Douglas R. Britton
WEISS & YOURMAN
618 S. Sixth Street
Las Vegas, NV 89101
(702) 598-4900

Kevin J. Yourman (147159)
James E. Tullman (175008)
WEISS & YOURMAN
10940 Wilshire Blvd., 24th Floor
Los Angeles, CA 90024
(310) 208-2800

Edward P. Dietrich (176118)
STULL, STULL & BRODY
10940 Wilshire Blvd., Suite 2300
Los Angeles, CA 90024
(310) 209-2468

Attorneys for Plaintiff

Plaintiff, through his attorneys, brings this action on behalf of himself and all others similarly situated, and on personal knowledge as to himself and his activities, and on information and belief as to all other matters, based on investigation conducted by counsel, hereby alleges as follows:

1. This action is being brought as a class action on behalf of all individuals, other than defendants and certain affiliated persons as described below, who purchased or otherwise acquired the common stock of Acres Gaming ("Acres" or the "Company) (the "Class") between March 26, 1997 and December 11, 1997, inclusive (the "Class Period").

2. As is more fully alleged below, this action arises from a scheme and common course of conduct by defendants which operated as a fraud and deceit on the Class during the Class Period. Defendants' scheme included disseminating false and misleading statements and/or omissions concerning the present and future finances and business prospects of the Company.

3. As a result of defendants' false statements, misrepresentations and omissions regarding the Company, the price of Acres' common stock was artificially inflated during the Class Period from a low of $4 3/4 per share on March 26, 1997 to a high of $12 5/8 per share on October 8, 1997. Acres' stock was then maintained at an artificially inflated level until December 11, 1997 when the Company could no longer conceal its severe internal problems from the financial community.

4. Specifically, despite months of repeatedly disseminating optimistic statements regarding its strategic alliance with International Game Technology ("IGT") and the current and future business and financial prospects of the Company, defendants were forced to disclose the breakdown of its strategic alliance with IGT, that the Company was redirecting its efforts from its former product line with IGT to pursuing a new product line, and that the Company was shifting its strategic focus to proprietary products. As a result of the disclosure of this staggering news, the price of Acres stock returned to its original state to close at $4 3/4 per share, the exact same price that the Company's stock traded at before defendants conspired to perpetrate this fraud upon the investing community.

5. Due to defendants' deceptive conduct, plaintiff and the other Class members purchased their Acres shares at grossly inflated prices. Had plaintiff and the other Class members been aware that the Company lacked the ability and capacity to follow through on its representations, they would not have purchased their shares, or at least not at the artificially inflated prices at which they purchased those shares.

6. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and §27 of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §78aa).

7. This action arises under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder (17 C.F.R. §240.10b-5).

8. Venue is proper in this district pursuant to §27 of the Exchange Act and 28 U.S.C. 1391(b) because the acts charged herein, including the dissemination of materially false and misleading information, occurred in this district. Acres is also incorporated in this district and, from the beginning of the Class Period, was listed as a publicly held corporation whose shares were traded on NASDAQ under the ticker symbol "AGAM."

9. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

10. On October 8, 1997, plaintiff Gordon Townsend ("Townsend") purchased 2,000 shares of Acres common stock for $12 3/4 per share and sold these shares on December 12, 1997 at a loss for $4 5/8 per share, thereby suffering damages as a result of defendants' violations of the federal securities laws alleged herein.

11. Defendant Acres is a Nevada corporation and maintains its principal executive offices at 815 N.W. Ninth Street, Corvallis, Oregon 97330. At all relevant times throughout the Class Period, Acres common stock was traded in an efficient market on the NASDAQ National Market System under the ticker symbol "AGAM."

12. At all times relevant hereto, defendant John F. Acres ("J. Acres") was the Chairman, Chief Executive Officer and a Director of the Company.

13. At all times relevant hereto, defendant Joseph A. Huseonica ("Huseonica") was President, Chief Operating Officer, and a Director of the Company.

14. At all times relevant hereto, defendant Robert W. Brown ("Brown") was Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company.

15. Defendants J. Acres, Huseonica, and Brown (collectively the "Individual Defendants") were at all relevant times controlling persons of the Company within the meaning of §20(a) of the Exchange Act. The Individual Defendants had the power and influence, and exercised such power and influence, to cause Acres to engage in the unlawful practices complained of herein.

16. The Individual Defendants are also each liable as individual participants in a fraudulent scheme and course of conduct that operated as a fraud and/or deceit upon the Class. Because of their executive, managerial and/or directorial positions with the Company, each of the Defendants had access to the adverse, non-public information about the business, finances present and future business prospects of Acres as particularized herein, and acted to misrepresent, misstate or conceal such information from plaintiff and the investing public.

17. It is also appropriate to treat the Individual Defendants as a group for pleading purposes under the federal securities laws and the Federal Rules of Civil Procedure and to presume that the false and misleading information complained of herein was disseminated through the collective actions of these Defendants. The Individual Defendants were involved in the drafting, producing, reviewing, and/or disseminating of the false and misleading information detailed herein, knew or recklessly disregarded that such materially misleading statements were being issued by the Company, and/or approved or ratified these statements in violation of the federal securities laws. Defendants' false and misleading statements and omissions of fact consequently had the effect of, both on their own and in the aggregate, artificially inflating the price of the common stock of Acres at all times during the Class Period.

18. Plaintiff brings this action as a class action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired Acres common stock from March 26, 1997 through December 11, 1997, inclusive. Excluded from the Class are: the defendants; the subsidiaries, affiliates, officers, and directors of Acres; the heirs and the members of the immediate family of the Individual Defendants; and the successors or assigns of the defendants.

19. The members of the Class are so numerous that the joinder of all members is impractical. While the exact number of Class members is unknown to plaintiff at this time, and can only be ascertained through appropriate discovery, plaintiff believes that there are at least thousands of members of the Class. As of August 31, 1997, there were 8,783,818 shares of Acres common stock issued, outstanding and efficiently traded on NASDAQ under the ticker symbol "AGAM".

20. Plaintiff's claims are typical of the claims of the other members of the Class, and plaintiff and all members of the Class sustained injuries arising out of defendants' wrongful conduct complained of herein.

21. Plaintiff will fairly and adequately protect the interests of the members of the Class and have chosen counsel experienced in class action securities litigation. Plaintiff has no interests antagonistic to, or in conflict with, the other members of the Class plaintiff seeks to represent.

22. The questions of law and fact common to the other members of the Class, and which predominate over any questions affecting individual members, are, inter alia:

(a) Whether the federal securities laws were violated by defendants' acts as alleged herein;

(b) Whether documents, releases and/or statements disseminated to the investing public and Acres shareholders during the Class Period omitted and/or misrepresented material facts about the business and financial condition of the Company;

(c) Whether defendants made materially false and misleading statements during the Class Period about the current business and financial condition and future prospects of the Company;

(d) Whether defendants acted knowingly and/or recklessly in making materially false and misleading statements and omitting material facts about the current business and financial condition and future prospects of the Company;

(e) Whether the market price of the Company's common stock was artificially inflated during the Class Period due to the non-disclosures and/or material misrepresentations complained of herein; and

(f) Whether the members of the Class have suffered damages and, if so, what is the proper measure of damages.

23. Plaintiff will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations or omitted material facts during the Class Period, as alleged herein;

(b) the misrepresentations and/or omissions were material;

(c) Acres' common stock was traded in an efficient market;

(d) the misrepresentations and/or omissions alleged tended to induce reasonable investors to misjudge the value of Acres shares; and

(e) plaintiff and members of the Class acquired their shares between the time defendants made the misrepresentations and/or omissions and the time the truth was revealed, without knowledge of the falsity of the misrepresentations.

24. Based upon the foregoing, plaintiff and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for, at least, the purposes of class certification, as well as for ultimate proof of the claims on their merit. Similarly, plaintiff and members of the Class are entitled to a presumption of reliance with respect to the omissions alleged herein.

25. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by the plaintiff or any other individual Class member may be relatively small, the expense and burden of individual litigation make it impossible for the Class members individually to redress the wrongs done to them. Plaintiff anticipates no difficulty in the management of this action as a class action.

26. Acres develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company offers products in four major categories: Bonusing; Slot accounting/player tracking; Slot products; and Proprietary games with the emphasis on the Company's bonusing products. Bonusing products provide players with opportunities for additional play and special pay-outs and are designed to enhance interest in the machines and games to which they are attached. The Company's products are based on its proprietary bonusing technology and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The Company's bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. The primary manufacturers of gaming machines have made extensive changes to the software used in their machines to support the Company's bonusing technology.

27. The slot accounting products collect, analyze and report data to casino managers to satisfy accounting and regulatory requirements and to enable casino management to analyze the performance of each gaming device by type and location. Player tracking systems allow a casino to monitor the playing patterns of individual players or selected groups of players and to develop incentives and promotions which target those players. Slot products are accessories, available to both casinos and gaming equipment manufacturers, that are designed to improve the visual and auditory experience for the slot player. Proprietary games are new gaming machines that the Company has developed primarily in conjunction with IGT.

28. In January 1997, Acres and IGT entered into agreements to form a strategic alliance whereby Acres would (i) create proprietary games, using IGT equipment as the foundation, to be installed under leasing or revenue sharing agreements in casinos; (ii) sell its Concept III Bonusing technology and player tracking components for use in IGT Smart System player tracking/slot accounting installations; and (iii) eventually withdraw from the player tracking/slot accounting business.

29. Prior to announcing the potential for this agreement in January of 1997, the Company's stock had performed poorly, in the range of $5 to $6 per share. However, when the Company announced the potential for a strategic alliance with IGT, which is considered the largest manufacturer of slot machines in the world, the Company stock price rallied to over $20 per share. The investing public had anticipated that IGT's large network of customers and percentage of the market would allow Acres to piggyback on IGT's growth. Defendants did nothing to dispel this belief.

30. Contrary to defendants' glowing representations concerning Acres' current business condition and future outlook, Acres' revenues and earnings came in way below expectations for the third and fourth quarters of the Company's fiscal year 1997 ended June 30, 1997. Along with these poor results came the collapse of the Company's stock price back to levels that it had traded prior to its alliance with IGT. Needless to say, the Acres' shareholders were devastated as they saw the literal collapse of the Company's value.

31. Faced with a dismal future outlook for the Company, and an annual vote by the shareholders for re-election of the board (of which each defendant was a member) looming on the horizon, defendants set out on a scheme and common course of conduct to artificially inflate and maintain the price of the Company's common stock back to its previously inflated levels. Specifically, defendants sought to convey to the market that the Company's alliance with IGT would bring great promise and profitability to the Company and its shareholders.

32. Defendants' wrongful scheme began on March 26, 1997 when, through the PR Newswire, the defendants announced the significant benefits of the strategic alliance between Acres and IGT:

Pursuant to the strategic alliance announced in January, 1997, Acres and IGT are working to combine IGT's Smart System for slot accounting and player tracking with Acres' Concept III bonusing and data collection components to give IGT's casino customers access to Concept III marketing and player entertainment tools. Although the process of integrating, testing and obtaining regulatory approval of the combined systems is on schedule, the delivery schedule has been adjusted to coincide more closely with the commencement of IGT's shipments to customers. Under this timetable, the Company also anticipates revenues and profit for its quarter ending June 30, 1997, will be below its previous expectations.

"We are pleased with the progress we have made in integrating the Concept III player tracking components into IGT's Smart System,"¹ said Joe Huseonica, President of Acres Gaming. "While we had hoped that the player tracking volume ramp would be much greater in this quarter, we are very pleased with the development of our relationship with IGT. In addition to the progress being made by our technical teams on player tracking and bonusing, we are also excited by the success IGT has experienced using our sound systems in their new Wheel of Fortune game. Shipment volume for the sound systems has been more than double our original expectations.

"We are also making progress in end-user sales of our bonusing system games and in the development of proprietary games," said Mr. Huseonica. "We have completed additional bonusing system game installations in Nevada and have received regulatory approval for installation of our Hurricane Zone(TM) in Missouri. Our first proprietary game, BlackOut Poker(TM), is nearing the end of the development and approval processes and we expect it to be placed in Nevada casinos during our fourth quarter."

33. On the following day, March 27, 1997, The Las Vegas Review-Journal published an article, which was based on and repeated information provided by defendants J. Acres, Huseonica, and Brown in the prior few days, that stated:

'[Acres] fundamentals remain intact,' said Andrew Zarnett, a gaming analyst with Ladenburg Thalmann & Co. Inc. in New York. 'The problem is that the ramp-up of the (International Game Technology) product is somewhat delayed, I believe until late June or July,' Zarnett said. Acre's Chief Financial Officer Robert Brown knew of no major problem at the company except for the delay in deliveries.

34. The foregoing statements were materially false and misleading at the time they were made because defendants either knew or recklessly disregarded that: a) the product roll out associated with IGT was experiencing significant delays such that Acres' products would be unable to reach the market in time to make the material contributions to Acres' earnings that defendants were representing; b) IGT's rescheduling of installations had been dramatically curtailed; c) the shipment of Acres' products, which were developed pursuant to the strategic alliance with IGT, was ultimately determined by IGT's sales and completely controlled by IGT; d) Acres would have to incur significant research and development expenses to develop a product to compensate for the shortfalls and delays attributable to the IGT partnership; e) Acres' revenues and earnings would be severely impacted because Acres had abandoned its most profitable product lines in agreeing to discontinue its slot accounting and player tracking business in its agreement with IGT; f) Acres would ultimately have to take a charge to earnings to reduce excess hardware inventory of older products as a result of discontinuing its slot accounting and player tracking businesses; and g) Acres' proprietary games under development were not near completion and would not reach the market in time to effect 1998 revenues.

35. As a result of the Company's poor earnings expectations, some analysts began to revise their estimations on the Company's outlook. Although they indicated that the Company's products would not reach the market in the time frame expected, they were not aware of the full extent of the problems facing Company nor the effect that these problems would have on the Company's future earnings and business prospects. In fact, defendants remained silent as they disseminated false and misleading information into the marketplace.

36. For example, on March 31, 1997, Deutsche Morgan Grenfell, Inc. issued a report, which was based on and repeated false and misleading information given its analyst J.J. Murren ("Murren") by defendants J. Acres, Huseonica, and Brown, in the prior few days. The report noted the following:

Acres Gaming to post loss for quarter in the $0.15 per share range: Originally, we had thought Acres would post EPS of $0.14, which was based on revenues of $7 million. This number was driven off the sales of Concept III products to IGT. The two companies continue to work together to marry IGT's Smart System and Acres' Concept III but delays in the shipments of products have occurred. Our new fiscal estimates are Q3-($0.15), Q4-$0.00, 1997-$0.18, Q1-$0.02, Q2-$0.05, Q3-$021, Q4-$032, 1998-$0.60. These new estimates reveal that we believe that significant shipments of the Concept III product to IGT will begin in the third fiscal quarter of 1998. We still believe in AGAM's products and system's and expect the IGT relationship to improve. IGT speaks highly of the system and needs the Concept III product to improve its competitiveness in the slot accounting/player tracking business segment. Additionally, due to the recent weakness of the Stock and AGAM's debt-free balance sheet, we believe that there is the possibility of a share buyback in the near future. The company has good growth prospects but the next six months should be tough. We are maintaining our BUY recommendation.

37. Defendants scheme was taking effect. Although faced with a deflated stock price and negative publicity which questioned the short-term financial outlook of the Company and management's predictions for delivery, defendants were successfully countering any negativity regarding Acres in the market. Defendants knew that if the Company's stock price remained at severely deflated levels, they would not survive the upcoming November shareholder vote that could potentially terminate their directorial positions.

38. Accordingly, on April 22, 1997, defendants made the following positive statements through the PR Newswire:

Acres Gaming (Nasdaq: AGAM) today announced revenues for the third quarter ended March 31, 1997 were $2,710,000 and net loss was $1,349,000 ($0.15 per share). Revenues were 87% higher than the $1,451,000 reported for the third quarter a year ago, when the Company reported a net loss of $502,000 ($0.07 per share). The Company has significantly increased its operating expenses over the past year, primarily by adding personnel to expand product offerings based on its proprietary Acres Bonusing Technology(TM).

Revenues for the nine months ended March 31, 1997, were $14,953,000, an increase of 352% over $3,311,000 for the same period in the prior fiscal year. Net income for the nine months was $1,506,000 ($0.17 per share) compared to a net loss of $2,080,000 ($0.27 per share) for the same period in the prior year.

As the Company previously announced, shipments of Acres Concept III(TM) data collection and bonusing components to International Gaming Technology (IGT) began during the quarter ended March 31, but volume was below earlier expectations. Although the process of integrating, testing and obtaining regulatory approval of the combined systems is on schedule, the delivery schedule has been adjusted to coincide more closely with the commencement of IGT's shipments to customers.

"Although our revenues and operating results fell short of our goals, we are pleased with the progress made during the quarter on a number of fronts," said Joe Huseonica, President and Chief Operating Officer of Acres Gaming. "While we had hoped that the volume of data collection and bonusing components would be much greater, we are excited by the range of opportunities available to us through the alliance with IGT, including operation of new proprietary games, sale of progressive jackpot displays and sales of slot sound systems, such as those being used in the successful new Wheel of Fortune game."

"Our revenue growth continues to be driven by our unique Acres Bonusing Technology(TM)," said Huseonica. "Recent installations of Hurricane Zone(TM) on the Las Vegas strip and in Missouri, like earlier installations, provide powerful demonstrations of the ability of our products to enhance the entertainment experience of casino slot play, and thereby increase casino revenue. We are developing additional applications of our technology to provide casinos other tools to help increase their slot play."

39. The foregoing statements were materially false and misleading at the time they were made because defendants either knew or recklessly disregarded that: a) the product roll out associated with IGT was experiencing significant delays such that Acres products would be unable to reach the market in time to make the material contributions to Acres' earnings that defendants were representing; b) IGT's rescheduling of installations had been dramatically curtailed; c) the shipment of Acres' products, which were developed pursuant to the strategic alliance with IGT, was ultimately determined by IGT's sales and completely controlled by IGT; d) Acres would have to incur significant research and development expenses to develop a product to compensate for the shortfalls and delays attributable to the IGT partnership; e) Acres' revenues and earnings would be severely impacted because Acres had abandoned its most profitable product lines in agreeing to discontinue its slot accounting and player tracking business in its agreement with IGT; f) Acres would ultimately have to take a charge to earnings to reduce excess hardware inventory of older products as a result of discontinuing its slot accounting and player tracking businesses; and g) Acres' proprietary games under development were not near completion and would not reach the market in time to effect 1998 revenues.

40. As a direct result of defendants' omissions, defendants' attempts at countering negative publicity was having its intended effect. Defendants had successfully quelled the bad press, convinced analysts that their relationship with IGT was strong and had driven Acres' stock price back to artificially inflated levels. In fact, just two months after Acres stock price had tumbled to a mere $4 3/4 per share, defendants' statements had driven the price of the Company's stock up to almost $7 per share. Unfortunately for investors however, defendants were not satisfied with the then current level of the Company's stock price and set out to artificially inflate the value of the Company even more.

41. On July 2, 1997, The Las Vegas Review-Journal published an article which was based on and repeated information given by defendants J. Acres, Huseonica, and Brown in the prior few days, which stated:

Analyst Andrew Zarnett is raising his earnings estimate for the June 1997 fiscal year to 16 cents from 5 cents. He is convinced Acres' strategic alliance with International Game Technology is strong.

42. Again, defendants' statements had their desired effect. Analysts and reporters were completely misguided as to the quality of the Company's relationship with IGT. Despite their statements to the contrary, defendants were completely aware that their relationship with IGT was not going to have the tremendous effects that defendants were representing and that serious delays in IGT shipments would have a tragic adverse impact on the Company's present and future business prospects. In fact, defendants had been aware for quite sometime that the Company's total dependence on IGT had eliminated their ability to control the Company's destiny. As a result, Acres began working on an additional bonusing technology, aside from the technology being marketed through IGT, to compensate for the problems accompanied by IGT's delays and that had developed when the Company agreed to discontinue its most profitable products.

43. Not satisfied with the impact that their previous statements had on the price of the Company's stock, defendants continued their scheme to artificially inflate the Company's stock by downplaying the problems that the Company had in the past and by reiterating the strength of Acres' partnership with IGT. Accordingly, on July 18, 1997, The Business Journal of Portland reported that:

This gaming-enhancement system, created by Corvallis' Acres Gaming Co., alerts gamblers that certain machines are poised to pay off big. It was first tested two years ago at the most unproductive row of $ 1 slot machines at the Edgewater Hotel and Casino in Laughlin, Nev. Four times an hour, storm clouds gathered on a monitor above the slots. Thunder would rumble and lightning would flash as gamblers' chances of a juicy pot improved.

In no time, profits from the test machines soared from $ 125 a day to $ 600 a day per device. Now it is Acres that expects to see its earnings soar. And some of Wall Street's finest are telling their clients to put their dough on AGAM.

Investors have heard all this before. Last year, broker enthusiasm for Acres' products and new management team drove the stock to $ 20.63, the highest level since the company went public in 1993. But when some key products weren't delivered on time, the company's results came in below Wall Street expectations. The stock fell below $ 5 a share by the end of March.

What Wall Street saw as a stumble, though, was really a rejuvenated Acres just reaching its stride, argued President and COO Joe Huseonica.

Speaking by cell phone this week from Las Vegas, where he was tending to business, Huseonica said, "Wall Street had a crush on us and pursued us hard last year. The Street reacted to the excitement of the company and its technology, and ran the stock up without us having the financials to support it. Then they dropped us for someone new.

"Now they're back, and it's for all the right reasons," he said. "Our management team is solid and we have a stream of new products about to hit the market."

*****

Three of the four major Northwest stock brokerage firms that track the company list it as a strong buy. The fourth recommends its accumulation. And Zack's Investment Research has Acres Gaming as its No. 1 investment pick out of 44 companies involved in the fast-growing gaming industry. That despite less-than-impressive results the last year, at least from a bottom-line standpoint.

*****

Huseonica said the company was spending heavily on personnel, product development and capital projects during the year, which all took a sizable bite out of profits. Wall Street, cool to Acres earlier this year after the shipment delays, now seems to accept his explanation. Its renewed ardor for Acres has already led to an upward spurt. By mid-week shares were trading at more than $8.

Analysts said they like the company primarily because it has no long-term debts, and its cash flow is more than sufficient to meet its needs. Those needs have included an aggressive expansion and capital improvement program to keep ahead of the stiff competition, several said. The company's plan to focus even more keenly on the company's core products, particularly their proprietary bonusing system, has aided in the turnaround, analysts said.

*****

Now that products are back on schedule and Huseonica has his team firmly in place, Acres is moving into high gear, Brown said. "We cracked the $ 20 million mark on the year that ended (June 30). Our outlook for next year is in the $ 30 million range," he said.

*****

That's the kind of performance power burst Wall Street has been looking for from Acres. "The company is known for developing innovative new products in the industry," Willard said. "But either fortunately or unfortunately, the stock tended to be run up in anticipation of things that didn't happen."

*****

IGT produces about 40 to 50 new gaming devices a year, all potential candidates for Acres Gaming enhancements. In essence, the deal links Acres Gaming to it largest market. As Huseonica explained, the alliance gives Acres the ability to adapt its existing enhancements technology to slot machine production. "We don't have to make a huge investment in technology in order to enter a new market," he said.

44. The foregoing statements, in addition to those stated above, drove the Company's stock price to more than $9 per share despite the fact that defendants knew or recklessly disregarded that a) the product roll out associated with IGT was experiencing significant delays such that Acres products would be unable to reach the market in time to make the material contributions to Acres' earnings that defendants were representing; b) IGT's rescheduling of installations had been dramatically curtailed; c) the shipment of Acres' products, which were developed pursuant tot eh strategic alliance with IGT, was ultimately determined by IGT's sales and completely controlled by IGT; d) Acres would have to incur significant research and development expenses to develop a product to compensate for the shortfalls and delays attributable to the IGT partnership; e) Acres' revenues and earnings would be severely impacted because Acres had abandoned its most profitable product lines in agreeing to discontinue its slot accounting and player tracking business in its agreement with IGT; f) Acres would ultimately have to take a charge to earnings to reduce excess hardware inventory of older products as a result of discontinuing its slot accounting and player tracking businesses; and g) Acres' proprietary games under development were not near completion and would not reach the market in time to effect 1998 revenues.

45. Shortly thereafter, on August 6, 1997, the Company reported record revenues and net income for fiscal 1997. Defendants used the opportunity as a platform for artificially driving up the price of the Company's stock even further with positive yet false statements relating to its relationship with IGT and the progress its was making with its shipments:

Acres Gaming (Nasdaq: AGAM) today announced record revenues of $20,455,000, net income of $1,798,000 and earnings per share of $.20 for its fiscal year ended June 30, 1997. Revenues increased 195% over $6,942,000 for the prior year, when the Company reported a loss of $1,641,000 ($0.22 per share).

Fourth quarter revenues also grew sharply to $5,502,000, an increase of 52% over the $3,631,000 reported in the fourth quarter of 1996. Fourth quarter net income was $292,000 ($0.03 per share) compared to $439,000 ($0.06 per share) in the prior year. The Company has significantly increased its operating expenses over the past year, primarily by adding personnel to expand future product offerings based on its proprietary Acres Bonusing Technology(TM).

"We are very pleased to report these results for our 1997 fiscal year," said Joe Huseonica, President and Chief Operating Officer. "Behind the numbers is a string of solid accomplishments as we continue to successfully move our unique bonusing technology into the market. Shipments of Acres Concept III(TM) data collection and bonusing components to IGT increased during the fourth quarter.

We continue to progress toward full introduction of the combined IGT/Acres system, as evidenced by completion of initial field installations."

46. A few days later, on August 12, 1997, Deutsche Morgan Grenfell, Inc. issued a report on Acres, which was based on and repeated information given its analyst Murren by defendants J. Acres, Huseonica, and Brown in the prior few days. The report stated:

Acres Gaming reported 4Q earnings of $0.03 per share compared to $0.06 per share last year. Net revenues during the quarter were up 52% to $5.5 million. Gross profit was also up significantly to $2.8 million from $1.8 million a year ago. Operating income, however, was down to $0.2 million from $0.4 million. The shortfall is related to the ramp up in research and development expenses as well as SG&A. The company has increased its personnel in order to expand its product particularly in the bonusing segment. AGAM sold approximately 2,200 sound systems and 2,100 bonusing units to IGT. In addition, the company had $1.2 million of revenue from Anchor (primarily Wheel of Gold kits) and Aristocrat. It also had $1.3 million of revenue from bonusing application sales directly to casinos. In fiscal 1998, we estimate that the company will sell approximately 13,200 sound units and 22,450 bonusing units combined. Driving the unit sale is the company's alliance with IGT, particularly with respect to the Wheel of Fortune. Acres supplies the sound system to the Wheel of Fortune. Demand for the Wheel of Fortune machine is high because of the high win per unit the machines has achieved. For example, in Atlantic City, the machine generates $1,000 in win per unit per day. Furthermore, Acres and IGT are progressing in their rollout of a combined IGT/Acres system -- the product is currently undergoing field testing. We believe that this relationship will be one the drivers in 1998 earnings as it further increase Acres distribution capabilities. Yesterday, IGT decided not to exercise its option to buy $5 million of Acres preferred stock. We do not view this as a condemnation of Acres, rather IGT has been divesting from some of its investments (in the 2Q, IGT recorded a $10 million gain in sale of investments) and is redirecting the cash to other programs, like its share buyback. Furthermore, AGAM does not need the cash, they have over $9 million in cash.

Acres programs have been met with good reviews by slot managers. In the fourth quarter, Acres completed installations at five Las Vegas casinos, bringing the total number to 20. Acres has been successful in with its bonusing/player tracking and slot accounting programs because the product is customized to the casino. We expect that in fiscal 1998, Acres will bring the number of installations to another 20 casinos.

We continue to rate AGAM BUY. Our fiscal 1998 EPS estimate is 0.60 and our fiscal 1999 estimate is $0.77. Our 12-to 18-month price target is $14.

47. On October 10, 1997, Deutsche Morgan Grenfell, Inc. issued a report on Acres, which was based on and repeated false and misleading information given its analyst Murren by defendants J. Acres, Huseonica, and Brown in the prior few days. The report stated:

Our fiscal 1998 estimate is $0.62 per share. Going forward, we are excited about the growth potential for Acres. The company's partnership with IGT will contribute to that growth, as will the increasing number of state approvals of its products. The IGS system will be available for viewing at the World Gaming Congress. IGS is the joint venture slot system with IGT that monitors the slot machines on the casino floor and provides features like player tracking and slot accounting. IGS has been constructed to work IGT's new Vision Series game. The Vision Series machine is another venue of growth for Acres, as the company currently supplies the sound boards and will eventually supply the bonusing features. The company has several proprietary games undergoing field tests in Nevada. Some of these include Blackout Poker. We continue to rate AGAM BUY. Our 12-month price target is $14, implying a potential 31% increase from today's price.

48. On October 22, 1997 through the PR Newswire, the Company announced its first quarter results:

Acres Gaming (Nasdaq: AGAM) today announced revenues for the first quarter ended September 30, 1997 were $5.9 million and net income was $255,000 ($0.03 per share). Revenues were $6.6 million in the first quarter a year ago, when the Company reported net income of $1.5 million ($.18 per share).

In January 1997, the Company formed a strategic alliance with International Game Technology (IGT) to market its Acres Bonusing System(TM) for casino-wide application with the new IGT Gaming System (IGS). Upon entering the IGT alliance, the Company discontinued offering its own slot accounting/player tracking system, sales of which had made significant contributions to revenue during the quarter ended September 30, 1996. The prior year quarter also included significant sales to Crown Ltd.'s casino in Melbourne, Australia and to an OEM gaming machine developer which utilizes Acres Bonusing Technology(TM) to enhance the excitement of its games. Those OEM sales continue, but at lower volume.

Gross profit is generally higher on products which feature Acres Bonusing Technology, including the Company's own slot accounting/player tracking system, the system for the Crown casino, and the products sold to the gaming machine developer. Sales of such products decreased $4.5 million from the first quarter of 1996 to the first quarter of 1997, and were substantially replaced with lower margin hardware component sales to IGT. When deliveries of the combined IGS and Acres Bonusing System begin, the Company expects its gross profit margin to increase as it will also recognize revenues from its bonusing software. The Company has increased its operating expenses over the past year, primarily by adding personnel to expand future product offerings based on its Acres Bonusing Technology.

"We are pleased that hardware shipments to IGT continue to grow," said Joe Huseonica, President and Chief Operating Officer of Acres Gaming. "Initial response from prospective customers to the integrated IGS and Acres Bonusing System has been very positive. In addition, use of our Acres Bonusing Technology in the successful Wheel of Fortune and Wheel of Gold games continues to be an important source of revenue."

49. Despite making partial disclosures to the market regarding the Company's discontinuance of its own slot accounting/payer tracking system and the impact that it had on the Company's performance in the past, defendants failed to disclose the true extent of the harm that the discontinuance would have on the Company and instead continued to tout the Company's relationship with IGT.

50. The foregoing statements were materially false and misleading at the time they were made because defendants either knew or recklessly disregarded that: a) the product roll out associated with IGT was experiencing significant delays such that Acres products would be unable to reach the market in time to make the material contributions to Acres' earnings that defendants were representing; b) IGT's rescheduling of installations had been dramatically curtailed; c) the shipment of Acres' products, which were developed pursuant to the strategic alliance with IGT, was ultimately determined by IGT's sales and completely controlled by IGT; d) Acres would have to incur significant research and development expenses to develop a product to compensate for the shortfalls and delays attributable to the IGT partnership; e) Acres' revenues and earnings would be severely impacted because Acres had abandoned its most profitable product lines in agreeing to discontinue its slot accounting and player tracking business in its agreement with IGT; f) Acres would ultimately have to take a charge to earnings to reduce excess hardware inventory of older products as a result of discontinuing its slot accounting and player tracking businesses; and g) Acres' proprietary games under development were not near completion and would not reach the market in time to effect 1998 revenues.

51. Consequently, analysts continued to follow defendants' lead. On October 24, 1997, Deutsche Morgan Grenfell, Inc. issued a report on Acres, which was based on and repeated false and misleading information given its analyst Murren by defendants J. Acres, Huseonica, and Brown in the prior few days. The report stated:

Both R&D and SG&A increased over last year, as the company is increasing its personnel due to an expected strong calendar 1998. The Acres bonusing technology has been extremely successful in both the Wheel of Fortune and Wheel of Gold over the past 12 months. Our FY98 EPS estimate is $0.62 and our FY99 EPS estimate is $0.80. In 1998, the company could begin to realize revenues from the marriage of the IGT and Acres systems, proprietary games such as Blackout Poker, System Games (i.e., Hurricane Zone, Molten Money, and Rodeo Grande), and through soundboards and bonusing components for the Wheel of Gold and Wheel of Fortune slot machines. We rate AGAM BUY with a 12-18 month price target of $14 based on 15x estimated calendar 1998 EPS.

52. On December 11, 1997, the Company shocked the investing community by revealing for the first time the true extent of the significant problems that IGT's delays were having on the Company and that the Company was shifting its strategic focus away from IGT to the development of products for the "Bonus Game" technology. In a PR Newswire article entitled Acres Gaming Creates New "Bonus Game" Product Category; Company Reorganizes Management Team to Implement New Strategic Focus, the following was noted:

Acres Gaming (Nasdaq: AGAM) today announced it is intensifying the focus of its creative efforts on the development of products for the "Bonus Game" category. Bonus Games feature a secondary game over a linked group of traditional slot machines. When certain milestones are reached on the base games, the secondary group game is activated and may pay awards to one, several or all of the players on the base games.

John Acres, Chief Executive Officer, stated, "We are very excited about this new product line. I have personally been working on it full-time for the past six months. We have developed significant intellectual property that uniquely applies to this category and uses much of the same underlying technology as the systems bonus equipment we offer in partnership with International Game Technology (IGT). We expect the IGT Vision game to be a particularly important platform on which to place our Bonus Games.

"Bonus Games work with any existing accounting and player tracking system and perform particularly well with the IGS system now sold by IGT. We plan to offer these games to operators on a variety of purchase and revenue sharing plans."

Acres continued, "In order to implement our new strategic focus, we have taken a number of crucial steps. First, while continuing our historically profitable business with IGT, we have decided to commit several million dollars to research and development for the new product line. This will, of course, affect our operating results over the next few quarters. We have the financial resources to take this step, and we firmly believe that this will result in maximizing our long-term shareholder value. Second, we are taking a write off of approximately $750,000 in the second quarter in order to reduce excess hardware inventory of older products. We originally expected to continue selling our legacy system, but it just is not nearly as powerful as the combined Acres Bonusing/IGT Gaming System. We want to focus only on the very best products for our customers. Finally, Company management has been reorganized to reflect the new focus. Joe Huseonica, formerly President and Chief Operating Officer, has left the Company. Roy Lytle, formerly VP of Manufacturing, has been promoted to Chief Operating Officer. In addition, a number of executive managers are being added and will be announced soon."

Commenting on the new product line, Bob Brown, Chief Financial Officer stated, "Bonus Games offer a unique opportunity to capitalize on our technology and intellectual property. However, they will not reach the market in time to contribute significantly to our fiscal 1998 revenue. Our systems partnership with IGT is progressing rapidly now but also will not contribute to fiscal 1998 revenue to the degree we anticipated because of delays in testing and regulatory approval. Because of the uncertainties inherent in the early stages of these products, we cannot reliably estimate future results and we expect to report operating losses in the second quarter and second half of the 1998 fiscal year."

53. Not surprisingly, the disclosure took the market as well as industry analysts by complete surprise. On December 12, 1997, Zarnett, an analyst with Ladenburg Thalmann, noted that the Company had misled analysts about its relationship with IGT in the following "Morning Meeting Summary" memorandum:

On December 11, we downgraded Acres Gaming, Inc. to a HOLD from BUY and cut our EPS estimate for the second fiscal quarter ended December 1997 to ($0.20) from $0.03, our fiscal 1996 (June) EPS estimate to ($0.37) from $0.50 and our fiscal 1998 EPS estimate to ($0.14) from $0.75. In an announcement on the morning of December 11 that was totally unanticipated and contradictory to recent guidance from management, the company revealed several disconcerting developments, including i) stated evidence that the product roll out associated with the IGT partnership is experiencing some delays, ii) a change in strategic direction that will lead to a substantial ramp-up in R&D expenses (allowing the company to develop proprietary games), and iii) the departure of Acres former president and Chief Operating Officer, Joe Huseonica.

The alliance with IGT is experiencing some delays. Contrary to what management lead us to believe, we are now aware that the joint venture with International Game technology (IGT-$23 7/16-Not Rated) will not contribute to earnings in fiscal 1998. Our original fiscal 1998 and 1999 projections for the integration of Acres Concept III bonusing and data collection components and IGT's Smart System were based on a schedule of installations that has been dramatically curtailed. We note that, by all indications, the corporate relationship remains strong. However, the actual rollout and, thus, revenue contribution, are taking longer than Acres originally expected because of unforseen delays in testing and final regulatory approvals. The Company is also now realizing that time to market is ultimately determined by the IGT's selling cycle, which is longer than anticipated and completely controlled by IGT. As we noted in our last Update, Acres and IGT have begun a unit installation at the Orleans hotel and casino in Las Vegas, ultimately aiming to install its bonusing technology in about 2,000 slot machines by the end of March 1998.

Acres intends to shift its strategic focus to the development of products for the "Bonus Game" category ... The Company announced that it will shift its strategic emphasis and pursue the development of proprietary games. In addition to its IGT relationship, Acres intends to commit significant resources and creative efforts to the development of proprietary bonusing products that feature a secondary game over a linked group of traditional slot machines. When certain milestones are reached on the base games, the secondary group game is activated and pays pout reward to selected players. Even though the Bonus Games products under development hold some promise, we believe that they will not reach the market in time to contribute to fiscal (June) 1998 revenues. We also believe that it is difficult to determine what contribution they may have towards our 1999 revenue forecast.

. . . . resulting in a substantial increase in R&D expenses and a one-time charge. While Acres will utilize similar underlying technology found in the systems bonus equipment offered in partnership with IGT, this strategic shift will result in a number of unforseen developments that will affect the income statement, including a substantial increase in R&D expenses to $6.0 million and $6.6 million in fiscal 1998 and 1999 respectively, as well as a $750,000 asset write-off (to be taken in the December 1997 quarter) to reduce excess hardware inventory of older products.

54. Each defendant had the opportunity to commit and participate in the acts alleged herein. The Individual Defendants were the top officers of Acres and they controlled its press releases, corporate reports, and its filings with the SEC. Thus, they controlled the public dissemination of, and could falsify, the information about Acres' business, products, financial results and prospects that reached the public and affected the price of its stock.

55. Defendants also had the motive to commit the acts alleged herein. Primarily, as alleged throughout the complaint, the defendants also had the motive to commit the acts alleged herein due to their desire to (i) increase the value of their own Acres holdings, including their options to purchase Acres stock and right to compensation incentives if Acres stock exceeded certain levels; (ii) to maintain the perks of their offices; and (iii) to ensure that they would maintain their lucrative positions especially in light of the upcoming annual shareholder vote for their re-election.

56. The market for Acres stock is an efficient market for the following reasons, among others:

(a) Acres stock satisfied the requirements for listing, and was listed, on the highly efficient NASDAQ stock exchange;

(b) As a regulated issuer, the Company filed periodic reports with the SEC; and

(c) The Company's trading volume in its stock was substantial, reflecting numerous trades, as high as 2,700,000 million shares in one day during the Class Period.

57. The statutory safe harbor providing for forward-looking statements under certain circumstances does not apply to any of the false forward-looking statements pleaded in this Complaint. None of the forward-looking statements pleaded herein were sufficiently identified as a "forward-looking statement" when made. Nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from that in the forward-looking statements accompany those statements. To the extent that the statutory safe harbor does apply to any forward-looking statements pleaded, the defendants are liable for those false forward-looking statements because at the time each of those statements was made, the speaker actually knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of Acres who actually knew that those statements were false when made.

58. Plaintiff incorporates by reference all preceding paragraphs of the Complaint.

59. During the Class Period, defendants engaged in a course of conduct, described above, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and a course of business which operated as a fraud upon plaintiff and the other members of the Class; made various untrue statements of material fact and omitted to state material facts necessary to make statements made, in light of the circumstances under which they were made, not misleading to plaintiff and the other Class members; and employed manipulative and deceptive devices and contrivances in connection with the purchase of Acres securities.

60. The purpose and effect of the defendants' plan, scheme, conspiracy and course of conduct was to artificially inflate the price of Acres common stock and then artificially maintain the market price of the stock in order to increase the value of their own Acres holdings, including their options to purchase Acres stock and right to compensation incentives if Acres stock exceeded certain levels, and maintain the perks of their offices.

61. The Individual Defendants, through their positions in the Company, at the time of the allegations herein, had actual knowledge of the material omissions and/or the falsity of the statements set forth in the foregoing paragraphs and intended to deceive plaintiff and the other members of the Class or, in the alternative, acted with reckless disregard for the truth when they failed or refused to ascertain and disclose in the aforementioned documents the full extent of the true facts to plaintiff and the other members of the Class.

62. As a result of the foregoing, the market price of Acres common stock was artificially inflated during the Class Period. In ignorance of the materially false and misleading nature of the misrepresentations, described above, made by defendants and the deceptive and manipulative devices and contrivances employed by the Individual Defendants, plaintiff and the other members of the Class relied, to their detriment, on the statements made by defendants and/or the integrity of the market price of the stock in purchasing Acres stock. Had plaintiff and the other members of the Class known of the material adverse information not disclosed by the defendants, they would not have purchased Acres stock at the artificially inflated prices that they did.

63. Plaintiff and the other members of the Class have suffered substantial damages as a result of the wrongs alleged herein.

64. By reason of the foregoing, defendants have violated, or aided and abetted violations, of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary to make the statements made not misleading; and (c) engaged in acts, practices and a course of business which operated as a fraud or deceit upon plaintiff and the other members of the Class in connection their purchases of Acres common stock during the Class Period.

65. Plaintiff incorporates by reference all preceding paragraphs of the Complaint.

66. Defendants J. Acres, Huseonica, and Brown acted as controlling persons of Acres within the meaning of §20 of the Exchange Act. By reason of their respective positions, they had the power and authority to cause Acres to engage in the wrongful conduct complained of herein.

67. By reason of such wrongful conduct, defendants are liable pursuant to §20 (a) of the Exchange Act. As a direct and proximate result of the defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Acres common stock during the Class Period.

WHEREFORE, plaintiff, and the Class, pray for judgment as follows:

1. Declaring this action to be a proper class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

2. Awarding plaintiff and the members of the Class compensatory damages;

3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as their reasonable attorneys fees, expert witness fees and other costs; and

4. Awarding such other relief as this Court may deem just and proper.

Plaintiff hereby demands a trial by jury.

¹ Emphasis added unless otherwise indicated.

Source: File to epost from Weiss & Yourman