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Acres Gaming Reports Strong Q2 Results

Net income for the quarter was $2.3 million, or $.22 per diluted share, more than three times the $729,000, or $.07 per diluted share earned in the prior year quarter. Net income for the first half of fiscal 2003 was $2.8 million, or $.27 per diluted share, more than two and one-half times the $1.1 million, or $.11 per diluted share earned in the first half of fiscal 2002.

Revenues for the quarter ended December 31, 2002 more than doubled to $11.6 million, from $5.3 million in the prior year quarter. Revenues for the first half of fiscal 2003 increased 53% to $17.5 million, from $11.4 million in the same period in the prior year.

"Business is quite good, and we continue to expect earnings for the fiscal year to more than double last year's earnings," said Bud Glisson, Acres' CEO. "Second quarter gross profit was a record for any quarter in the company's history, and we have an estimated $19 million gross profit in our December 31 order backlog. We're aggressively investing in growth initiatives, adding staff and planning for a $3.3 million increase in second half expenses. We're more confident than ever about our future," Glisson concluded.

Gross profit margin was 59 percent in the current quarter versus 63 percent in the prior year quarter. The prior year quarter's gross profit benefited from $1.2 million in royalties received upon settlement of litigation. The Company recorded no revenue during the second quarter of fiscal 2003 from Station Casinos on Bonusing modules installed during the quarter due to the contractual requirement to deliver other Bonusing modules in the future. For the first half of fiscal 2003, gross profit margins were 62 percent compared to 56 percent in the same period of fiscal 2002. The higher gross profit margin during the first half of fiscal 2003 was primarily attributable to an increased mix of software sales compared to the prior year first half ended December 31, 2001, despite the $1.2 million in royalties included in the prior year.

Net operating expenses increased to $4.2 million in the current quarter from $3.0 million in the prior year quarter. For the six-month period ended December 31, 2002, net operating expenses increased to $7.6 million from $5.7 million in the same period of the prior year. Approximately one-half of the increases resulted from items considered infrequent in nature, including legal expenses, a provision for bad debts of $250,000, and compensation related expenses for the quarter. The balance of the increases resulted from intended investments in the business to support the Company's order backlog and growth initiatives, including additional research and development staff and prototype expenses; an increase in selling, general and administrative staff and compensation related expenses, including the Company's first ever matching contribution to its 401K plan.

In the prior year comparable periods, the Company had convertible preferred stock in its capital structure and had relatively no on-going financing expenses. The preferred stock was replaced with convertible debentures that will be fully retired in September of 2003. Debenture interest, warrant and issuance costs of $233,000 and $475,000 are included in interest and other income (expense) for the quarter and first half, respectively. The prior year quarter and first half had no interest, warrant or issuance costs, and included a gain from the settlement of litigation of $339,000.

At December 31, 2002, the Company had cash and equivalents of $9.3 million, compared to $7.3 million at June 30, 2002. The increase of $2.0 million is primarily attributed to the cash provided by operations of $2.8 million partially offset by cash used for fixed asset purchases and debt repayment of $800,000.

The Company's order backlog at December 31, 2002 was $23.8 million, compared to $20.1 million at December 31, 2001. 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.

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