Multimedia Games, Inc.
HOST:  Mr. Gordon Graves
DATE:  November 21, 2001

OPERATOR: Good afternoon and welcome, ladies and gentlemen, to the Multimedia investor relations conference call. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Ms. Julia Spencer. Please go ahead, ma'am.

MS. SPENCER: Good afternoon, everyone, and welcome to the Multimedia Games investor conference call for our fiscal year 2001 earnings. I'd like to mention that we have a number of MGAM officers and our Corporate Counsel on the call with us today. Gordon Graves, our CEO and Chairman of the Board; Clifton Lind, President and Chief Operating Officer; and Craig Nouis, our Chief Financial Officer, are here with us to talk about this year's results and answer your questions.

Before we start, however, I'd like to read a short statement. The following comments, including any statements predicated upon or preceded by the words "potential," "believe," "expect," and "should" are considered forward-looking statements within the meaning of federal and state securities laws. Such statements are subject to a number of uncertainties that could cause the actual results to differ materially from those expected, including, but not limited to, those described under Item 1, Description of Business - Risk Factors contained in the company's annual report on Form 10-K for the fiscal year ended September 30th, 2000, which are incorporated herein by this reference.

I'd like to now turn the call over to Mr. Gordon Graves, our CEO and Chairman of the Board. Gordon?

MR. GRAVES: Thank you, Julia. We've got a number of MGAM's management staff and others from MGAM on the call today. We've got Clifton Lind, our President and Chief Operating Officer, who is the guy that's really put together this whole team of management here at MGAM, and who we're all proud of. I'm especially proud of the group Clifton's put together. And Craig Nouis, our CFO, and Gary Loebig, our Executive Vice President of Marketing and Sales, is on the phone; Skip Lannert, one of our Vice Presidents in charge of our Class II activity, is on the phone. We've got some of our directors here, I know [we have] John Winkelman, who is well known in Indian country; Tom Sarnoff, who's a name known throughout the world; and Dr. Marty Keane, who is one of the leading technologists in the gaming industry, all of whom are on our board, are here today.

Clifton and Craig will be talking today about our results for this fourth quarter and for the year just ending. I know that we're all excited about the fabulous performance of MGAM. I just returned this morning from a business trip during which I visited some places that have installed some of our new Class II machines. We've got as fine an electronic player station now as there is any place in the world. It's as good as IGT's, or Bally's, or Williams'. It's good -looking, [and] the video games that we've developed are just as good, if not better, than those companies are turning out.

And, in addition to that, I think, right now, we're the only leading supplier of video gaming player stations that has a true interactive capability. So we're sitting in a wonderful position right now with customers that, I say, they trust us, they believe in us, we've always delivered for them, and I think that they trust that we're fair.

One thing that I've learned this past year is that the most important thing for a manager to do is to become a good judge of people. And I think that Clifton Lind has put together a team of the best in the business. It's the best that I've ever worked with, watched, and I think that the reason we've been so successful this past year, and we're going to be successful this coming year, is primarily because of this team. No question, the products are important, and the market position is important, but it's the people that really make it happen. And Clifton, I would like to turn it over to you now, and tell you how much, on behalf of all the shareholders, we appreciate what the team has done.

MR. LIND: Thank you, Gordon. And since this has turned in to a mutual admiration society, let me say, that it's been an honor for me to work with you for the past 11 years. And I look forward to a long and continued relationship which, I'm sure, will be beneficial to the shareholders of Multimedia Games.

Fiscal 2001 has been an exceptional year for Multimedia Games, and our success is the result of the convergence of many concepts and technologies, and the implementation of content which has been under development by our staff for many years. MGAM's good fortune is a result of years of hard work under the dedicated leadership of Gordon Graves, Gary Loebig, Skip Lannert, Brendan O'Connor, Frank Rehanek, Ed Lepkowski, Glen Goulet, Steve Kent, Gordon Sjodin, and Ruby Fernandez, as well as the commitment and dedication of every member of the MGAM team.

This year's results were strongly affected by the introduction, in January, of MegaNanza, the first of our new generation of Class II games, which was also the result of years of system development and content design. And it was predicated upon the recent court rulings which clarified the laws that govern Class II gaming. Based upon the information available to us today, it is our belief that MegaNanza is out-performing all other Class II games in the marketplace. MegaNanza is currently earning our customers three times the revenue of our Legacy games. The roll-out of additional new-generation systems in the next few months will be the driving force of MGAM's earnings and earnings growth for the upcoming year. I'd like to turn the meeting over to Craig now, and let him talk about the specifics of our earnings announcement this morning, and the results that we've had this last year. Craig?

MR. NOUIS: Thank you, Clifton. As Clifton indicated, fiscal 2001 has been a great year for Multimedia. What I'm going to do is really summarize the key financial points from our results, really beginning with our revenues and net income numbers.

For our fourth quarter earnings for 2001, our net income number came out to $3.4 million, and this was based off of gross revenue numbers for that quarter of about $47.8 million, and a net gaming revenue of about $15.9 million.

Our annual numbers came in at a net income of about $6.7 million. And this was off of gross revenues of just under $132 million. For the year, our gross revenues have increased about 36% over the revenues from the prior year.

In terms of our earnings per share, we had previously provided guidance that indicated the basic [earnings per share] would be about $1.00 and fully diluted [earnings per share] would be about 80 cents. Our actual results for the year has basic at about $1.07 and fully-diluted earnings per share at 86 cents. These computations were based on 6.1 million shares outstanding for the basic calculation, and about 7.7 million shares outstanding for the fully-diluted calculation.

In terms of the fourth quarter 2001 earnings per share, basic earnings per share came in at 43 cents per share, and fully-diluted earnings per share came in at 36 cents per share. These calculations had outstanding shares of about 7.9 million shares for the basic computation, and about 9.5 million shares outstanding for the fully-diluted calculation. As of September 30, 2001, the company had about 7.9 million shares of common stock that were issued and outstanding. This is net of the treasury stock.

Next, I'd like to talk a little bit about the EBITDA numbers. The annual EBITDA for September 30, 2001 was about $21.7 million, and this is compared to the September 30 of 2000, which had about $13.9 million of EBITDA. This represents about a 56% increase over last year's EBITDA numbers. In terms of the quarter EBITDA, the fourth quarter of 2001 had $8.6 million, and this is about 86% over the same quarter in the prior year. So, as you can tell, that was a significant increase for us.

Our earnings per share numbers exceeded our prior guidance by about 7%, and this was really due to a couple of factors. The first factor is that we had a slightly higher number of units that were actually placed in service than what we had anticipated. And our hold per unit was slightly higher than what we had expected. For fiscal 2001, we had an average of about 722 --

MR. GRAVES: That was for the last quarter, right? Of 2001?

MR. NOUIS: No. The 7% increase --

MR. GRAVES: No. The 722 MegaNanza units.

MR. NOUIS: The 722 is for the entire year, the average for the entire year.

MR. GRAVES: Oh. Okay. I've got you. I thought that was the last quarter.

MR. NOUIS: As of --

MR. GRAVES: We placed 722.

MR. NOUIS: As of September 30, 2001, we had 1,966 units that were placed in service.

MR. GRAVES: Yes.

MR. NOUIS: But the average throughout the year was 722. In terms of our Legacy games, Class II Legacy games, at September 30th, we had 2,979 units, and this is compared to 3,986 units in the prior year. In addition, our Class III games, the video lottery systems, we had about 1,506 placed in service as of September 30, 2001, and this was compared to 1,282 games that was placed in service as of September 30, 2000.

As you can tell, we had a decrease in our Class II Legacy games over prior year, and this is really because MegaNanza units are earning so much more for our customers, that they're starting to place some of these MegaNanza units at the expense of some of our Legacy games. Also during 2001, we had about 2.6 million options and warrants that were exercised. And this resulted in proceeds to the company of about $17 million. When you combine this with our operating results, the stockholders' equity increased by approximately $19 million, to $32.3 million as of September 30, 2001. In addition, our working capital increased from a deficit of about $587,000 in the prior year to a working capital of $7.5 million as of September 30, 2001. Now, having summarized the key basic financial points for the year 2001, I will turn the discussion over to Clifton, who will talk a little bit about next year.

MR. LIND: Thank you, Craig. For the upcoming year, our technical challenge is going to be to maintain the current rate of placement of 200 new-generation Class II units per month, while maintaining the average hold per machine at a high level.

We continue to feel that as the number of Class II units increase in specific gaming halls, the average hold per machine will decline, as it's healthy to optimize the number of units in a machine by minimizing the wait that players have to get to our machine at the key playing times, which are usually Friday, Saturday, and Sunday evenings. We will continue to work with our customers in order to optimize the number and mix of Class II units serving their clients. Based upon our current backlog, we anticipate that a rate of placing over 200 Class II new-generation [machines] per month during fiscal 2002 is achievable.

One of the things that we have been doing in the past is cannibalizing some of our older games because there has simply not been sufficient floor space to expand our number of new generation games without taking out some of our other games. And so Craig, Gordon, and I, and other staff members have been working on programs that, in essence, put walls up around our machines to enable the facilities, nearly all of which could use additional equipment, to expand the number of our units that they have on the floor.

During the first and second quarters of fiscal 2002, we also expect to roll out three new Class II gaming systems and a significant number of new game faces and game designs. On a strategic level, our challenge is to correctly anticipate the direction of our appropriate regulatory authorities, and to have the most exciting content available to players over a large of variety of key communication channels.

For the first time in the Company's history, assuming that we assume the current placement rate, which our backlog almost assures, it is clear that the first quarter of this year will exceed the prior quarter of last year in earnings growth. This is a trend that management is dedicated to try to continue, so that we consistently have quarter-to-quarter earnings growth each year.

For the fourth quarter of fiscal year 2001, MGAM recorded after-tax earnings of $3.4 million. Because MegaNanza's hold per day per player station during the first half of our first fiscal quarter of 2002 has already exceeded our forecast, we are raising our earnings forecast for this quarter. Management now expects first quarter after-tax earnings to be at least 12% higher than the fourth quarter earnings of fiscal 2001.

In spite of the expected increase in the calculated number of fully-diluted shares, which we forecast to be at 9,660,000 as of December 31st, the first quarter fully-diluted earnings per share should exceed those for the fourth quarter of 2001 by at least 10%.

Based solely on the expected positive variances for only the first quarter, management is raising its guidance for fiscal year 2002 by 10%, and we now expect fully-diluted earnings per share to exceed $1.65. This is a 91% increase over the fully-diluted shares for fiscal 2001, which we announced today.

Gordon and I remain confident about the future, based primarily on the fact that we feel that the MGAM team is the best in the industry. Our technology team, under the leadership of Brenda and Joe, Jeff and Bo, and our sales and marketing team, under the leadership of Gary, Skip, Tommy, and Glen have done an extraordinary job this year. And we are confident that they will make an even greater contribution in the future.

The new systems and products which we will introduce over the next few months to expand MGAM's stable of Class II gaming systems is as exciting and as potentially rewarding as the first of our new generation of games, MegaNanza.

However, the entire management team understands that success can be fleeting if it's not supplemented by hard work. In my many years of corporate management, I have never had the honor of working with a management team that is as capable and as committed as to MGAM's future as this one is.

On another exciting development to which we want to alert our investors is a potential development concerning two of our directors. Gordon and I are in the process of negotiating a licensing agreement of certain products for international exportation with one of our directors. And we are negotiating a strategic cross-marketing agreement with another director. If these negotiations are successful, two of our directors will be submitting their resignations in the near future, and will be serving MGAM in an expanded revenue-producing capacity. Because of confidentiality agreements, we cannot go further in discussions of the specifics of these potential agreements at this time. But we are convinced that they will be in the long-term interest of MGAM's shareholders, and will expand our marketing capabilities both domestically and abroad.

As a result of these negotiations, Gordon has appointed a subcommittee of the board which has prepared a short list of candidates to fill these two potential board vacancies. Gordon and I, as well as the rest of the top management team, that the short list contains the names of several outstanding candidates who will valuable contributors to MGAM in the future and, as importantly, that the management team is excited about working with.

Finally, on a personal note, I wish to alert our investors to the fact that in January I will be filing a Form 4, which will indicate that I have transferred a small portion of my personal stock to my family's charitable trust and to a family partnership, as well as to certain family members. These transfers are being made because my wife and children and I wish to share with others the good fortune which has come to our family as a result of our association with Gordon and Multimedia Games. My family members and I are the sole trustees and partners of these entities, and I wish to ensure all of our investors that at the present time, we have no intention of liquidating any of this stock. It will be held for the long-term benefit of my family members and for the charitable trust that we have established. It is my personal opinion, and that shared by my children and my wife, that there is no better investment for the family entities at this time than to continue to hold shares of Multimedia Games, and in fact, my extended family has been a net purchaser of stock over the past few months. I wish to, at this time, turn this back over to Craig Nouis, who has some further comments.

MR. NOUIS: Yes, just to clarify one point in the numbers that I've put out there. Gordon was right, the 722 units was the actual number of units that was placed in service during the fourth quarter.

MR. GRAVES: I bet the average wasn't much different from that.

MR. NOUIS: That's right.

MR. GRAVES: Yes.

MR. NOUIS: And that's where the confusion came in. The average for the year was 876 units. So I just wanted to clarify that point.

MR. LIND: Okay. Gordon, I'd like to turn this back over to you for further comments and for questions.

MR. GRAVES: Okay. Thanks, Clifton. Well, Clifton's talking about he's transferring some stock over and I, as all of you know I'm sure, that I sold 200,000 shares of MGAM stock. I've sold some earlier this year at six; and sold some this year at -- I don't remember what I sold it at, but significantly less than it is now, thank God. I hope that every time that I sell any stock, that we'll see the stock go up shortly thereafter. And I don't think that necessarily shows any people thinking that the stock becomes more valuable as I think it's worthless. I think it's going to become worth more and more. But, you know, I'm sitting in a situation where I certainly, financially, have been rewarded tremendously, and I feel like I'm very fortunate to be working with this bunch of guys that I think are going to increase my net worth significantly more. I don't have any plans to sell any more stock, at the present time. My wife did sell 4,000 shares recently, and the stock's gone up significantly since she's sold her 4,000 shares. But we both are so grateful for the way MGAM has treated us, and the way the Native Americans have treated us. So, we'd like to open it up to questions now.

OPERATOR: Thank you, sir. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. If you have a question, please press one, followed by four, on your push-button telephone. If you wish to withdraw your question, please press one, followed by three. Your question will be taken in the order that it is received. Please stand by for your first question.

Our first question in queue comes from Charlie Jobson. Please state your affiliation, followed by your question.

MR. JOBSON: Delta Partners. Gordon and Clifton, I just want to congratulate you on your success, and congratulate the whole team. I'm really happy for you, and you guys really deserve it.

MR. GRAVES: Thank you.

MR. JOBSON: I want to delve a little bit into the new software platform. How quickly are you going to be able to rotate new titles to the new platform? Can you give us an idea of the second generation titles that are coming out shortly? And can you also delve into the Player's Club and the marketing programs that you're now able to do, and some of the defensive characteristics you might be employing to, you know, ward off any competitors that might come out in the near future?

MR. GRAVES: That's a great question. Clifton, would you like to answer that?

MR. LIND: Thank you, Gordon. In fact, Charlie, as always, that was a great series of questions. I did not write them down. If I pass one up, let me come back to that. As you know, we have talked -- let me digress. Our largest single expenditure in our company, in the broadest sense, is on product and content development. You know, fully, more than a third of our staff and, depending on how broadly you interpret it, up to 50% of our staff is devoted to new product development and to content implementation.

We will be bringing out new titles, getting new game titles on the existing system, at a rate of at least two Williams games a quarter, two Bally games a quarter, and at least two new games of our own per quarter. That does not include additional clones of games that we will bring out, which basically use the same game engines, but present a variety of graphics that are driven by the same gaming engine. So for each one of our own titles that we bring out, there are normally two clones of that one title. So if we bring out two titles a quarter, we're actually bringing out six games a quarter, six new game faces a quarter.

One of the things that we have invested so heavily in over the last 12 months is the development of new gaming platforms, which now enable us to use the same graphics and same gaming engines across the platforms, so that when we develop a game for our Class II system, or the Class III system, or our universal gaming system, it is only a matter of days for us to port that game to one of the other systems. So, for example, with each Williams title that we bring out in Washington State, if we have the permission to do so, we can also leverage those into either one of our other Class II gaming systems.

Charlie, you saw that we announced that we had entered into such a strategic relationship with Bally, who now lets us take their game faces, over 2,000 games and titles, into the Class II market. We hope to expand that, and are working on trying to get such an agreement with Williams, and we think that it is to the benefit of both of those companies to have Class II players see their game faces, so that when they travel to destination resorts, they are able to play games with the same look and feel as they're playing in our local Class II Native American casinos.

You touched upon the fact that we have been working on and now have, in both Class II locations and Class III locations, ongoing tests and deployment of our Player's Club system, which has been very well received in both the Class III marketplace and the Class II marketplace. Our Player's Club, for those nations in Washington State that are playing both the Class II games and the Class III games, will soon offer the ability to players to accumulate points for playing on either Class II games or Class III systems. And we are working with a number of casinos and their consultants and with marketing to add the features that those independent casinos want, that supplement the basic features of our Player's Club system. One of the things that our Player's Club system has the ability to do is to have analytical filters that let us understand player preferences which, in turn, help us in the game design process, and also let us play sub-games based upon players' preferences that they may be choosing during the time that they're playing our basic games.

So all of those systems are exciting. We have completed or are about to deploy, in both Class II facilities and Class III facilities, progressive games that could, in jurisdictions where it's allowed, be statewide or nationwide progressives. Our progressives in Washington State for our Class III system are only permitted by compact to be in-hall progressives.

The fact that we have almost completed the development, and it is in beta test right now, and will be deployed in January of next year, our new Gen Four software, as we describe, it will broadly expand our ability to design specific games, and specific gaming systems for individual casinos.

Gordon has done a lot of research, along with Gary Loebig, and Glenn Goulet, on the desires of many of our customers, while participating in linked interactive games, to also be able to offer to their specific clients, different versions or sub-games of the games that are being played on a linked interactive basis. And Gen Four will make it very easy for us, for either Class II gaming systems or Class III gaming systems to do that. The tests, so far, have been extremely exciting and we're pleased with where those are going.

We'll be rolling out, in several venues in January, pull-tab systems. And, as you're aware, our test is well underway on our proxy play internet gaming system with the Lac Vieux Tribe in Michigan. Charlie, that's the best my memory can give about all the questions you asked. Which ones did I miss?

MR. JOBSON: Just, Clifton, just on the Player's Club, how many people are signed up for the club right now?

MR. LIND: In the Player's Club, we have that at three different halls in Oklahoma and, in those halls, each one varies, depending on the size of the halls. But we have a minimum of 2,000 in each hall, and some halls, a much larger group of people who have signed up to the Player's Club.

These are good numbers for our local and regional halls because, you know, it takes a while for people to get comfortable with the fact that their play is now visible. And so we anticipated that it would take some time to get total participation of the halls. But they have been extremely well received. They are, as you know, patterned after frequent flyer clubs, and players are already claiming prizes, and additional play, based upon their playership, has been very well received. And we intend to proceed with broad implementation on that on a casino-by-casino basis.

MR. JOBSON: Okay. I'll ask one more question. I've got more, but I'll go back in the queue. You know, is it prudent for you guys to increase the deliveries past 200 a month now that it seems like the market's really accelerating, and, you know, at some point in the future, although not maybe in the next six, eight, nine months, there might be competition coming in? You know, how do you keep to the delivery schedule?

MR. GRAVES: We are exceeding the rate of 200 a month, and our goal is that, as we put in these additional structures which allow people to add machines rather than to cannibalize the machines, to actually have the net deliveries, the net machines in play, exceed 200 a month, which means, if you assume that we are cannibalizing about 50 machines a month of our Legacy games, that we will actually be placing in excess of 250 per month.

Right now the ability for us to deliver additional equipment is directly tied to the ability of these individual halls to add additional space. It is not a supply problem, and we will be accelerating that rate of delivery here over the next few months. Again, we're hoping to get the net deliveries well up above the 200 mark, even though we have been exceeding the 200 mark on installations of MegaNanza machines.

MR. JOBSON: Okay. Have you signed any trailer deals with tribes in Oklahoma yet?

MR. LIND: We have. Oh, yes. We have eight trailers that have been installed or are in the process of being installed. And we have a rolling order going with the modular building manufacturers so that there are always two in the queue, and there are several significant installations of multiple trailers which we'll be making in the first quarter of next year that are signed and ready to go.

MR. JOBSON: Okay.

MR. GRAVES: Charlie, this is Gordon. I've been trying to talk Clifton into keeping one of those trailers just always on the move, on the road, so he can get it in there the day that anybody asks for it. But I haven't been able to talk him into doing that, yet.

MR. JOBSON: Sounds good to me. Thanks a lot. I'll be back.

OPERATOR: Thank you. Our next question in queue comes from Ronald Rotter. Please state your affiliation, followed by your question.

MR. ROTTER: RLR Capital Management. Hi, guys.

MR. GRAVES: Hi.

MR. ROTTER: A couple of numbers. On the EPS comparison in the fourth quarter in the press release, you didn't give what that comparison was for the fourth quarter. Then, could you also talk about where you are in terms of current backlog, and where you are in terms of current installed base. And then, finally, if you could talk, at all, about any new tribes, new states, that we might be looking forward to in the near future, in terms of deliveries?

MR. GRAVES: Clifton, that sounds like another good question for you to answer.

MR. LIND: I'll handle the first part, and then I think I'd like you to talk a little bit about the second part. Ron, if I understood your question correctly, as of September of 2000, which was a year ago, we had 3,986 Class II recurring revenue machines in the field.

MR. ROTTER: No, no, no. My question was on the EPS comparison for the fourth quarter.

MR. GRAVES: Earning per share.

MR. ROTTER: Right.

MR. LIND: Oh, oh, I'm sorry. I'm sorry. I thought you meant electronic player stations. Excuse me.

MR. ROTTER: No. Right. EPS has two meanings.

MR. LIND: Of course.

MR. GRAVES: They're really one and the same, it's just a relationship.

MR. LIND: Yes. Right. So repeat your question, Ron.

MR. ROTTER: What the fourth quarter earnings comparison was for this year versus last year, fully diluted.

MR. LIND: Okay. Just one second, Ron. I'm going to flip back to that. Okay. We are not required to publish that as you are aware, Ron. And so this is not a number that you will see in any published documents that we have.

MR. ROTTER: I know that you're not required to, but most companies, when they do give releases, do give it in terms of --

MR. GRAVES: I believe it was -- what -- Clifton, was it about 24 cents last year?

MR. LIND: Gordon, I don't want to mis-state --

MR. GRAVES: It was in that ball park, Ron.

MR. ROTTER: Okay. I guess I can work through the numbers.

MR. LIND: No, no. I'm going to give it to you in just a second here. I'm going back through some of my personal notes that I have in my computer so. But let's go on to your other question while I'm looking at it.

MR. ROTTER: Okay.

MR. LIND: What was your next question?

MR. ROTTER: The next question was in terms of where you are in terms of current backlog and current installations.

MR. LIND: Our last guidance that we gave on backlog was 700. We are significantly above that today, we are exceeding the goal of 200 machines a month, and have had a very good two months since the end of September. But, based upon the fact that we have a short week this week, and the fact that we'll see another short week in December, you know, management wants to stay significantly ahead of that rate, and we're accomplishing that. We have adequate machines available today to take care of the backlog and will exceed the installation rate of 250 gross machines, at least in the first two months of this year. And, depending upon the availability of additional space, we certainly know we'll exceed 200 in December, and then it may be that we're able to ratchet December up as well. But we've put out a lot of machines in the new facilities we've provided in the last two months, and we're just hoping that we're able to put up walls fast enough to do that. Okay. Craig, do you want to take Ron's first question here?

MR. NOUIS: Yes. As Clifton indicated, and as I'm sure you are all aware of, we're not required --

MR. ROTTER: I know. But most companies do give that out even though you're not required.

MR. NOUIS: All right. Well, looking at it, it looks like it was about 19 cents, fully diluted, in the prior year.

MR. ROTTER: Okay. And this, again, it was --

MR. NOUIS: Fully diluted, it was --

UNIDENTIFIED: 36 cents.

MR. NOUIS: 36.

MR. ROTTER: 36, right.

MR. NOUIS: But that was based on a significantly --

MR. ROTTER: Higher per-share count.

MR. NOUIS: -- higher share count.

MR. ROTTER: Right. Okay. And then your guidance in the first quarter, I kind of missed that. You said, what was your EPS guidance for the first quarter of this year?

MR. LIND: We said that earnings per share for the first quarter will be up 12%, I believe.

MR. ROTTER: Okay. So we're talking --

MR. GRAVES: 10%, at least, Clifton. Didn't we say ten?

MR. ROTTER: Around a 40 cent type of number, then. Okay. Great. And then, the final question was, in terms of the current backlog, is that all primarily in the state of Oklahoma?

MR. GRAVES: Let me say something about the backlog, if I can, Ron.

MR. ROTTER: Sure.

MR. GRAVES: I think it's a mistake for us to talk about backlog for a couple of reasons. Going forward, I've always done that, and I always kind of liked to do that. But I think we're at the stage where it's real complicated how much the backlog should be. Normally, of course, you don't want to keep a customer waiting more than a couple of months for product.

MR. ROTTER: Right.

MR. GRAVES: And so, backlog ought to be a function probably of how many we're delivering. And, on the other hand, especially when we see there's going to be some significant change in the player station coming up, we want to keep it down.

MR. ROTTER: Uh-huh.

MR. GRAVES: And, so I don't think it's a very good measure of how good we're doing. And, you know, it's going to go up and down, it's going to be cyclical even if we tried to control it, you know, to some big, large number, it will still be cyclical. But I'm not sure that it's wise for us to give that number for competitive reasons, also. I think if we get out there talking about what our backlog is, and it's long, customers are going to have competitors coming in and say, well, you don't want to wait all that long --

MR. ROTTER: Yes.

MR. GRAVES: -- for product.

MR. ROTTER: It makes sense.

MR. GRAVES: And so, I think that's Clifton's call, certainly, you know, that's his call. But I know that he feels that as we're getting stronger here, that we've got to play things a little bit closer to the vest as we get to be a dominant force in this business. And I think we're getting there. And I think that that's one of the management styles that Clifton brings that's a little different than mine, that's a change we need now, as we're making this transition.

MR. ROTTER: Okay. Well, rather than discussing numbers, is it fair to ask you if there's any meaningful backlog coming from outside of Oklahoma at this point?

MR. GRAVES: Clifton?

MR. LIND: Yes. There are significant developments from outside of Oklahoma. As you know, we have benchmark testing going on in both California and Florida. Those benchmark tests are going well. We have two other states that we either have machines in or are about to put machines in, that would be significant new states. And in at least one of those states, we are controlling the deliveries because we do not want that to have an impact on deliveries in other states that might be caused by inopportune timing, if you'll let me say. But there are new states that we expect to expand the current number of machines in, and new states that we expect to get in for the first time.

MR. ROTTER: Okay. And then one final question. WMS has been having software problems, I know, with their Class III machines. Does that also apply to your Class II machines? Are you having any problems getting any deliveries from WMS because of their problems?

MR. GRAVES: Any problems that Williams might have in no way impacts anything. We haven't had any problems with them or with Bally, because we put our own processors and our own software in those machines. We don't buy either processors or software from either of those two.

MR. ROTTER: So the problems that they're having don't impact you guys?

MR. GRAVES: None. In no manner at all.

MR. ROTTER: Okay. Great. Thank you very much, and congratulations on a great year.

MR. GRAVES: Thanks.

OPERATOR: Thank you. Our next question in queue comes from David Bain. Please state your affiliation, followed by your question.

MR. BAIN: Yes. Roth Capital Partners. Super job, guys. Congratulations.

MR. GRAVES: Thank you.

MR. BAIN: I was wondering if you can sort of give me a quick and dirty on the revenue breakdown by geographic area for the quarter?

MR. GRAVES: Other than the benchmark tests that have been going on in Florida, there has been no change, in the revenue breakdown that we've had all of last year and for the last quarter. Oklahoma continues to be our dominant marketplace and the primary source of our revenue, with Washington State being second, and then a handful of other states adding up to take up the last 20%. The new revenue that we've had this year, in this last quarter, comes from our -- the only new regional revenue comes from the benchmark testing that is being done in Florida.

MR. BAIN: Okay. Great.

MR. GRAVES: And, you know, as you know, we intend to open up some new states, not only in the near future, but in this fiscal year, which will change that a little bit.

MR. BAIN: Right.

MR. GRAVES: Because there are new venues that we think now are ready for the new-generation games.

MR. BAIN: Okay. And in terms of the MegaBingo game, I think you guys had planned on redesigning that game and putting it out again. Is there anything going on there?

MR. GRAVES: That is, we're on the cusp of that happening.

MR. BAIN: Okay.

MR. GRAVES: The initial tests were started the end of the last week, and we will continue to do the roll-out over the next 45 days. The technology is very exciting and we're having good sign up on new halls. And, so, that will be a more significant revenue producer, and a net income producer for us in this fiscal year, although we don't have any significant amount of that in our forecast.

MR. BAIN: Okay. Also, I've been doing a lot of reading on the international electronic bingo markets sort of opening up. Did you guys want to discuss that at all or is that --

MR. GRAVES: Are you talking about over the internet, or are you talking about --

MR. BAIN: I've been reading it over the internet, but, no, I'm talking like Alberta possibly opening itself up. I'm reading about the UK loosening up some restrictions.

MR. GRAVES: We are aware of and aggressively pursuing those opportunities. As you know, in Canada, there are a great number of interest holders who have a strong political influence that ultimately determines who the provider of those gaming systems is going to be.

MR. BAIN: Uh-huh.

MR. GRAVES: And so, Canada is always of interest to us, and we put a reasonable amount of effort into that. We have negotiations constantly underway with strategic partners who can help us in Canada, and also, any time an opportunity like Alberta comes up, we try to pursue it directly, as well as through strategic partners. So we pay attention to those, and go after those. It has been our experience that there's usually a lot more discussion about the potential of those things than actual developments that would allow people from outside the country to get in.

Having said that, you heard me talk earlier about a potential strategic relationship that we're negotiating with a director who would, in fact, take our technology to some other foreign countries where he has some good, ongoing contacts, and the ability to do a better job of exploiting those than we might do trying to get in there directly. So we are viewing the international market with a great deal of interest. But, at the same, the domestic market is going to continue to be our primary focus and our primary revenue generator for the next several years.

MR. BAIN: Sure. Well, once again, congratulations. It was just an outstanding quarter, and you guys are just doing a fantastic job.

MR. GRAVES: Thank you.

OPERATOR: Thank you. Our next question in queue come from George Paoletti. Please state your affiliation, followed by your question.

MR. PAOLETTI: Hi. Digerati. Let's see. I think I understand the revenue line well, but I'm trying to understand your expenses better. And, I guess, two questions. First one, you know, you use the term EBITDA. Can you go through what the difference would be between your operating income and EBITDA that would be significant from a cash flow basis or some other basis you're thinking of?

MR. LIND: Yes. Our EBITDA number really, reconciling items to get down to your net income number, is really just as you would expect. We have some interest expense and interest income that we're adding back, depreciation and amortization. But, really, that's about everything that's going to need to be added back.

MR. PAOLETTI: Right.

MR. LIND: And taxes, obviously.

MR. PAOLETTI: Right. I'm just trying to understand, you know, what's the difference between the EBITDA and operating income, and, like, what would the operating income be this quarter?

MR. LIND: The operating income for the quarter, let me just run that real quick, is about $0.9 million.

MR. PAOLETTI: Okay. Great. And going forward, you know, on the expense side of the business, what kind of leverage are you looking at? If you could grow revenues, well, I guess, net revenues are growing about $4 million a quarter, sequentially, for the last few quarters. If you were to continue growing revenues about $4 million a quarter, can you go through what the major expense increases would be related to that, and, you know, what kind of incremental margin you might be thinking you could do over the next year?

MR. LIND: Certainly. This is Clifton. Our major expense is for product development and for game development. It is our management team's goal to continue to invest heavily in that. As I said earlier, that is our largest single collective expenditure that we have. And we intend to expend heavily on that this year.

You are correct in the apparent growth rate of the net gaming revenue, and we expect that to be accelerating over at least the next six or eight quarters from existing revenue sources. But we are also going to be not only spending aggressively for product development but for market development. We will enter our first charity markets this year and, as you know, from the press to our conference calls, we consider electronic interactive gaming opportunities in the charity market to be a great growth area for us. Also, we have games that we can leverage into the lottery markets and into the horse track markets where they allow video lottery terminals.

And, selectively, we are going to be adding sales and marketing staff and business development staff to go after those markets, which are generally longer sales cycles because, in many cases, the charities, for example, require a law or a rule change to allow electronic bingo. And because of the fact that we've not been in the video lottery market on horse tracks, which are generally run by lotteries, so it's going to take us a good deal of effort to break into our first track in that regard.

MR. PAOLETTI: Uh-huh.

MR. LIND: So the our expenditure level -- this thing could be even more of a cash draw than it's going to be this year, but looking ahead to 2003 and 2004, we are going to be investing heavily in market development, and hope to break into the charity market, as I said, the end of this year, and into a lottery or race track venue during 2003.

MR. PAOLETTI: Okay. So --

MR. GRAVES: Clifton, can I comment on something here?

MR. LIND: Sure.

MR. GRAVES: I know Clifton and I agree that if we want to grow this company long term, and I think we've got an opportunity now to grow at the type of rate that we have been seeing, that we can, perhaps, continue to grow at that rate for a long time in the future. If we can or if Clifton can, primarily, and the rest of all of the staff, as far as that goes, if we can effectively convert the cash we're generating into new products, and do that effectively, we can have a long, long-term growth rate here. And I personally feel that if you can come close to doubling that, you're better off not. If you're doing a good job, if management's doing a good job, they're going to be investing pre-tax dollars as much as possible into new products.

Obviously, it's getting to the point where some of that expenditure is required to be after tax. But a lot of it you can still do, as you're doing your maintenance work, and as you're having expense work; our staff is getting to where they can do a lot of development work that's looking at the future. That's a good way to spend cash that assures you're going to have this growth rate for a long, long time.

MR. PAOLETTI: Okay. I guess, do you think that you can effectively grow staff by 60, 70% by next year?

MR. GRAVES: That's, you know, I don't -- Clifton?

MR. LIND: We're effectively adding three members to the technology team each month. And, if we get a specific development opportunity, we'll need to expand that. As I said, Gordon and I have a great deal of confidence in our management depth in the software development, and the hardware development, and the product development area. And, so, I think we have sufficient management to be able to add as many team members as we need. If we get a huge product development for a market that we're not in right now, we, of course, would bring in additional technical management to help us do that. As you learned in our past conference call, one of the things Gordon and I are most pleased with is the depth of management talent that we added in sales and marketing over the last year, and in market research. And so, I think that we are able to add staff to all of those departments and have them effectively managed and have them be contributors. So I think your point is, that it would appear to be reasonable for us to see margins growing if the revenue trends continue to grow that way that they are. And there is no question that that is what the numbers would tell you. However, we're dedicated to investing as much of that as we can into product and market development in this next year ahead, to 2003, 2004, and 2005.

MR. PAOLETTI: Okay. One last question, you know, you talk about R&D and technology, is that the line item that you call salaries and wages in your --

MR. GRAVES: That is part of that. Also, we have a number of members of the technology team and the marketing team that show up in contract labor and consulting. They're fully dedicated to us but, for business reasons, they are termed consultants to us. So it is spread throughout several SG&A classifications. You can't just identify just one.

MR. PAOLETTI: Well, can you give me an idea of what's the difference between salaries and wages and SG&A?

MR. GRAVES: As I said, it is more than just salary. The development effort, and the product development effort is spread over more line items in SG&A than just the salary and wages line.

MR. PAOLETTI: All right. All right. Thanks a lot.

OPERATOR: Thank you. Our next question in queue from Scott Gambill. Please state your affiliation, followed by your question.

MR. GAMBILL: Emergent Financial Group. Season's Greetings, everyone.

MR. GRAVES: Well, greetings.

MR. GAMBILL: I was looking at your Legacy games line here in the earnings release, and I see we're kind of starting to see that expected attrition of old games and the ramping up of MegaNanza. Do you have some kind of a target ratio? [Such as:] we're going to take down so many of these old Legacy games for every new MegaNanza game that comes out? Is there some control factor there, or is it in free fall -- do you understand what I'm saying?

MR. GRAVES: No. I don't think so. I mean, I think we can predict what it's going to be.

MR. GAMBILL: Is it? Okay.

MR. GRAVES: But it's primarily what's the customer wants. And, you know, I don't think that's anything that's necessarily very healthy to try to control.

MR. GAMBILL: Yes.

MR. GRAVES: It's a matter, I think we can predict pretty well, what's it's going to be. You know, Clifton said something about that earlier.

MR. GAMBILL: Uh-huh.

MR. GRAVES: And I think he and Craig both have a pretty good guess on what it's going to be.

MR. GAMBILL: And you're comfortable with what's happening?

MR. GRAVES: Well, let me say there's a couple of things that you need to consider. Number one, is that, you know, we are now developing games at -- we've got such a powerful engine going in the development of games, that we're liable to see some games coming out here that have a big, positive impact on that, so we don't see any more drop in that. But, on the other hand, you know, it's kind of hard to predict what the customer is going to -- whether he's going to want more Legacy games or not. It's, you know, it's just a guess. I think that -- Clifton and Craig -- I think you all would agree, that what we've got out there now in our forecast is relative conservative.

MR. NOUIS: Uh-huh.

MR. LIND: With no question. Scott, listen. We have the two most popular gaming systems out in the Class II market today. And it's not that our Legacy games are any less popular today among their dedicated players than they were before. Our Legacy games continue to be the leading interactive bingo games that are out there, and we see you have a reason to believe that that's going to happen. It's just that as we bring out new systems and new games, they're directed at broadening the markets that are being played in the bingo facilities and the casinos that we serve. One of the things that our new game, MegaNanza, has done, is that according to surveys we've run, in nine months it has lowered the average age in our customers' halls from 63 to 53. And so, our customers are excited because, for the first time, they have a product to serve the 30-something people, who might be looking for something that's closer to an experience that they would be having if they went to a destination resort. So one of the great things that's happened for the first in the history of electronic bingo, we have started bringing in a new generation into the gaming halls. And that is net new business for our customers, and net new business for us.

Gordon, Skip, and others in our game design and product design team have many exciting ideas that will expand the form and type of interactive gaming that we will be offering over the next year, so that we can appeal to other market segments. So they're going to have many new choices of interactive game formats and, you know, gaming styles to choose from. So I am not going to be surprised and, in fact, we expect that some of these new gaming systems that we're running now will attract new players, and there will be -- it's not a zero sum game, we're going to be drawing in more players with different preferences into the hall, and offering products that appeal to them.

And, you know, we could all name different sorts of interactive examples that are out there in the marketplace today. But we have interactive examples that we think are proprietary to us. And we have the best technology to present, and the best concepts to capture the digital generation and give them an opportunity to participate in our gaming systems. So, I think --

(Tape malfunction)

MR. GRAVES: -- in interactive gaming that will be generating revenue for this company a year from now that we, for competitive reasons, you know, have not discussed publicly and will not discuss until we're installing those machines in the marketplace.

(End of Tape - Side 1)

MR. GAMBILL: -- if you want to make a little additional comment on how that seems, how that feels, particularly going into this quarter, on new games?

MR. GRAVES: It feels good.

MR. GAMBILL: Well, that's good to hear.

MR. LIND: As Gordon has told you, I'm sure, the last two significant gaming systems that our company has brought out have increased our customer's earnings three-fold. And we are going to bring out additional systems that we think will earn as much as MegaNanza and the other new-generation games are going to earn. But, we're not necessarily predicting that in the next year anything will show another three-fold increase over and above what we're making today and our customers are making on the MegaNanza systems.

However, we are working on other Class II systems that we think will earn as much as MegaNanza, and give a greater variety and bring in new players to the halls. So we're excited about that expansive capability. And what we're seeing is, as Craig went over the figures, you know, we had a relatively small number of new-generation machines in the field on the average last year. And now we're getting the benefit of the fact that not only are we adding new machines, but we're starting out with a broader base. And so, the numbers are growing quite nicely. And, I mean, you can do the math. It's going to be an exciting year for us if we continue to put out the machines at the rate that we're going. But it wouldn't be a bad year for us, Scott, if we just had all of the machines we have in the field today, you know, playing for the full year.

MR. GAMBILL: Right.

MR. LIND: Yes.

MR. GAMBILL: Okay. I appreciate it. Thank you.

MR. GRAVES: Thanks.

OPERATOR: Thank you. Our next question in queue comes from Ken Green. Please state your affiliation, followed by your question.

MR. GREEN: Boston American Asset Management. Great quarter, fellows. This is both for Gordon and Clifton. IGT recently stated that they thought that about ten new jurisdictions may shift to gaming because of budget constraints and local budgets getting out of whack due to the economic slowdown. Could you, you know, kind of outline where that would be? And plus for, you know, for MGAM. And then you might want to comment specifically, on New York.

MR. GRAVES: Well, let me say that I think that the research work that Merrill Lynch has been putting out, or that Dave Anders over at Merrill Lynch has been putting out on this subject, is pretty much on the mark. You know, from a local standpoint, we maybe see some particular opportunities that are a little bit different than what IGT's talked about. But they're pretty much right on the mark, too. There's no question that, you know, New York and any place that -- there's about nine states that look like they are going to expand their gaming, and certainly New York is one of them. And there's, you know, the rest of them are talked about in those reports. I don't have that right in front of me. But, Clifton, do you know, off hand, what those were that were talked about in those research reports?

MR. LIND: I don't know, specifically, the reports that you're referring to. But let me say that we have activities underway in 12 states, right now, that we think are going to give us an opportunity to expand this coming year. And eight of those are states that we are not currently in today.

We never bid against either the Federal Reserve or IGT. I'd vote with them. I think they're right. Insofar as New York is concerned, the current compact is a situation that, obviously, creates some Class III casinos, where William's, Bally's, IGT, Aristocrat, and others will place full slot machines directly. We will not have any involvement in those. However, there are a large number of locations which will remain Class II locations, and we will hope to expand into. And, of course, the race tracks are also gaining rights to put in a video lottery system. You know, our system is approved. We certainly intend to have a marketing effort into those systems. However, we will say right now that to get into the race tracks in New York would be a long shot for us because there are other well-known gaming providers who have past experience with many of those locations. And it would be unlikely that we would displace any of those system providers at this time.

MR. GRAVES: Let me say, it's my guess, that we're going to see about half the states look to their lottery and, for the first time, for probably ten years, put pressure on their lotteries, saying we need you to get out there and raise us more revenue. And I think what's happened in New York with the legislature, we're seeing that same attitude in most of the states. And I think we're going to see the lotteries looking for ways to raise revenue. I think we've got a wonderful product that the lotteries could use, and I think we've got a lot of potential there. Obviously, none of that's in our plan right now. And, obviously, whether we go do that or not is going to be whether Clifton and the team, the men and women out there that are on the front line, feel like we can afford to go pursue that opportunity. It's a wonderful opportunity, by the way, there's just no question.

MR. LIND: But, Gordon --

MR. GRAVES: -- to have a negative effect, I think it's going to have nothing but a positive effect on the Native American gaming, by the way.

MR. LIND: And when Gordon says it's not in our plan, we have nothing in our financial forecast that is driven by new business that we might place in lotteries or race tracks. However, it is absolutely something that we have sales and marketing resources devoted to in the budget this year, to help us go after.

MR. GREEN: Just one quick follow up on new jurisdictions. You mentioned California, you know, where you were testing. Could you kind of elaborate a little bit on that? You know, given that there's been so many new machines put in California in the last year, what kind of areas are you putting your type of machines? Is it Class II or Class III?

MR. GRAVES: Well, right now we are essentially testing there, but our market opportunities there is a Class II opportunity. And there's a number of tribes in California that are now recognized, that don't have compacts, and therefore, can't put in Class III, that are potential candidates for us. And then there's some of the others that do have compacts that would like to expand their Class II operation, most of which are looking at keeping -- if they put any of our machines in, that they would fall within the 2,000 limit that they can put into their facilities, for the most part, although there is some possibility that some of those that are at the 2,000 limit, might be interested in putting in some electronic bingo stuff. Certainly, the current California tribes, it seems to me, like they're being extremely careful to assure that they are politically sensitive to what the people in Sacramento would like in that respect. And I think all that's working right now in a very healthy mode, in terms of the relationship between the tribes and the state regulatory bodies and the federal regulatory bodies. I think it's getting healthier than it's ever been, and I think that Native American gaming is reaching a new stature level where a lot of those problems that have gone on in the past, between the states and the tribes, we're going to see going away.

MR. GREEN: Thank you. Great quarter, again, fellows. Thank you.

MR. GRAVES: Thank you.

OPERATOR: Thank you. Our next question in queue comes from Remy Trafelet. Please state your affiliation, followed by your question.

MR. TRAFELET: Hi. Remy Trafelet, it's Trafelet and Company. Can you guys, you just touched on this before, generally, but was wondering what the dollar hold was on the new-generation games for the fourth quarter?

MR. GRAVES: Clifton, do you want to answer that?

MR. LIND: For the fourth quarter, on the average, it was slightly over $200 a machine.

MR. TRAFELET: Okay. Wow. Great. Okay. And Clifton, how would you expect that to kind of run off over the course of this year?

MR. GRAVES: Well, let me answer that. I think it's impossible for us to, you know, Clifton can talk about what he's used in his projections, but I think it's impossible for us to know what's going to happen there. I think that we can all look at Vegas and say that we know that in an environment where there's lots of casinos, that more than likely, the economic model that's used in Vegas is probably a pretty good one. And Vegas seems to want to put in machines until the hold per machine gets down to about $100 a day on average, over seven days a week, and I think that reason that they do that is that they want to make sure they can handle the traffic on weekends, as Clifton was talking about. That's one of his focuses or one of our team's focuses to look at [how to optimize machine placement].

And so, you know, we can say I don't think we're going to see that type of density in Indian country, because Indian country serves more of a local market. And I think that's going to probably, more than likely, keep the level. But that's going to be a customer driven thing and what the whole machines goes. And so, it's going to be a function of how many machines we install that is going to determine where that comes down to. And, you know, we have been more pessimistic in the past than probably -- it's turned out better than we had anticipated in terms of the figure of the market demand out there. And so we can guess, but we really don't know what it's going to do. Clifton, do you want to talk about what you've been using in your projections, or do you think that's appropriate?

MR. LIND: Well, as you, and I, and Craig are committed never to - at this point in the market place, Craig and I use extremely conservative forecasts in our model for this upcoming year and the years thereafter. It is absolutely correct that, not only has the hold exceeded, so far this year, what Craig and I have had in the model, it also did that last year. And we intend to continue to forecast on that conservative basis. But, you know, our economic analysis of machine placement shows that it is beneficial to us, from a return on assets, a return on equity, and on earnings per share, to keep putting in those machines to satisfy the market, you know, certainly until the revenue per machine, on the average for a week, is down to $125 or $100 a day. And, again, as you have said, we don't think our market will be exactly like what's going on in the strip, but it will, in some way, approximate it. And so, we expect as we greatly grow the number of machines in each individual hall, to see that [hold per machine] fall off.

And I show in my model a significant decline, this year, in the average hold per machine as we saturate halls. And I have been too pessimistic year-to-date in what I have been forecasting. We have significantly outperformed that both from an installation rate, and from what the average hold per machine has been. So we are delighted with the fact that even though we continue at a rapid rate to do install follow-on orders into existing halls, that the hold has not fallen off as quickly as we have used in our conservative forecast.

MR. TRAFELET: Okay. Clifton, can we get any idea of where you've taken the halls down to for, you know, by year end?

MR. LIND: In my forecast, I have the hall averaging about $162 for the year.

MR. TRAFELET: Okay. And is it currently holding the $200 now that you were at in the fourth quarter?

MR. LIND: Yes, it is.

MR. TRAFELET: Okay. So that's probably ahead of the number, the $162?

MR. LIND: No. That is, you know, our current hold is being influenced by some extraordinarily high holds that we have in four or five local markets, that are near major metropolitan areas, and we are delighted to see that hold be that high. And, you know, one of those markets happens to be, you know, a benchmark testing that we're doing in, you know, a couple of major new states.

MR. TRAFELET: Okay. Got it. And year end, an estimate on the total number of new generation games that would be out by the fourth quarter of next year?

MR. LIND: Well, we ended this year, September 30th, with 2,000. And we're planning to add at least 2,400. And so that would be 4,400. But, if we accomplish our goal of adding 200 -- that is adding enough new-generation games to take out the predicted 50 per month machine drop in Legacy games, then we'd get up to 5,000 that would be out there by the end of the year.

MR. TRAFELET: I have fourth quarter.

MR. LIND: Right. By the end of September. Yes.

MR. TRAFELET: All right. Okay. Well then you're not going to like -- yes. Okay. So then, this question then. You're probably not going to like what your conservative guidance, but if your guidance for the first quarter now comes up to about 40 cents, which is 12%+, on top of the 36 cents for this quarter, which basically puts you at a run rate of $1.60 right there. Then you have, you're basically taking the new generation games up from, you know, 2,000 to potentially, you know, 5,000 for the course of the year. And, how do we reconcile that?

MR. GRAVES: Well, I think there's a couple of things. Clifton, if you don't mind me jumping in here. Well, you go ahead and answer, then I'll put in my two cents worth. Clifton?

MR. LIND: No, go ahead.

MR. GRAVES: It seems to me like, you know, we don't know what's going to happen. We know sooner or later the hold for machines is going to come down. And that's a function of how many machines get installed. The number of machines that get installed is a function of whether there's any uncertainty in the what the Justice Department and the NIGC is going to do. And is that uncertainty, it does seem to be getting less and less, and as it gets less and less, at some point, we're going to have stronger and stronger competition. And as that happens, and more people enter into the marketplace, there's going to be more machines put out there. And as more machines are put out there, the hold per machine is going to drop. And how fast that's going to happen, is anybody's guess. And I think, again, that Clifton's and the team's, their proclivity to be conservative is to everybody's advantage, in terms of our guidance. And we can all see what the upside is, and I feel comfortable with that. Clifton, I'll turn it over to you.

MR. LIND: Oh, okay. I was just going to say that, obviously, you know, based upon the first quarter results, that our guidance, for the year as a whole, is very conservative. And, as we have said, we have only considered the first quarter in giving this new guidance. It does not take into account what the improvement in subsequent quarters might be as a result of exceeding our expectations in this first quarter. So, I mean, how do you reconcile it? You have to just view our guidance as being extremely conservative and the management team is committed to vary from that guidance on the upside, and do it significantly and try to quarterly bring good news to the marketplace. And, you know, I'm going to be disappointed if we don't exceed our guidance. However, it's a pretty compelling story just on our guidance. It's going to be another year before we almost double our earnings per share. So I'm not embarrassed about our guidance at all.

MR. TRAFELET: No. No. Those are great numbers and a good quarter. Okay. Understood. Thank you.

MR. GRAVES: Thank you.

OPERATOR: Our next question comes from Mr. Bill Brady. Please state your affiliation, followed by your question.

MR. BRADY: Yes. Presidio Management. Terrific quarter. On the guidance that you gave for $1.65, do you have a revenue figure in mind to achieve $1.65? And then, what percentage of that revenue would actually be spent on R&D, as opposed to the 33 to 50%, which you said would be spent on product development, content, and market development?

MR. GRAVES: Bill, certainly, this year, gross revenue is going to exceed $200 million, based on the burn rate that we're going right now. And net gaming revenue should exceed $50 million, pretty significantly. And the net gaming revenue is what we really look at as disposable revenue for us to invest in the future. Of that amount, we will spend in product development and R&D, in the broadest sense, you know, somewhere between $12 and $24 million -- and you say you can drive a truck through that. You certainly can. But that depends on what opportunities we have, specifically in development for new facilities for our tribes and our existing markets who might be interested in us developing new gaming systems for them. And, also on the energy, and the money, and the resources that we might acquire to apply to new gaming systems for the charity market, or the race tracks, or the lotteries. So certainly, in the broadest sense, I would think that you could expect us to spend $15 to $18 million on product development, system development, and pure R&D. And let's say, on the low side, $50 million as a percentage of let's say --

(Tape Malfunction)

MR. GRAVES: -- if net gaming revenue were $60 million, that would be about 25% of our disposable annual resources that we'll be spending on that.

MR. BRADY: Yes. Okay. Then on the facilities you're providing to house the new games, either trailers or modular buildings, are you financing these or leasing them to the tribes, or are you just sustaining the expenses yourselves. How does that work?

MR. LIND: These are modular buildings which there are two different systems that are out there right now, two different methods. The tribes who wish to own them and make them a part of their permanent facilities, generally increase our share of the hold to pay for them, and they would increase our share of the hold by five to ten percent of our share of the hold. And those things would pay for themselves in four to six months, depending upon the facility.

For the tribes who are using these modular buildings as a temporary facility, we're happy to put those out there and bear the expense ourselves. Since they are modular and have axles under them and we can take down the facades and move them from location to location. For an expenditure of about $80,000, we can get 80 new machines in a facility, machines which pay for themselves very quickly. And so we're happy just to provide these additional walls, and we depreciate these expenditures over 36 months, and the numbers work pretty well for everybody concerned.

MR. BRADY: Okay. Thanks, Clifton.

OPERATOR: Thank you. Our next question in queue comes from Todd Heinzen. Please state you affiliation, followed by your question.

MR. HEINZEN: Hello, gentlemen. Tom Heinzen with Emergent Financial Group. I guess Scott and I are kind of tag teaming you here today. Just one simple question. Do you have enough shares authorized to split the stock, if you wanted to?

MR. LIND: We have plenty of shares authorized to split the stock. And we, as a management team, believe that splitting at appropriate times is an important part of the strategy for a growth company. And that our audit committee and Gordon, under Gordon's leadership, continuously review that. And there's been a great deal of discussion about the right timing to potentially split the stock in the near future.

MR. HEINZEN: Thank you very much.

OPERATOR: Thank you. Our next question in queue comes from Mr. Steve Emerson. Please state your affiliation, followed by your question.

MR. EMERSON: Steve Emerson, Emerson Investment Group. How many shares did you buy back since the authorization?

MR. LIND: Steve, Craig will handle that for you, but it's --

MR. EMERSON: Approximately.

MR. LIND: Right. Well there's two different authorizations. First, there was an authorization for us to buy shares during our last fiscal year. And Craig can report on the numbers that we bought back during the last fiscal year. Then we've also had new authorization, early in September, to buy back an additional million shares. And he will give you the results of our activity on that. Okay.

MR. NOUIS: The stock that we bought back during the 2001, was about 555,000 shares at an average price, if I remember, about $9.40. Did that answer your question?

MR. EMERSON: Since September, how many did you buy back?

MR. NOUIS: Since September, the bulk of that, let me see if I've got that broken down. Since September, we, I believe, have repurchased about 300,000 shares, and some of that was, in fact, repurchased during the month of September.

UNIDENTIFIED: That is correct.

MR. EMERSON: And average price?

MR. NOUIS: The average price was about $13.

MR. EMERSON: Excellent. Can you update us on how you see the Indian Gaming Commission carrying on or what you see there? You implied a very positive feeling a minute or two ago.

MR. GRAVES: We are excited about the leadership that is being exhibited by the commissioners. At this time, they are maturing as an agency, and the commissioners appear to be supporting the tribes as an independent agency, and separating themselves a little bit from the guidance that they're getting from Justice. The fact is that next year all three of the current commissioners will rotate off the commission, and the president will have the opportunity to appoint new commissioners. And so the commission is a little bit in a transition situation. And, when you get into those situations, while we're very pleased with the leadership that the commission is providing, you know, sometimes for either better or worse, they may take some actions that they want to take to leave a legacy of their stewardship of the office.

And so right now, I want to say the majority of the commission has been very supportive of Class II gaming and of the Native Americans' right to self govern on Class II gaming. And we are excited about their leadership in that regard, and think that's positive for Class II gaming and the tribes, and it's what Congress intended when they set up the commission. But we'll just have to wait and see, you know, by September of next year, there will be three new commissioners, including the new chairman on board and, you know, a lot of the direction of the new commission will depend on the political views and the gaming views of the new commissioners. And, at this date, there's no clear indication of who those people are going to be.

MR. EMERSON: Okay.

MR. NOUIS: Getting back to your other question about the fourth quarter treasury stock, just for the exact numbers, it was 263,000 shares, at an average price of $13.13.

MR. EMERSON: Excellent buying. I guess I was competing with you.

MR. LIND: Regrettably, my personal orders to buy more shares didn't get executed because I bought for the company first.

MR. EMERSON: Oh, well, congratulations. My last question, I'm trying to figure out the impact, possible impact on gross win per day. For instance, when you have the Player's Club, what kind of impact has it seen?

MR. LIND: Well, I think it's too recent. The Player's Club has only been installed, in the longest installation, for the last ninety days. And, you know, we're just going through the sign up of players. But, I mean, if you look at the results that Player's Club have had in mature gaming organizations, it's been rather spectacular in that, at least for the group of people who are playing, it can increase gaming revenue 10 to 15% for the group that are members of the Player's Club. So we expect it to have a positive impact. And it could be even greater than that because, in most cases, none of our customers are doing any form of direct marketing to their customers. So, for the first time, we're capturing data for them that can be used to help them run promotions and special tournaments among their Player's Club members.

MR. EMERSON: And is there any split on cost or revenue generated, or is it still the 70/30 kind of --

MR. LIND: There's no difference in the split on the additional revenue generated.

MR. GRAVES: Clifton, can you hear me?

MR. LIND: Yes, sir.

MR. GRAVES: I lost my audio for a little while. But I wanted to say with respect to Steve's question, I wanted to add something about that Player's Club. I think that one thing that we're just now getting into Steve, that I think is real exciting is that it looks like you can use that Player's Club, and the ability to learn the preference of people and what their practices are, that it is a very powerful additional security tool that tribes can use at this time, where we're all so sensitive or making sure that we go into some place that is really safe.

And I think it's something that the tribes are getting really interested in doing and which we've got the capability to do a better job than most people can do just because of this ability to recognize a person and say, hey, this isn't the normal guy that comes in here and uses this account number. He's got a whole different pattern of play than the man that normally or the woman that normally uses this account.

MR. EMERSON: Got it. Along those lines, how many games do you typically have in your, let's say, larger locations now versus first of the year or last year's? Is part of the reason that you're maintaining $200 a day, is that you now have 10 to 12 games out there versus the original MegaNanza? Is this a good reason why we should expect a much better gross per day than you're currently projecting?

MR. GRAVES: Well, I think that the ever-expanding variety of game faces and types of games, Steve, will undoubtedly let us draw new players into the casinos. And the main thing that has happened is all of these new game formats, our surveys indicate that on the scale of gambling versus entertainment, people are now seeing our games more as entertainment than they are gambling.

And so that has long been a goal for us to provide content which is seen as entertainment content rather than just a system that provided the wagering experience. So I think there's a combination of things going on, that new players are coming into the halls finding new game types, new game faces that appeal specifically to them and, as they find that entertaining, they spend more of their entertainment dollar in the casino than at one time they did. So I think that there's a number of things at play here, but certainly the variety of games is a positive thing for us.

MR. EMERSON: Well, can you quantify this? Like, for instance, your top --

MR. GRAVES: In January, there was only one game. By February, we had two clones of that game. Now for MegaNanza, we probably have 15 game faces, which include, at least, five different game types, and different prize, cost levels that really give you a multiple of 30 or 40 different games.

MR. EMERSON: Okay. Then your original game, or let's say the original three games, what percent of your hold or daily wagering do they constitute now? Is it 10% or 70%?

MR. GRAVES: No, no. The Meltdown family of games probably accounts for 35% of the hold on the new MegaNanza games now.

MR. EMERSON: And the new games then have much higher win per day, or just --

MR. GRAVES: No, no, no, no, no. That's really getting into stuff that's pretty sensitive from a competitive standpoint.

MR. EMERSON: I understand. Thank you very much. I hope you continue to increase or keep your average at a high level using the multiplicity of games. And I would guess that your competitors aren't doing that? Or are they?

MR. GRAVES: Well, you know, right now we're fortunate enough to be in a situation where the competitors that we've got in the Class II Native American business are mostly smaller companies that don't have the ability to put out this number of games. And I think that certainly the number of games you put out there, from my experience, is one of the most important factors in having hits. It's kind of like the movie business. So I think that's a very important part of the strategy for the company. But I think that this interactivity capability that we've got - right now, there's only one other company in all the gaming business I know of that has close to as much interactive capability as we do - I think that's going to get more and more valuable.

MR. EMERSON: Thank you very much, and congrats.

MR. GRAVES: Thank you.

OPERATOR: Thank you. Our next question in queue comes from Ken Moss. Please state your affiliation, followed by your question.

MR. MOSS: Hi. Ken Moss here. Masacco Money. I just wanted to congratulate you all. I thought it was a knock the cover off the ball kind of a quarter, and I think it bodes really well. I wanted to particularly, in a way, thank the sales staff. I know everybody is directing all the congratulations to the top officers. But I know that it really gets done by the troops in the field. And I think the sales staff, that's brought in these opportunities, is terrific for us.

MR. GRAVES: And the field service people, and the customer service people, it's just, I'll tell you what, everybody in this company from the purchasing agent on, they're all salesman. And this, as I said, this is the most talented organization I've ever seen.

MR. MOSS: Well, I'll tell you they're performing that way. When it gets down to crunch numbers, it's obvious that these things don't happen by mistake or overnight. And you guys are really grinding it out into a nice, fine methodology at the moment. Hopefully, it will continue deep into the future. I was wondering if and when you break into the charity market, is that going to require an additional real building-up of infrastructure, or is that something that, let's say, the staff can just sort of swing over and handle at the same time, so that the overhead doesn't have to get built out on it?

MR. GRAVES: Well, I think it's fortunate that in the charity bingo business, you can have both worlds, in that there is an organization right now of distributors in the various states scattered around the country that distribute the products to the charities. And so there's a relatively small number of distributors that you have to sell to.

MR. MOSS: Uh-huh.

MR. GRAVES: And our sales organization that we presently have not only is capable of doing that, but for a large part, has experience in selling to those distributors, and already has a personal relationship with those distributors. Now as we go to our more sophisticated products, it's not clear what role the distributor should be playing. In some states, it's necessary to have a distributor by law. Other states, you can do it direct, and, you know, I think that Gary Loebig, our Executive Vice President of Marketing and Sales, who, in my opinion, is the best salesman to the charity industry, historically, has been the most effective in that area. We'll have to make that call as we get our feet wet, and get some units out there that he'll have to make that decision of whether we're going to add a lot of staff to do direct sales, or whether we'll work mostly through a group of those distributors.

MR. MOSS: Uh-huh. Once again, thank you very much. You certainly made my day this morning, guys, when I looked at the press release. And I think the team is doing fabulously. And I get a real sense of the size and the depth of what you're really up to over there from this phone conversation.

MR. GRAVES: We really appreciate all of your support.

MR. MOSS: And I'd be in no great hurry to split the stock. I'd let it at least double first. Thank you so much.

MR. GRAVES: Let me say about that. You know, two guys I've worked with over the years that I have tremendous respect for was Henry Singleton* at Teledyne and --

MR. MOSS: Great guy.

MR. GRAVES: Yes. And Chuck Matheson* at ICT. Chuck always seemed to want to split whenever the stock got to $30, he wanted to split it back to $20. Henry always wanted to pay lots of dividends. We all know the man from Berkshire, that he just lets her go on up in value. So, you know, I don't think all that's too very important compared to a lot of the other things that we're all focused on. It's not too very important an issue.

MR. MOSS: Yes. I quite agree. I think it's built on what the business is really like, and it sounds like you guys are taking care of business.

MR. GRAVES: Well, thank you so much.

MR. MOSS: My pleasure.

OPERATOR: Thank you. Our next question in queue comes from Mr. Richard Keim. Please state your affiliation, followed by your question.

MR. KIME: Kensington Partners. Most of my questions have been asked, but I do have one, and maybe I'm beating a dead horse. But just on the guidance, using $1.65 for the year, and using a hold of $165 versus $200 this past year, and using 2,000 end of the year machines in play, does that, in your guidance, is that what makes the $1.62 or $1.65, whatever --

MR. GRAVES: No. If you use those figures and you don't significantly increase SG&A and R&D you will get a much higher number than that.

MR. KIME: Yes. That's what I was sort of thinking.

MR. GRAVES: Yes.

MR. LIND: So as was pointed out by other people, our guidance is extremely conservative based upon what it appears we will do the first quarter.

MR. KIME: Thank you very much.

MR. GRAVES: Thank you.

OPERATOR: Thank you. Our next question in queue comes from Charlie Jobson. Please state your affiliation, followed by your question, sir.

MR. JOBSON: It's Delta Partners.

MR. GRAVES: Hey, Charlie. How're you doing?

MR. JOBSON: Hey. Good. I switched phones. Clifton, could you give us an estimate on what your SG&A and your selling expenses are going to be for '02, on the income statement?

MR. LIND: Charlie, just increasing by 20 to 25%.

MR. JOBSON: Okay. Just 20 -- so I think it was $7, $13 million for '01, or, at least, that what's I had forecast. I'm not sure where exactly they turned out. But increase those numbers 20 to 25%?

MR. LIND: I mean, you know, obviously, those are hugely discretionary numbers. I mean, we don't have anything at all like that committed, you know, at the present time. And it all depends -- this is the most dynamic business I've ever had the pleasure to operate in. And each day we come down here and find that there's new opportunities, both from a sales and marketing standpoint, and a product development standpoint, that we didn't know about the day before. And we also find that some that we were dead sure of the day before have changed over night on us. And so, you know, to get down to the $1.65, I have been extremely conservative and increased SG&A and product development very, very significantly in our forecast. And I've not been very generous with what we think we're going to do in revenue growth, and net gaming revenue growth.

So, I mean, you know, most of the analysts who have been, you know, doing their own numbers, and feel that Craig and I are being extraordinary conservative and that much higher numbers are feasible, and both of those feelings are correct. So, you know, trying to err on the side of conservatism, we have a large number of discretionary dollars in there for SG&A and for product development that, right now, one could, you know, say depending on the way the opportunities fall, might not get spent.

But we may conceive, you know, through our process of sifting through new interactive gaming opportunities for the future, we may come up with another one that we want to pour huge resources into later this year. And, you know, kind of the good news/bad news is, if we foresee those kind of opportunities, and we pour huge amounts of SG&A and product development money into developing those new products for new markets, then 2003, and 2004, and 2005 are going to have a much better chance of showing the kind of earnings per share growth that we've shown these last two years. On the other hand, if some of those development opportunities get delayed, then we'll spend fewer dollars, and 2002 will be much better than the guidance that we've given. And it's our job, as management, to effectively evaluate the opportunities out there, and create new opportunities, and anticipate what new broad-band delivery vehicles we can use in order to get gaming products of various types out to customers.

And we feel that we have the best technology in the industry, which is helping us have the best content out there in the industry. And in the budget, we're forecasting to spend heavily, and think that's the right decision to do, especially with the kind of earnings growth we're already predicting, which we feel is conservative at this time.

MR. JOBSON: Okay. Okay. Fair enough. Also, could you give us what the EBITDA number was for the month of October?

MR. GRAVES: For October? I can't give you that for October. No.

MR. JOBSON: Okay.

MR. GRAVES: It is certainly larger than it was for the month of September, or the quarter, the average of the fourth quarter.

MR. JOBSON: I'm guessing it was over $5 million. Would I be correct in that?

MR. GRAVES: I would be shocked if your guess was not correct.

MR. JOBSON: Okay. Also, you mentioned, you know, the win per day, and two-year tests or one-year tests was really high. I'm assuming that was Florida.

MR. GRAVES: Were you talking about $5 million for one month?

MR. JOBSON: Yes.

MR. GRAVES: No, that would be too high for the EBITDA for October.

MR. JOBSON: It's too high. Okay. How are the win per day tests running in California?

MR. GRAVES: I don't think on any of those numbers, Charlie, we can really talk about them.

MR. JOBSON: Okay. All right. Let's see. On the Oakland project, is that on the front burner or the back burner right now?

MR. GRAVES: It's on the back burner. It's just, you know, as I said before, there's a number of tribes in California that are now recognized but don't have compacts that are great candidates for us. And there's, you know, we've kind of decided it's probably in our best interest not to talk about who our prospects are in terms of which particular tribe. But certainly, Lytton is one of the tribes in California that is in that unique position, of now being recognized, but not having a compact.

MR. JOBSON: Okay. All right. And have you announced, was the test in California with the Pechangas? Or not?

MR. GRAVES: It was the Sycuan. I think we've said that some time ago. It was with Sycuan.

MR. JOBSON: Okay. All right. Thanks again.

MR. GRAVES: Uh-huh.

OPERATOR: Thank you. As a reminder, ladies and gentlemen, should you have a question, please press one, followed by four on your push button phones at this time.

At this time, there are no further questions in queue. I will now turn the conference back to Mr. Graves to conclude.

MR. GRAVES: All right. Well, we certainly appreciate everybody's support. I know I am extremely pleased with the performance. And I think that we've got a tremendous staff here from top to bottom. I think that our board of directors needs to be complimented, and I think they've done a great job. And I know that all of us appreciate the support of the investors which makes it all possible. Thanks very much. Clifton, have you got anything you want to add?

MR. LIND: No, just that I am sure that we'll continue to have the dedication and commitment that this entire team, from top to bottom, needs to continue to keep Multimedia Games on the forefront of new gaming development. And it sure is fun and exciting to be a part of this organization. And Gordon and I are sure happy that all the young guys let us come down here and participate with the exciting developments that are taking place.

MR. GRAVES: Everybody have a good turkey day.

OPERATOR: Thank you. Ladies and gentlemen, if you would like to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089, with an ID number of 216730. Thank you all for participating, and have a nice day. All parties may now disconnect.

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