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Acres Gaming Reports Record Financial Results

Income before income taxes for the quarter was a record $3.1 million, or $.29 per diluted share, compared to the net loss before income taxes of $(259,000), or $(.03) per diluted share in the prior year quarter. Income before income taxes for the nine months was $5.8 million, or $.56 per diluted share, compared to $889,000, or $.09 per diluted share earned in the prior year nine months.

Revenues for the quarter increased 70% to $9.5 million, from $5.6 million in the prior year quarter. Revenues for the nine months increased 58% to $27.0 million, from $17.1 million in the prior year nine months.

Gross profit margin was 76 percent in the quarter versus 49 percent in the prior year quarter. For the nine months, gross profit margin was 67 percent compared to 54 percent in the prior year nine months. The higher gross profit margins were primarily attributable to an increased mix of software sales compared to the prior year periods. During the quarter and nine months ended March 31, 2003, the Company recognized approximately $1.9 million and $3.8 million, respectively of revenue from bonusing modules installed at properties operated by Station Casinos. The prior year nine-month period's revenue and gross profit included $1.2 million in royalties received in connection with the settlement of litigation.

Net operating expenses were $3.9 million in the quarter and $11.6 million in the nine months, compared to $2.8 million in the prior year quarter and $8.5 million in the prior year nine months. R & D expenses for the quarter were 23% higher than the prior year quarter, and Sales and Marketing expenses for the quarter were 52% higher. General and administrative expenses for the quarter increased $592,000 due primarily to higher legal expenses of $204,000, bonus accruals of $120,000 and higher salary and benefit expenses of $100,000.

The realizability of tax benefits associated with the company's net operating loss carryforward, unutilized research & development tax credits and other credits and timing differences is now more likely than not. Therefore valuation reserves against deferred tax assets were eliminated at the end of the third quarter, resulting in a $4.2 million income tax benefit that contributed an equal amount to net income for the quarter. Since the benefit of these deferred tax assets has now been fully reflected on the Company's balance sheet and statement of operations, these tax benefits will not be available to reduce income tax expense in future periods.

At March 31, 2003, the Company had cash and equivalents of $14.5 million, compared to $7.3 million at June 30, 2002. The increase of $7.2 million is primarily attributed to the cash provided by operations of $8.1 million partially offset by cash used for fixed asset purchases of $644,000 and debt repayment of $375,000.

The Company's order backlog at March 31, 2003 was $24.6 million, compared to $23.8 million at December 31, 2002 and $24.3 million at March 31, 2002. Backlog, however, may not be a meaningful indicator of future revenues. The Company's revenues fluctuate significantly based on the timing of the delivery of any large order. Gross profit in the March 31, 2003 order backlog is estimated at 78%, or $19 million.

During the fourth quarter of fiscal 2003, the Company expects to recognize revenue of approximately $8.6 million in connection with the previously announced IGT patent license and litigation settlement agreements. The Company cannot predict when, if ever, additional revenues will be received in connection with the agreements. Including this $8.6 million, the Company expects income before income taxes for the fiscal year ending June 30, 2003 to be $15.5 to $16.5 million, and net income to be $16.0 to $16.6 million. These amounts do not include approximately $4 million of revenue from Station Casinos that the Company had expected to recognize in fiscal 2003, but now expects to recognize in fiscal 2004.

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