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

(Commission File No.) 0-22498

Registrant’s telephone number, including area code:

(702) 263-7588

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

None

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

Common Stock, $.01 par value

(Title of class)

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

Yes [X] No [   ]

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

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PART I

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

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

ITEM 1. BUSINESS

General

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

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

The Market

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

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

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

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Products

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

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

     Acres Advantage

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

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

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

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

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

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

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

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

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

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

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

     Acres Bonusing

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

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

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

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

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

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

     Acres Cashless

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

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

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

     Bonus Games

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

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

Research and Development

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

Customers

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

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

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

(See note 1 to the consolidated financial statements.)

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

Marketing

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

Production and Manufacturing

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

Patents

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

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

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

Competition

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

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

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

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Government Regulation

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

     Regulation of Products

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

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

     Corporate Regulation

          Nevada

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          Other Jurisdictions

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

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

Employees

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

ITEM 2. PROPERTIES

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

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

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

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

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

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

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

EXECUTIVE OFFICERS OF REGISTRANT

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

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 normal 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

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

     Patrick W. 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, 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.