s/   Robert W. Brown                                                                                                              
|                         |  |                                                                                                                                    
|                         |  | Robert W. Brown
        Director                                                                                                   



40



---



##### Table of Contents



|                         |  |                                    
|------------------------ |  | -----------------------------------
|Date: September 27, 2001 |  | /s/   Roger B. Hammock             
|                         |  |                                    
|                         |  | Roger B. Hammock
        Director  
|                        
|Date: September 27, 2001 |  | /s/   David R. Willensky           
|                         |  |                                    
|                         |  | David R. Willensky
        Director



41



---



##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                   
|No.     |  | Description                                                                                                                                                       
|        |  |                                                                                                                                                                   
|3.1     |  | Articles of Incorporation of Acres Gaming Incorporated, as amended (4)                                                                                            
|       
|       
|       
|       
|       
|       
|       
|       
|3.2     |  | Bylaws of Acres Gaming Incorporated, as amended (3)                                                                                                               
|       
|       
|       
|       
|       
|       
|       
|       
|+10.1   |  | Acres Gaming Incorporated 1993 Stock Option and Incentive Plan, as amended (4)                                                                                    
|       
|       
|       
|       
|       
|       
|       
|       
|10.2    |  | Lease dated August 5, 1999, between the Company and Avery Investments (1)                                                                                         
|       
|       
|       
|       
|       
|       
|       
|       
|10.3    |  | System Upgrade Agreement dated June 7, 1999 between Crown Limited and the Company (5)                                                                             
|       
|       
|       
|       
|       
|       
|       
|       
|+10.4   |  | Employment Agreement dated July 1, 1996 between the Company and John F. Acres (4)                                                                                 
|       
|       
|       
|       
|       
|       
|       
|       
|10.5    |  | Stock Purchase Agreement between the Company and IGT dated January 28, 1997 (4)                                                                                   
|       
|       
|       
|       
|       
|       
|       
|       
|10.6    |  | Registration Rights Agreement between the Company and IGT dated January 28, 1997 (4)                                                                              
|       
|       
|       
|       
|       
|       
|       
|       
|10.7    |  | Master Agreement for Product Development, Purchase and Sale
between the Company and International Game Technology, Inc. dated
January 27, 1997 (4)                
|       
|       
|       
|       
|       
|       
|       
|       
|10.8    |  | Lease dated March 3, 1998 between the Company and #26 McCarran
Center, LC (2)                                                                                     
|       
|       
|       
|       
|       
|       
|       
|       
|+10.9   |  | Amendment to Employment Agreement dated July 20, 1998
between the Company and John F. Acres (6)                                                                   
|       
|       
|       
|       
|       
|       
|       
|       
|10.10   |  | Product Sales, Delivery and License Agreement dated December
8, 2000 between Acres Gaming Incorporated and IGT(7)                                                 
|       
|       
|       
|       
|       
|       
|       
|       
|10.11   |  | Acres Software Maintenance Agreement dated December 8, 2000
between Acres Gaming Incorporated and IGT(7)                                                          
|       
|       
|       
|       
|       
|       
|       
|       
|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(8)
|       
|       
|       
|       
|       
|       
|       
|       
|+10.13  |  | Key terms of an oral employment arrangement between Acres
Gaming Incorporated and Floyd W. Glisson(8 )                                                            
|       
|       
|       
|       
|       
|       
|       
|       
|10.14   |  | Lease dated July 30, 2001 between the Company and URS Corporation                                                                                                 
|       
|       
|       
|       
|       
|       
|       
|       
|21.1    |  | Subsidiaries of the Registrant                                                                                                                                    
|       
|       
|       
|       
|       
|       
|       
|       
|23.1    |  | Consent of Arthur Andersen LLP, Independent Public Accountants                                                                                                    



---

|+   |  | Management contract or compensatory plan or arrangement.                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999,
previously filed with the Commission.
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the exhibits to the Companys Annual Report
on Form 10-K for the year ended June 30, 1998, previously filed with the
Commission.                    
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
|   
|   
|   
|   
|(4) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996,
previously filed with the Commission. 
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the exhibits to the Companys Annual Report
on Form 10-K for the year ended June 30, 1999, previously filed with the
Commission.                    
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the exhibits to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998,
previously filed with the Commission.



1



---



##### Table of Contents



|(7) |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(8) |  | 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.   



2