Notes – Third quarter and first 9 months of 2003

In compliance with the requirements of the „Prime Market“ of the Vienna Stock Exchange, beginning with the quarterly report for Q1 2003 BETandWIN.com Interactive Entertainment AG is publishing more detailed information including a complete consolidated balance sheet, a consolidated income statement, a consolidated cash flow statement and a consolidated statement of changes in shareholders‘ equity. This policy deems to significantly improve the quality and transparency of the Group’s interim periodical financial reports.

To ensure improved comparability with previous periods, we are publishing selected key figures for betandwin in a „pro forma consolidated“ form and using also the „at equity“ method.

However, the consolidated balance sheet, consolidated income statement, consolidated cash flow statement and consolidated statement of changes in shareholders‘ equity will only be presented using the „at equity“ method.

Highlights (pro forma consolidated)

Q3 2003

Considerable increase in turnover and net winnings

Positive development of EBITDA and EBIT continues in Q3

Quarterly result before taxes improved by more than EUR 2 million compared to previous year

Number of bets placed up 88%

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First 9 months of 2003

Turnover and net winnings after commission and taxes up 70% and 107% respectively compared to first nine months of 2002

Positive EBITDA, EBIT and consolidated earnings before taxes
Positive development of liquid assets (including short-term securi-ties) continues: EUR 23.402 million as of 30 September 2003

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Development of business in third quarter of 2003 (pro forma consolidated)

Considerable increase in turnover and net winnings

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In the third quarter of 2003, betandwin increased turnover from its betting and casino operations as well as lottery games* to EUR 87.249 million after a turnover of EUR 51.098 million in the same period the previous year. This represents a rise in turnover of EUR 36.151 million, or 70.7%. In the same quarter, turnover from betting operations totalled EUR 32.253 million (Q3 2002: EUR 24.030 million), whilst that from casino operations was EUR 53.866 million (Q3 2002: EUR 27.068 million), and that from lottery games EUR 1.130 million.

In absolute terms, in the third quarter of 2003 net winnings after commission and taxes** from betting and casino operations as well as lottery games totalled EUR 5.163 million after EUR 3.559 million the previous period, an increase of 45.1%. This development is all the more remarkable in view of the fact that strong growth in all product sectors made it more than possible to make up not only for the termination of cooperation between associated company betandwin e.K. and betting distribution partners, but also for customers‘ positive betting results.

A net winnings margin of 10.4% was reported from betting operations in the third quarter of 2003, as against 12.0% in the same period of 2002. The net winnings margin from casino operations was 3.1% as against 2.5% the previous year. Net winnings from lottery games totalled 11.1%.

Revenue for the third quarter of 2003 in the amount of EUR 6.436 million (Q3 2002: EUR 3.908 million) was up EUR 2.528 million, or 64.7%, on the figure for the same period the previous year. This figure included EUR 0.550 million of non-recurring revenue from refunds of betting duties from previous periods.

Lottery Games: www.balls-of-fire.com has been operated by the subsidiary BAW International since May 2003. Whereas lottery games were reported under the casino product segment during the pilot phase, with effect from the third quarter of 2003 they are now reported under the „lottery-like products“ segment.

(**) Net winnings after commission and taxes: to ensure better comparability with previous periods, the revenue indicator „net winnings after commission and taxes“ (= turnover from betting and casino operations and lottery games less winnings from betting and casino operations and lottery games minus betting duties, casino taxes and commissions) is now reported instead of the previous indicator „gross winnings“.

Positive development of EBITDA and EBIT continues in Q3

EBITDA for Q3 2003 amounted to EUR 0.923 million (Q3 2002: -EUR 0.869 million), with positive EBIT of -EUR 0.127 million (Q3 2002: -EUR 2.115 million). Compared to the same period the previous year, these figures represent improvements of EUR 1.792 million (EBITDA) and EUR 1.988 million (EBIT) respectively.

Total expenses (personnel, marketing, other expenses) amounting to EUR 5.513 million were up EUR 0.736 million, or 15.4% compared to the same period the previous year (Q3 2002: EUR 4.777 million).

Personnel expenses of EUR 1.680 million (Q3 2002: EUR 1.670 million) were slightly up by EUR 0.010 million, or 0.6% compared to the previous year. At the reporting date of 30 September 2003, the company employed 124 people (Q3 2002: 114). The planned increases in staffing levels were attributable mainly to regional expansion and the additional languages and products offered as a result, and to the rapid expansion of IT and product development capacities.

Marketing expenses in the third quarter of 2003 totalled EUR 1.663 million as against EUR 1.174 million in the comparable period the previous year, an increase of EUR 0.489 million, or 41.7%. Apart from an extensive TV advertising campaign by the company’s German partner betandwin e.K., investment was increasingly future-oriented, principally in the implementation of communication concepts aimed at Turkish and Greek customers.

Other expenses (which include items such as bank charges, IT services, rental, travel, calculation of betting odds, consulting and auditing, exchange rate losses and investor relations) of EUR 2.170 million (Q3 2002: EUR 1.933 million) were up by EUR 0.237 million, or 12.3%. In proportion to the expanding volume of business, this increase was mainly due to a rise in expenses such as bank charges and variable licence fees for third-party software employed and additional consulting services in connection with acquisitions.

Quarterly result before taxes improved by more than EUR 2 million compared to previous year

In the third quarter of 2003, betandwin reported a quarterly result before tax of -EUR 0.047 million (Q3 2002: -EUR 2.170 million) and a loss for the period after tax of -EUR 0.364 million (Q3 2002: -EUR 2.069 million).

Number of bets placed up 88%

In the third quarter the number of bets placed rose to 5,052,182 (Q3 2002: 2,686,422), representing an increase of 88.1%.

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Development of business in first 9 months of 2003 (pro forma consolidated)

Turnover and net winnings after commission and taxes up 70% and 107% respectively compared to first nine months of 2002

In the third quarter of 2003, betandwin increased turnover from its betting and casino operations as well as lottery games* to EUR 274.527 million after a turnover of EUR 161.321 million in the first nine months of the previous year. This represents a rise in turnover of EUR 113.206 million, or 70.2%. In the first nine months of 2003, turnover from betting operations amounted to EUR 115.977 million (first nine months of 2002: EUR 66.348 million), that from casino operations was EUR 157.420 million (first nine months of 2002: EUR 94.973 million), whilst that from lottery games amounted to EUR 1.130 million.

In absolute figures, in the first nine months of 2003 net winnings after commission and taxes** from betting and casino operation as well as lottery games totalled EUR 16.730 million compared to EUR 8.086 million in the first nine months of 2002. This represents an increase of EUR 8.644 million, or 106.9%.

In the first nine months of 2003, the net winnings margin from betting operations was 10.6%, compared to 8.6% in the same period the previous year. The net winnings margin from casino operations in the first nine months of 2003 was 2.7% (first nine months of 2002: 2.5%), that from lottery games 11.1%.

Revenue for the first nine months of 2003 in the amount of EUR 19.069 million (first nine months of 2002: EUR 8.852 million) exceeded that of the same period the previous year by EUR 10.217 million, or 115.4%.

p> Positive EBITDA, EBIT and consolidated earnings before taxes

The positive development of the company was reflected in EBITDA of EUR 3.941 million and EBIT of EUR 0.523 million for the first nine months of 2003. In the comparable period the previous year, EBITDA and EBIT were -EUR 6.899 million and -EUR 10.235 million respectively.

A reduction of EUR 0.623 million, or 4.0%, compared to the first nine months of 2002 brought total expenses for the first nine months of 2003 to EUR 15.128 million (first nine months of 2002: EUR 15.751 million).

Personnel expenses included in this amount came to EUR 4.687 million, a reduction of EUR 0.180 million, or 3.7%, by comparison to the previous year’s period (first nine months of 2002: EUR 4.687 million).

With a substantial rise in turnover, marketing expenses were reduced by EUR 0.942 million to EUR 4.631 million, equivalent to a reduction of 16.9% compared to the same period in 2002 (EUR 5.573 million). Apart from the acquisition of new customers, increased importance was attached to efficient internal marketing methods designed to increase the level of activity of registered customers.

Expenses for consulting, rent, leasing and licence fees linked to turnover as well as bank charges and accounting exchange losses caused other expenses to rise from EUR 0.499 million, or 9.4%, to EUR 5.810 million compared to the same period the previous year (first nine months of 2002: EUR 5.311 million).

In the first nine months of 2003, betandwin.com reported positive consolidated earnings before tax (including minority interests) in the amount of EUR 1.201 million (first nine months of 2002: -EUR 10,572 million) and negative consolidated earnings after tax (including minority interests) of -EUR 0.858 million (first nine months of 2002: -EUR 10.024 million).

A total of 14,136,381 bets were placed in the first nine months of 2003 (first nine months of 2002: 7,775,155), a rise of 81.8%.

Positive development of liquid assets (including short-term securities) continues: EUR 23.402 million as of 30 September 2003

Thanks to the positive cash flow from current business operations, liquid assets including short-term securities increased to EUR 23.402 million as of 30 September 2003 as compared to EUR 20.124 million as of 31 December 2002.

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Outlook

p> The results for the first nine months of 2003 reflect the impact on operations of the implementation of the company’s selected growth strategy. Both Playit (Scandinavia) and Beteurope/Eurovest (Turkey) were acquired in line with the company’s strategic orientation, and will enable the company to penetrate the market faster. Thanks to the integration of the newly won management team, it will also be possible to produce and present a product range better suited to different regional customer requirement.

Whereas the integration of Beteurope/Eurovest was virtually concluded by the end of the third quarter, Playit is only scheduled to be integrated during the course of the fourth quarter. The full benefit of synergies from both acquisitions is likely to be felt only at the end of the fourth quarter of 2003 and in the first quarter of 2004.

The lottery-like product „balls-of-fire“ will undergo a technical and visual upgrade during the coming months. From the first quarter of 2004, the existing potential will be more efficiently exploited by support in the form of appropriate marketing measures. There are also plans to extend the product range with multiplayer poker in the first quarter of 2004.

The continual expansion of the product portfolio coupled with a consistent drive for regional expansion aimed at giving the company clear market leadership in continental Europe is designed to make the profitability of the company less susceptible to possible legislative changes at national level, or fluctuations in turnover and/or margins due to seasonal variance or products.

The joint venture with Columbia Exchange Systems Ltd., a leading developer of technical solutions in the first of person-to-person (P2P) betting systems, represents another decisive step in this direction. Under the working title „Ebexx“, there are plans to establish a European sports betting exchange in cooperation with strategic marketing partners in the first half of the year 2004.

As previously announced, in the business-to-business segment, the first turnkey solution for a (Greek) marketing partner was completed in the third quarter of 2003 in the form of a first „live test application“. The necessary preparations – an optimised and scalable IT infrastructure and the establishment of organisational structures – are currently underway for the continued development of this new distribution channel.

Legislative situation in Europe

Against the background of shrinking market shares, state gaming providers in Europe are intensifying their efforts against their private-sector competitors. In this context, following the initial victories of De Lotto, the Netherlands state betting company, against a British gaming company, and of Anomar, the Portuguese state company, against eight Portuguese companies involved in trading and operating gambling equipment, the verdict of the European Court of Justice in the case of Gambelli Vossen the Italian government – awaited with tremendous interest by the entire gaming industry – will be of pathbreaking importance.

In accordance with the decision announced by the European Court of Justice on 6 November 2003, in the future EU member states must ensure that it is possible for every provider of services to provide the services for which he is licensed in his country of origin unless domestic restrictions are justified in the public interest.

The Court finds first of all that the Italian provisions constitute a restriction on the freedom of establishment, the freedom to provide services and the freedom to receive or benefit from services offered by a supplier. As regards the possibility of justifying such restrictions, the Court states that they may be justified if they are necessary for consumer protection and for the preservation of the social order , taking account of moral, religious and cultural factors and of the moral and financial consequences for individuals and society. Furthermore, the main aim of such restrictions must reflect an overriding reason of general interest, such as reducing gaming opportunities. The procurement of finances for public funds, on the other hand, cannot constitute justification. The restrictions must not go beyond what is necessary to attain that objective and must be applied in a non-discriminatory manner.

The Italian court points out that the Italian State is pursuing a policy of substantial expansion of betting and gaming at national level to procure funds, while protecting licensees of the State. The Court of Justice finds that if participation in lotteries, games of chance and betting are encouraged by a Member State with the aim of deriving a benefit for itself, that State cannot rely on the need to uphold public order in order to justify restrictive measures.

Nevertheless, this judgement should not gloss over the fact that there is still the possibility of legislative changes that may be to the company’s disadvantage. Even if only temporarily effective, such changes in betandwin’s core markets could still have a negative impact on the assets, financial situation and profitability of the company.
Press: BETandWIN