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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Commission File No.) 0-22498

ACRES GAMING INCORPORATED

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.

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of December 31, 2002 was $49,174,872. For purposes of this computation, all executive officers and directors of the Registrant have been deemed affiliates. This shall not be deemed an admission that such persons are affiliates.

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of August 31, 2003 was 10,571,426 shares.

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

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

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our expectations.

ITEM 1. BUSINESS

General

     In this report the terms “Acres,” “Company,” “we,” “us,” and “our” refer to Acres Gaming Incorporated.

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

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

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

The Market

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

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     Casino gaming has also grown rapidly worldwide, including in Australia, Canada, Europe and Africa, as well as in parts of Asia, the former Soviet Union and South America. The Company estimates that approximately 640,000 casino-style gaming machines are currently in use in the United States and that the total number in use throughout the world is significantly greater.

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

Products

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

	1)		Casino-wide, fully integrated applications offered as the Acres AdvantageTM, Acres Bonusing™ and Acres Cashless™; and
	2)		Bonus Games comprised of single or a linked group of traditional slot machines that activate a secondary “bonus” game when certain milestones are reached on the traditional games. Bonus Games are developed as a “topbox” that can be attached to a new or used slot machine manufactured by another company. The Company had begun development of its own slot machine so that Bonus Games can be offered without another company’s slot machine.

     Acres Advantage

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

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

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

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

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

     Slot Monitoring. Slot monitoring products collect play data about each gaming device. This information is transmitted to a central computer system where it is immediately available to the casino management, and where it is stored for future analysis and reporting. The equipment is configured to monitor all slot machine functions including

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coins deposited in the machine, coins paid out of the machine, coins available to “drop,” number of games played, jackpot occurrences and other machine functions.

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

     Cage, Credit and Table Games Management. This product allows a casino to track and manage the cash, chips and credit vouchers for table games and the cashiers’ cage. It also provides automated mechanisms for enabling players to obtain credit through online or in-house credit facilities and can use a touch screen mechanism for inputting players’ table games activity into the patron management module.

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

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

     Acres Bonusing

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

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

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

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

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

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

     Acres Cashless

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

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

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

     Bonus Games

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

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

Research and Development

     The Company devotes significant resources to the development of new products and the enhancement of existing products. The Company had 68 full-time employees involved in research and development as of August 31, 2003. Research and development expenses were $6.9 million, $5.7 million and $4.7 million in the years ended June 30, 2003, 2002 and 2001, respectively.

Customers

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

     Prior to fiscal 2003, more than 50% of the Company’s net revenues were derived from sales to three or fewer customers in any given fiscal year. In fiscal 2003, sales to five customers accounted for slightly more than 50% of the Company’s net revenue. The following table sets forth net revenues for each of the Company’s major customers as a percentage of total net revenues for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

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     The Company’s revenues from sales to customers in the United States totaled $41.2 million, $23.0 million and $40.5 million for the years ended June 30, 2003, 2002 and 2001, respectively. The Company’s revenues from sales to customers outside the United States totaled $5.9 million, $3.4 million and $3.5 million for the years ended June 30, 2003, 2002 and 2001, respectively. (See note 1 of notes to the consolidated financial statements.) The following table sets forth net revenues for the United States and outside the United States as a percentage of total net revenues for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

(See note 1 to the consolidated financial statements.)

     The Company’s backlog of orders for its products were approximately $19.0 million, $20.0 million and $21.1 million as of June 30, 2003, 2002 and 2001, respectively. Backlog, however, may not be a meaningful indication of future sales. Sales to the Company’s customers are made pursuant to purchase orders or sales agreements for specific system installations and products are often delivered within a few months of receipt of the order. The Company does not have any ongoing long-term sales contracts. The Company’s revenues and results of operations may be materially affected, in the near term, by the receipt or loss of, or delivery over an extended period of time required under, any one order.

Marketing

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

Production and Manufacturing

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

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Patents

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

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

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

Competition

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

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

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

Government Regulation

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

     Regulation of Products

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

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

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     Corporate Regulation

               Nevada

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

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

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

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

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

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

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

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

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

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

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

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

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

     The Company may not make a public offering of any securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes.

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

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

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

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

               Other Jurisdictions

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

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     The Company might not obtain or be granted renewals for required licenses, permits, certificates or approvals necessary to conduct its business in all jurisdictions in which it is required to do so. Failure by the Company to obtain, or the loss or suspension of, any necessary licenses, approvals or suitability findings, may prevent the Company from selling or distributing its products in such jurisdictions.

Employees

     At August 31, 2003, the Company had 162 full-time employees of whom 68 were involved in research and development, 54 in customer service and support, 15 in material control, 7 in sales and marketing and 18 in administration and management. None of the Company’s employees is represented by a labor union or covered by a collective bargaining agreement. The Company has not experienced any work stoppages and believes that its employee relations are good.

Available Information

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

ITEM 2. PROPERTIES

     The Company’s headquarters and principal operations are located at 7115 Amigo Street, Suite 150, Las Vegas, Nevada. This facility encompasses approximately 39,000 square feet. The lease commenced on June 15, 1998 and was extended in June 2003 for an additional 60 months with a new expiration date of June 15, 2008. Currently, the base rent is approximately $52,600 per month, plus $9,700 per month for property taxes, building insurance and common area maintenance.

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

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

ITEM 3. LEGAL PROCEEDINGS

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

     The defense of the lawsuit with Anchor in the U.S. District Court for the District of Nevada was accepted by the Company’s former professional errors and omissions insurance carrier. However, in April 2000, the carrier denied coverage. The Company is involved in litigation, now pending in the U.S. District Court for the District of Nevada, with its former insurance carrier regarding such coverage. On motions for summary judgment, the court found on February 28, 2002 that the insurance carrier has a duty to defend the Company against the lawsuit. Upon a motion for reconsideration, on March 5, 2003 the court found that the insurance carrier has a duty to defend the Company against the entire Anchor lawsuit, but is entitled to reimbursement from the Company for the amount the insurance carrier paid for claims alleged by Anchor that are not covered by the Company’s policy. The Company cannot predict the outcome of this suit.

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     In another insurance coverage suit, the Company sued its former general liability insurance carrier for breach of insurance contract related to the cost of defense of claims alleged by Casino Data Systems in a separate lawsuit that has been settled. The suit against the insurance carrier is now pending in U.S. District Court for the District of Nevada. The insurance carrier seeks a declaration that no coverage is provided for the claim, that if coverage is provided it should be provided by the prior insurance carrier, and that the Company must reimburse the insurance carrier for amounts paid under its insurance policy to defend the Company. On motions for summary judgment, the court found on February 28, 2002 that the insurance carrier did not have a duty to defend the Company against the lawsuit and that the Company must repay the insurance carrier approximately $70,000 in defense costs previously paid by the insurance carrier. At June 30, 2002, the Company recorded a liability in the amount of $70,000 to provide for the contingency. Upon a motion for reconsideration, on March 5, 2003 the court found that the insurance carrier has a duty to defend the Company against the lawsuit. The insurance carrier has filed a motion requesting leave to file an interlocutory appeal of the trial court’s ruling on the motion for reconsideration. The Company cannot predict the outcome of this suit but believes that an unfavorable outcome would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

     Wild Game NG, LLC, a Nevada limited liability company, which owns and operates Siena Hotel Spa Casino in Reno, Nevada, filed a lawsuit against the Company in November 2001 in the Second Judicial District Court of the State of Nevada in the County of Washoe. Siena alleges that the Company failed to perform its obligations under a $1.8 million Equipment Sale Agreement to install and maintain a networked slot accounting, cage and credit and player tracking system in Siena’s casino. Siena seeks damages in excess of $30,000,000, largely comprised of consequential damages (damages for lost profits). On September 25, 2003, the Company filed a motion for partial summary judgment to preclude Siena from seeking consequential damages, which are not recoverable pursuant to the terms of the Equipment Sale Agreement. The Company believes that Siena’s claims are unfounded and has filed counterclaims seeking, among other things, payments Siena owes the Company for installation of the Company’s hardware in Siena’s casino. The Company cannot predict the outcome of this suit but believes that an unfavorable outcome would not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

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

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

     There were no matters submitted to a vote of security holders during the quarter ended June 30, 2003.

EXECUTIVE OFFICERS OF REGISTRANT

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

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

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

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

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

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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     The Company estimates that there are approximately 3,800 beneficial owners of the Company’s common stock.

     The Company has never paid or declared any cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company expects to retain its earnings to finance the development and expansion of its business. The payment by the Company of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements and other relevant factors.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected financial information concerning the Company and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the audited financial statements and notes included in “Financial Statements and Supplementary Data”. The balance sheets and statements of operations’ data as of and for each of the five years in the period ended June 30, 2003 are derived from the audited financial statements of the Company. The historical results are not necessarily indicative of the results of operations to be expected in the future.

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

Overview

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

     The Company’s financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. Prior to fiscal year 2003, three or fewer customers have accounted for more than 50 percent of annual revenues. (See Item 1. “Business — Customers” and “Factors That May Affect Our Future Operating Results”).

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

Critical Accounting Policies and Estimates

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

     Revenue Recognition

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

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

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

     Research and Development Costs

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

     Legal Contingencies

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

     Income Taxes

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

Results of Operations

     Comparison of the Years Ended June 30, 2003 and 2002

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

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

     Component materials purchased primarily from computer and electronics vendors comprised 55 percent of the cost of revenues in fiscal 2003 and 56 percent in fiscal 2002. Manufacturing, procurement, software customization, service and installation labor and expenses accounted for the remaining cost of revenues. Changes in the components of the cost of revenues result from changes in the mix of products sold. Materials represented a smaller portion of cost of revenues in fiscal 2003 because hardware sales represented a smaller portion of total revenues.

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

     The Company’s research and development expenses increased to $6.9 million in fiscal 2003, from $5.7 million in fiscal 2002. This increase resulted primarily from an overall average increase in the number of research and development personnel and from expenses for prototypes and outside services to support the Company’s new product and product enhancement efforts. The Company expects to continue to spend a significant percentage of its revenue on research and development to enhance and expand the capabilities of Acres Advantage, Acres Cashless and Acres Bonusing products and develop additional bonus games.

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

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

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

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

     Comparison of the Years Ended June 30, 2002 and 2001

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

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

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

     The Company’s research and development expenses increased to $5.7 million in fiscal 2002, from $4.7 million in fiscal 2001. This increase resulted primarily from an overall average increase in the number of research and development personnel and from expenses for prototypes and outside services to support the Company’s new product and product enhancement efforts.

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

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

     Net operating loss carryforwards were utilized to reduce taxable income in fiscal 2002 and 2001, and therefore no income tax provision has been recorded. Net income for the year ended June 30, 2002 was $3.9 million ($0.38 per diluted share) compared to $4.2 million ($0.41 per diluted share) for the year ended June 30, 2001.

Aggregate Indebtedness and Fixed Payment Obligations

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

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

     On December 21, 2001, the Company sold $5,000,000 principal amount of 6% convertible subordinated debentures convertible into shares of the Company’s common stock at $4.6433 per share to three institutional investors. In June 2003, the debentures’ remaining principal balance of $1.4 million was converted into shares of Acres common stock. The investors also acquired warrants to purchase 177,674 shares of the Company’s common stock at an exercise price of $4.6433 per share. Interest on the debentures accrued at the rate of 6% payable semi-annually starting in April 2002. Principal payments of $300,000 were due monthly from June 2002 to August 2003 and principal payments of $500,000 were due monthly from September 2003 until the principal was repaid no later than December 21, 2003. The Company also issued a warrant to purchase 75,317 shares of its common stock at an exercise price of $4.6433 per share to the placement agent in connection with the sale of the debentures and warrants.

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

     At June 30, 2003, the Company had $1.6 million outstanding under non-cancelable purchase commitments and safety-stock agreements with suppliers. These commitments generally require that the Company take physical delivery of and pay for the items within 180 days.

Liquidity and Capital Resources

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

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

     At June 30, 2003, the Company had collected $4.2 million in advance deposits against its order backlog of approximately $19.0 million. Backlog, however, may not be a meaningful indication of future sales. Sales are made pursuant to purchase orders or sales agreements for specific system installations and products are often delivered within a few months after receipt of an order.

     The Company does not have any material ongoing long-term sales contracts. The Company’s revenues and results of operations may be materially affected, in the near term, by the receipt, loss or delivery over an extended period of time of any one order.

     The Company believes that it can complete the deliveries and installations comprising its order backlog, and obtain and complete enough additional sales to provide sufficient operating cash flow for fiscal 2004. Failure to successfully deliver the products comprising the order backlog, failure to obtain additional orders or failure to subsequently collect the resulting revenues could have a material adverse affect on the Company’s liquidity. The Company could reduce operating expenses to improve liquidity, by reducing personnel and other expenses.

     In August 2002, the Company entered into a one-year revolving loan agreement with a commercial bank to provide up to $3.0 million in financing secured by inventory and accounts receivable. The agreement provides for interest at a rate equal to Prime plus 1%. The agreement contains certain financial covenants including minimum net worth, minimum cash flow, net income and operating income requirements. Management believes that the Company was in compliance with all covenants under the agreement through its expiration in August 2003. The Company has elected not to renew the loan agreement.

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

Recent Accounting Pronouncements

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

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company does not invest in market risk sensitive instruments.

FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

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

Failure to complete the merger with IGT

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

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

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

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

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

Liquidity

     Although management believes that sufficient revenues will be generated during fiscal 2004 to meet operating, product development and other cash flow requirements, such revenues will depend on the completion of existing orders and the receipt of future orders.

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

Reliance on a Few Major Customers

     The Company is dependent on sales of its products to a limited number of casino operators for a substantial portion of its revenues in any given fiscal year. Prior to fiscal 2003, three or fewer customers accounted for more than 50% of annual net revenues in any given fiscal year, and in fiscal 2003 five customers accounted for more than 50% of the Company’s net revenues. The following factors could have a material adverse effect on the Company’s revenues:

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

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

Other Risks

     Litigation. The Company is engaged in a variety of litigation as more fully discussed in “Item 3. Legal Proceedings.” This litigation is expensive and could have a material adverse affect on the Company.

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

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

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

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

     Fluctuations in Quarterly Operating Results. The Company’s quarterly operating results have fluctuated in the past, and are expected to fluctuate significantly in the future, due to a number of factors, including, among others, the size and timing of customer orders, deliveries of orders, the timing and market acceptance of new products introduced by the Company, changes in the level of operating expenses, technological advances and new product introductions by the Company’s competitors, competitive conditions in the industry, regulatory approval and general

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economic conditions. Product development and marketing costs are often incurred in periods before any revenues are recognized from the sales of products, and gross margins are lower and operating expenses are higher during periods in which such product development expenses are incurred and marketing efforts are commenced. The Company’s quarterly revenues and results of operations may be materially affected by the receipt or loss of any one order and by the timing of the delivery, installation and regulatory approval of any one order. The Company may not be able to achieve or maintain profitable operations on a consistent basis. The Company believes that period-to-period comparisons of its financial results may not be meaningful and should not be relied upon as indications of future performance. Fluctuations in operating results may result in volatility in the price of the Company’s Common Stock.

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

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Report of Independent Accountants

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

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Acres Gaming Incorporated and Subsidiary at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements of Acres Gaming Incorporated and Subsidiary for the year ended June 30, 2001 were audited by other independent accountants who have ceased operations. Those accountants expressed an unqualified opinion on those financial statements in their report dated August 16, 2001.

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

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

Report of Independent Public Accountants

     To the Stockholders of Acres Gaming Incorporated:

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

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

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

ARTHUR ANDERSEN LLP
Las Vegas, Nevada
August 16, 2001

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

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001

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

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ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001

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

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