Multimedia Games, Inc.
HOST:  Mr. Gordon Graves
DATE:  November 13, 2002

OPERATOR: Good day, and welcome, everyone, to the Multimedia Games fourth-quarter fiscal year 2002 conference call. This call is being recorded. With us today from the Company is the Chairman of the Board and Chief Executive Officer, Mr. Gordon Graves, the Chief Financial Officer, Mr. Craig Nouis, the President and Chief Operating Officer, Mr. Clifton Lind, and Director of Investor Relations, Ms. Julia Spencer. At this time, I would like to turn the call over to Mrs. Spencer.

MS. JULIA SPENCER: Good morning, everyone, and welcome to our conference call and webcast. I am going to turn the call over briefly to Mr. Paul Hurdlow, who will read a forward-looking statement.

PAUL HURDLOW: In the course of this presentation, Multimedia Games' management will make forward-looking statements. In particular, they'll make statements about the company's guidance, and they're likely to make statements that are forward-looking in response to questions. The outcomes are subject to risks and uncertainties which could cause our results to differ materially from what we expect. We would refer all investors to the risks and uncertainties detailed from time to time in our public filings, and urge investors to review those prior to making decisions to trade the stock.

MS. JULIA SPENCER: Thank you, Paul. We're ready to start. I am going to turn the call over to Gordon Graves.

MR. GORDON GRAVES: Before I start, I want to take time and thank all of you shareholders, and analysts that cover MGAM for your support during what has been an extremely challenging time for MGAM over the last six months. I am sure everyone out there knows that early this summer, the NIGC notified us that they thought our Class II game -- our latest Class II game -- was not actually a Class II game. The negative publicity resulting from that, and coupled with subsequent events and some perhaps overly harsh analytical coverage created a great deal of uncertainty about our stock that was somewhat discouraging to our employees and our management team, and I am sure, much more disappointing to all of our investors. In spite of all of these adverse circumstances, our team met those challenges head on. They responded to them, and we achieved all of our financial and marketing goals for the year. I want to say that the confidence that our shareholders showed in MGAM during this difficult time helped tremendously.

Our year-end diluted earnings per share of $1.77 before one-time charges marked a big increase over 2001 -- over 100 percent. Gross revenue increased 121 percent, net income increased 279 percent, and EBITDA increased 152 percent. Someone might ask, "How can MGAM, having as much trouble as we had this past six months, still meet and exceed guidance?" For one thing, we have a history of being somewhat cautious in our guidance. Certainly, I think the events of the past six months show why such caution is warranted. Secondly, and I think more importantly, we do have a wonderful market position. We have an excellent range of products. We have some great games, and an outstanding management team. That team did a great job in the past six months. Now, it is my pleasure to introduce Craig Nouis, our Chief Financial Officer, who will present our financial overview.

MR. CRAIG NOUIS: Thank you, Gordon. As Gordon has said, we have had an outstanding year. My comments today will be limited to a few of the key points in the press release, and some of the key developing trends. I am excited to report that our net revenue has more than doubled. Diluted earnings per share for fiscal 2002 have increased more than 200 percent over the prior year’s. Net income for the year increased 279 percent over the prior year. Net income as a percentage of net revenues was 28 percent for the current year, compared to 15 percent in the prior year. For this year, SG&A expenses were $34.3 million, compared to $19.5 million in 2001. The increase in SG&A relates primarily to increases in salaries and wages and unusually high legal fees. For the year, SG&A as a percentage of net revenues decreased from 45 percent to 37 percent. Depreciation continues to increase, as we build our fleet of Class II player stations. Depreciation as a percentage of our average PP&E decreased to 9.9 percent for the fourth quarter, compared to 10.7 percent for the third quarter. This downward trend is consistent with our expectations as the total number of installed Class II player stations increases. These Class II player stations are depreciated over three years, and represent roughly 70 percent of our net PP&E. In the past, that percentage has been higher, primarily due to a higher population of leased Class III player stations, which had accelerated depreciation lives, in accordance with lease terms. These types of leasing agreements are not available for our high-speed Class II player stations, and for the most part, they are not requested by our Class III customers as frequently, so they are not having the same type of impact as in the past.

The key factor driving our earnings growth is the rate at which we place our player stations. As of September 30, 2002, we had a 166 percent increase in our installed base of New Generation player stations over last year's number. Net equity on our balance sheet has more than doubled, from $32.4 million as of September 30, 2001, to $65.5 million as of this year. Our cash has increased from $4.9 million last year to $15.2 million for the current year. Cash did decrease during the fourth quarter, primarily from our effort to increase our inventory of finished player stations. As of September 30, 2002, our inventory was $14.6 million, compared to $6.7 million in the previous quarter. Our inventory of new player stations at June 30, 2002 was 316 units, compared to 1,555 units as of September 30, 2002. The balance of the inventory represents component parts for the player stations. I would also like to make sure that everyone is clear that our non-current inventory on our balance sheet does not represent older inventory, but rather player station and component parts that we expect to place in the Class II market, which will be transferred to PP&E and then depreciated after the player stations are placed into service. The current inventory relates primarily to Class III player stations and component parts that we expect to sell in the state of Washington. Clifton will be discussing inventory further in his presentation. Now, I will turn the discussion back over Gordon Graves.

MR. GRAVES: Speaking for the entire MGAM team, including the Board of Directors, I would like to introduce Clifton Lind, who, as most of you know, has been our Chief Operating Officer for many years. Yesterday, Clifton accepted the Board's unanimous offer to succeed me as our new CEO, starting in February. We're starting that transition process immediately, by the way, and expect to have it completed in 90 days. I want to make it clear that I plan to maintain most of my family's assets in MGAM stock, and as long as that is the case, I plan to be as actively involved in MGAM as makes sense.

Let me say that Clifton's contribution to MGAM's success in the past five years has been immeasurable. Right now, MGAM has more opportunities than I have ever seen before, and the challenges facing our Chief Executive Officer and the management team are likewise larger than ever before. I am very pleased that the Board has offered me the opportunity to continue to serve the company as an active Chairman of the Board. I want to assure Clifton and the rest of the Board, the staff, and our shareholders that I see my most important task as doing everything I can to assist Clifton and the team in meeting those challenges. I am extremely optimistic, and confident that we are going to be successful in that regard. Clifton?

MR. CLIFTON LIND: As we stated in this morning's press release, we are providing a range for next year's guidance, instead of providing a specific number. Since the exact timing of several potential strategic placements of Class II player stations is somewhat beyond our control, we believe that it is most forthcoming to provide a range this time. In this morning's press release, we stated that our guidance for diluted earnings per share for fiscal year 2003 was from $2.30 to $2.60. If expected placements occur early in 2003, we expect our EPS to be at the upper end of this range. If none of these placements were to materialize, we would expect earnings per share to be at the lower end of the range. The entire executive team clearly understands that it is our job to be at the top end of, or to exceed, this guidance range. Guidance for the first quarter is $0.47 to $0.50. The executive team is committed to achieving quarter-over-quarter growth this quarter, as well as each quarter in the future.

Regarding the increasing inventory level, we try to maintain at least 500 to 600 player stations in stock at all times in order to meet our normal placement demands. The availability of adequate player station inventory is the key to our ability to support our core business, as well as to rapidly respond to major facility opportunities. In this current competitive environment, we're more likely to be hurt by our inability to quickly seize upon a major opportunity than by the opportunity cost of having cash tied up in inventory for a short period of time. As we have stated publicly, we're currently engaged in discussions with a number of customers and prospects who have requested that we be in a position to deliver a significant number of player stations on short notice. We're confident that our rationale for recently increasing inventory levels remains valid today. In any event, average placements will consume this inventory over a few months.

I would like to join Gordon in expressing our personal gratitude to the outside members of our Board of Directors for their tireless efforts on behalf of MGAM's investors and employees in the just-completed management transition process. I am honored by the opportunity to be of service to this exciting company, and to be the Board's choice for our incoming CEO. To the shareholders, customers and staff, I pledge to focus my energies and efforts in four primary areas -- team building, business development, creating shareholder value and supporting our Chief Technical Officer in his efforts to promote the development of new technology to better serve our customers. I wish to say a special word of gratitude for the hard work of our staff, and in particular, our executive team, for its creativity, dedication and incomparable efforts during the most challenging year that we have just completed. This team clearly represents the future of our company. As I indicated earlier, I will dedicate a significant amount of my energies to removing any and all obstacles that keep them from being the success that they can be. Our future is in their hands, and it is in good hands.

For those of you do not know me personally, let me say that Craig and I are keenly aware of our obligations to build shareholder value, as well as the effort that it will require. In that regard, there are some things that you should know about me and our management team. I will not turn to the chat rooms for advice. I have an extremely confident Executive Committee and dedicated Board of Directors to aid me and guide me in making my decisions. Please do not be hoodwinked by anyone claiming to have insider information. Our Board of Directors, our management team and I take our personal integrity in corporate governance very seriously. If anyone claims to have insider information prematurely, please contact our General Counsel, our SEC Council, or the Chairman of our Audit Committee with any information concerning alleged premature disclosures. We will not hesitate to use any legal means to investigate the situation and to bring the wrongdoers to the attention of the appropriate authorities. I have high standards for our Executive Committee and its team members, and it is clear that they feel an intense obligation to support the entire MGAM team. We expect them to do their best, to speak openly, to defend their positions passionately, to put the interest of our shareholders and our company before their own, to make mistakes and to learn from those mistakes.

Many of you are aware that the short position in our stock is at an all-time high. There is neither any thing illegal or unethical about investors betting against a management team. I want to assure you that we will not undertake any short-term tactics to drive out the shorts; rather, we will make decisions based on long-term profitability, long-term growth, and long-term growth in shareholder value. Our earnings performance and our ability to consistently generate net free cash flow will be the milestone by which this management team earns the support of all investors.

I am keenly aware of the special responsibilities, accountabilities and personal liability associated with the position of CEO in a public company. I do not presume that I can bear these responsibilities alone. Rather, I count on and expect the Board of Directors, the executive management team, the Chairman and members of the Audit Committee, our Chief Financial Officer, our independent auditors and our entire staff to hold me accountable to protect the interests of all of MGAM's shareholders, whether large or small. I am proud of our Board of Directors. Over the last several years and months, I have seen their hearts and their minds and have had a chance to look into their souls. My father, who taught me to choose my friends and associates wisely, would be pleased to know that I've had the opportunity to work with this Board of Directors. They will be stern taskmasters.

It is an honor to work with our Chief Financial Officer. As the second-largest individual shareholder, I am not only impressed with his professional capabilities, but also his personal and professional integrity. You should be especially pleased with the way that he vigorously and fearlessly defends the interest of our shareholders. Craig is a man of unquestionable integrity. I would trust him both with my family's fortune and my professional career. I would rather have a thoughtful response from Craig than the words from a legion of Madison Avenue or Wall Street spin doctors. He has the support and the respect of the entire management team.

Regarding my personal stock holdings, please do not be misled by the naysayers. As I did at the end of last year and earlier this year, and in the immediate future, I will be donating additional stock to my family's foundation. I will be giving some shares to family members and to my family partnership. Although I have never sold a single share of MGAM stock to date, if I do so in the future to pay taxes or repay debt to MGAM, please do not be misguided. I am committed to MGAM for the long run. You will not be surprised by learning after the fact that I have liquidated a significant part of my holdings.

Let me conclude by stating that our staff and management team are committed to building shareholder value consistently over the long term. We are committed to personal and corporate integrity. I know that many of you share these views, and we will do our best to earn your confidence and support in the future. Finally, I want to extend a special thank you to MGAM's founder, Gordon Graves. As a result of his efforts and leadership in building this company, MGAM has a great opportunity to play a material role in furthering the development of Native American gaming and other gaming sectors. As MGAM's Chairman, Gordon will continue to build his legacy and retain his well-deserved unofficial title of Dean of Interactive Gaming. I remain convinced that Class II and video lottery gaming will grow substantially over the next few years, and you can be assured that everyone at MGAM will carefully plan and execute our strategies to continue to design and deploy the very best games for customers, to provide the very best possible working environment for our talented and dedicated staff, and to build shareholder value. Julia, we are ready to move into the question-and-answer period.

MS. JULIA SPENCER: We are going to let Gordon be the “dean” of the question-and-answer session.

MR. GRAVES: Let's cut loose.

DAVID BAIN, SEIDLER AND COMPANY: I did sort of a back-of-the-envelope type forecast on Class II gaming devices, what the market could look like in three years or so, and taking into account the political situation, the federally recognized tribes, the population in different jurisdictions, I have come up with a number a little bit under 40,000. I was wondering whether you have tried to forecast this out, and what kind of numbers you were looking at, and maybe a little specifics as to jurisdiction.

MR. GRAVES: As you know, obviously, there are lots of big variables here, and we're going through a period with a new set of rules at the NIGC, and a whole new situation here, so it could vary all over the place, but I think certainly Clifton is best qualified [to talk about that]. He looks at that all the time, and tries to figure that out. We feel that the opportunity in Class II gaming is extremely large. That is dependent, as you well know, on whether other forms of gaming are approved in the jurisdictions where our current or potential Class II gaming facilities operate, but we do not feel that the rate of growth in Class II gaming is over for our nation. In fact, we see more and more Native American tribes who are in either Class II or Class III gaming now embracing the growth in gaming, and we have an extremely high level of interest from tribes who have not previously been involved in gaming and opening up Class II facilities. It is not possible to accurately put a range on the Class II opportunity, but the management team is convinced that it remains very large.

DAVID BAIN: During the quarter, it looks like there were more MegaNanzas installed than Reel Time [Bingo]. Can we get a little color on that, and any news with the MegaNanza?

MR. GRAVES: We continue to install MegaNanza machines for any of the tribes who ask us to do so. We also install Reel Time bingo. Most of the installations of MegaNanza were at tribes that had been running MegaNanza prior to the NOV being issued to one of the tribes, and we have agreed to continue to support that. Currently, we have appealed the case, which was dismissed based upon a jurisdictional issue, and we also have a tribe, the one that received the NOV, which is involved in the administrative process. The first activity of that administrative process will be after the first of the year, and it could take some time to have the administrative process go through the entire round of discussions, and for the NIGC's executives and for the Native American tribes involved to arrive at a conclusion. But we are prepared to support our tribes in the event that those NIGC discussions or mediations go well, and also, we have a number of actions available to us to support our tribes with other games and systems, if the tribes determine they would rather switch out to other standard-sequence bingo games.

DAVID BAIN: With inventory doubling over the quarter, one would think that you're poised for a huge potential future order, and one would think that it would not be in Oklahoma, since it looks like it would be of such bulk. Can we get any kind of color on at least what jurisdictions you are looking at, and some of the capacity there, currently?

MR. GRAVES: Let me say that you are absolutely correct. We're ready. If somebody wants a bunch of units, we are ready. Certainly, there is one way you can assure that you're not going to get the big orders, and that is if you do not have a product to deliver. So we're ready. I do not think it is probably very wise for us to talk about jurisdictions, but let me say that there are a number of jurisdictions where it is not just one jurisdiction. There are a number of our jurisdictions where there are big quantity opportunities.

DAVID BAIN: Can you discuss the hold per day per machine and some of the trends you're seeing?

MR. LIND: We are pleased with the trends in the hold per machine. It is not to say that they are trending upward. As you know, as we attempt to optimize the financial return of individual tribes and locations, we work with the tribal operators and continually add machines at their request, up until the time that we feel that it [the hall] is oversaturated. Currently, we have many locations where people are waiting in line too long during peak days and hours to play our games, and we aggressively work with the tribal leaders to put those [extra machines] in. We have, as you know, at least four different games and game types and gaming systems operating out there, and we have adopted as a policy a position that it only helps our competitors for us to give out public information about the overall performance. As you know, we are under confidentiality agreements with all of our tribes, so we cannot discuss any locations. We expect, because we're going to aggressively continue to put out machines, to continue to drive the hold per machine down as we increase our revenue and we increase the tribes' revenue as well.

DAVID BAIN: Gordon, as Chairman, will you continue to be working with the tribes as well, acting as a liaison of sorts? Also, on Phil Hogan, if you guys have any updates there?

MR. GRAVES: We don't have any updates on Phil. The other question -- yes, I am going to keep being involved with the tribes. Not on a day-to-day basis, as I sometimes have done in the past, but you couldn't tear me away. It is a great pleasure, and we have a great relationship with those tribes. I am going to stay involved with them. I would say that it will be more social, probably, than it has been in the past, but now that I have Clifton to blame for when something goes wrong, it will be more pleasant.

JEFF MARTIN, ROTH CAPITAL PARTNERS: If you look at the last three quarters – the second, third and fourth quarters of 2002 – it appears that revenue growth has flattened out from second to third and third to fourth. Is that due to contributions in the second and third quarter from the sale of Class III [machines] to Washington State? Could you give us a little more detail on that, if it is not the case?

MR. LIND: Obviously, the spurts in income we see from the relatively small sales of Class III player stations causes some erratic fluctuation from quarter to quarter. While the market in Washington State still has plenty of growth opportunities, those opportunities are now driven by the expansion or opening of new facilities, as well as tribes’ passing milestones that let them put in new machines. So, as we did over the first three quarters, you do see some fluctuation. Also, as you are aware, in the last half of the month of June and in the months of July and August, we were busily rolling out an entirely new gaming system, for which I made the decision to jump a generation of architectures, and therefore, it took us longer than expected to roll that out, because we were caught unexpectedly in the middle of a generation change that I had approved, and we were at the point where we could not go back to an older generation of software that was based on an earlier architecture. I think that the distractions of the end of the third quarter and the entire fourth quarter, with a number of issues, not the least of which have been the NIGC and the resulting rollout of this new game, are what affected the third and fourth quarters, and caused it to appear that earnings have gone flat. We will correct that this quarter, and the management team is committed to doing everything in its power to achieve consistent quarter-to-quarter growth, and as Gordon said, we believe that we have never had more opportunities to expand our operations, and therefore, we think that we will achieve that goal.

JEFF MARTIN: Did you have any installations outside of Oklahoma during the quarter?

MR. LIND: Sure.

JEFF MARTIN: Are you able to speak to the number of states, excluding Oklahoma, you had installs in?

MR. LIND: Let me say that – consistent with my earlier comments about not wanting to help our competitors – I do not want to go into the details of the other states. There were two new jurisdictions that we added. The fact is that there are more installations to come in those jurisdictions, and I intend to adopt a policy of talking about things after the fact rather than before the fact, and we will be keeping all of the investors posted as we make major new installations in new venues. We're working in a large number of jurisdictions right now, in several areas of our gaming activities, and also in our future intended gaming activities.

JEFF MARTIN: Is it out of the question to ask how many of your 635 installs of the New Generation [machines] were in Oklahoma?

MR. LIND: The vast majority of those installations were in Oklahoma.

JEFF MARTIN: Do you have an R&D headcount for the fourth quarter versus third quarter?

MR. LIND: It is growing out of control. Let's go onto the next question, and let me pull out my headcount sheet and give you exact numbers. That involves a group of different departments in the company. I can tell you that it has doubled over the last six months.

JEFF MARTIN: When you have the number, I would appreciate that.

MR. LIND: I will get that to you.

JEFF MARTIN: Based on the interruption of introducing a new platform in the third quarter, into the fourth quarter, would it be reasonable to assume that the hold will uptick from the fourth quarter to the first quarter?

MR. LIND: Would you repeat that question, please?

JEFF MARTIN: Would it be reasonable to assume that given the introduction of the new platform toward the end of the third quarter, that we might see the hold uptick from fourth quarter to first quarter, since you were essentially working out the bugs with Reel Time for most of the beginning of the fourth quarter?

MR. LIND: As you are aware, historically, the fourth calendar quarter -- our first fiscal quarter -- is always our slowest quarter. So yes, we have been delighted with the continued progress of the rate of increase on the hold of Reel Time, but we are moving into the quarter and the season when typically, bingo players and people who frequent Native American casinos might divert part of their revenue. So we have never forecast in the past, and do not forecast this year, that the first quarter will be our best quarter in hold per machine. Rather, this quarter will be down, compared to what we expect the second quarter to be after the first of the year and once we get past the holiday season.

JEFF MARTIN: Craig, what was the income tax for fourth quarter?

MR. NOUIS: For the year, it was $15,384,000. For the fourth quarter –

JEFF MARTIN: So that would be about $3.5 million?

MR. NOUIS: $3,400,000.

DAVID EHLERS, LAS VEGAS INVESTMENT ADVISORS: Given the fact that it was a difficult year, you guys have done pretty fine. I would like to ask you whether you can clarify the situation with the New York Lottery contract. It seems like there are a lot of different interests and different parties to this contract. I'm wondering whether you could tell us what is going on there, and tell us, as best you can, what you can see.

MR CLIFTON LIND: As you are aware, the New York lottery issued three different RFPs [Requests for Proposal] for the Racino system to serve the eight tracks in New York. They issued one for the central system, which we were the successful bidder on. They issued an RFP for the player stations to go into the facility and to hook up with our central system, and as you are aware, there were four winners on that. And then they issued another RFP for a testing lab, and Gaming Laboratories International was selected as the winner of that. We have given what we believe to be the final draft of the contract to the New York lottery staff. We have gotten their comments back on that. We have included their comments in another draft, and it is currently the subject of review internally, for budgetary reasons, and also with other state authorities outside of the lottery who have input into that. We hope to be pleasantly surprised and making an announcement shortly that we have signed the last draft of the contract that has been sent out; even after it is signed, there will be a 30-day period while the controller of the currency in New York State reviews the terms of that contract. It can take up to 30 days; we expect the turnaround to be quicker than that. We are very pleased with the progress that we have made in the contract negotiations, and are honored to be working with the New York Lottery staff, which has done just an extraordinary job. To my knowledge, they have not issued any final contracts for the four vendors that were selected to provide the players stations. I'm sure they are involved in the same contract negotiation process that we are in right now. We continue to have meetings with not only the New York Lottery and its technical staff, but we continue to have regular meetings with the vendors of the player stations that will be hooking up to our central system. As you are aware, there is a constitutional challenge that is underway. Although it is unreasonable for me to speculate on the outcome on that, let me say that better minds than I feel that the constitutional challenge affecting this system will not be successful. It is a New York Lottery hope that this system gets on sooner than later. There are a number of tracks that have already committed to go forward with this. There are another group of tracks who want to negotiate further with the state over revenue shares. We expect all of that to move ahead smartly, and I want to add that because of the uncertainty associated with the timing of the signing of the contract, there's absolutely no revenue [from the lottery] included in our forecast for fiscal year 2003. Depending on how many of the tracks sign on at the initial opening and how many come on over time, the initial few months could have a negative impact on earnings. However, we are confident that ultimately all of the tracks will sign on, and we are hopeful that the number of player stations that are hooked up to this system is at the upper end of the limit that New York State estimated.

RONALD ROTTER, RLR PARTNERS: My questions are related to speculation on what is going on in Oklahoma in the race tracks, in terms of putting in slot machines. How would that impact your tribes? What is the physical proximity of these race tracks to the halls where you have your machines? There is also speculation about putting in Class II machines. What is the probability of Class II machines versus Class III machines? And then, the logical question from that – what is the likelihood that you would be competing for putting in those machines?

MR. LIND: It is too early to tell. There is not sufficient data to know where all of that is going to come down. As you can imagine, there are passionate interest holders on all sides of that issue, including our tribal customers. We intend to do everything in our power to support all our tribal customers. I know that they will be involved in any potential negotiation with the State. As you are aware, the new Governor-elect campaigned with a major platform of getting a lottery approved in the state of Oklahoma. As you are also aware, the citizens of Oklahoma defeated that effort in the last attempt to get a constitutional amendment to make it legal for the State to run lotteries. If the Governor and the citizens of Oklahoma approve a lottery, then there is an entire additional set of relationships and negotiations that will take place because of Native Americans' special rights to conduct any form of gaming that is being conducted within the State. We have the race tracks, both the quarter horse associations and thoroughbred associations, who have an interest in the outcome of this. We have the Native American tribes who have a great interest in the outcome of this, and we have a Governor whose first obligation is to get a lottery approved and get revenue going from the lottery. And expansion of other forms of gaming could theoretically hurt the lottery, unless the state gets a significant cut of the revenue from these other forms of expanded gaming. I know that it is not the answer that you want, but it is simply too early to tell how all of these negotiations and the effort to pass a new constitutional amendments will affect our tribes. We think that the effect will not be sudden, and that because of the number of regulatory and legislative hoops this has to go through, we would not expect to see any impact on us for at least 12 months, or maybe 18 months, even if the lottery or the race tracks got expanded rights to do gaming.

RONALD ROTTER: I know this past year was certainly unusual -- in normal times, what would be the expected seasonality of revenues? You mentioned that the first fiscal order is usually the slowest. Going from there, how would you expect the normalized revenue streams to be, on a quarter-by-quarter basis, fiscally?

MR. LIND: The first and the second quarter are our two slowest quarters. [During] our third fiscal quarter, which is the second calendar quarter, our gaming activities normally increase, and our fourth fiscal quarter is normally the best quarter. The distribution around all of that swings within a few points around 25 percent of the average for the year, and as we have introduced non-traditional electronic bingo games, we think we are seeing a trend that is erasing that seasonality. But the first two quarters are 2 to 3 percent each below a pro rata distribution. The third quarter is maybe 1 percent above a pro rata distribution, and the final quarter is 3 to 4 percent above a pro rata distribution of income throughout the quarter.

RONALD ROTTER: So there is not any few huge variance between the quarters, but just minor variance.

MR. LIND: That is correct. It used to be much more significant when we only had traditional electronic bingo games playing.

RONALD ROTTER: Thank you.

STEPHEN NEREN, FAHNESTOCK AND CO.: In view of what appears, at times, to be manipulation in your stock, I've strongly suggested in the past that you consider New York Stock Exchange listing. I am curious – has that been taken up by the board yet?

MR CLIFTON LIND: The board has asked to do a study of that, and will report back to me.

STEVE NEREN: Any idea how quickly that can be?

MR CLIFTON LIND: Our next board meeting is scheduled for the second week of December, and we expect Craig to have a recommendation at that time.

STEVE NEREN: Considering the increase in your inventory, you obviously did this, as you have pointed out because you anticipate the possibility of some substantial new orders. Since you have increased your inventory now, rather than waiting for something like Red River, some of these orders would appear to be in new jurisdictions, which I think you may have alluded to. Just calculating what you have done in the past, it would certainly appear that if these orders are placed reasonably early in the year -- again, I am assuming that you expect that as a possibility, since you have it in inventory now -- it would certainly appear to me that your earnings could easily well exceed the $2.60 you gave us [as] the upper end of the range. Are you once again being ultraconservative?

MR. NOUIS: We always hope to surprise and reward our shareholders by exceeding the guidance. I do not feel in this case that we are being ultraconservative. As you had pointed out, and Gordon and I stated earlier, a number of the opportunities that we have alluded to are for a very significant number of installations of either brand-new or expanded facilities. [multiple speakers] When you go into a new jurisdiction or expand an existing jurisdiction very significantly, there is a significant amount of effort put in to promoting the new facilities and training new players and bringing in new players to those facilities. For example, if we go into a facility that currently has 300 machines and increase it to a facility that has 900 machines, there is a curve where initially the hold per machine for the larger number of machines will reduce rather dramatically as we are building the playership as those new facilities. So we take a very cautious approach, and expect our team to over-deliver in that regard, but certainly, depending on the timing and depending on the jurisdiction, of which there are several that we are contemplating installations in, as we said, we could achieve the management team's goal of being at the upper [end of the] range, or exceeding that. However, you know very well that there are so many hoops that a sovereign nation must jump through to get in the position to be able to conduct or expand gaming, and many of those issues are out of our control, and therefore, it is difficult for me to be precise on the timing. But the earlier it happens, the better we will do, and it is beyond our control. [If] they happen later in the year, then it will be harder to exceed that range or get at the upper end of that range. But you can be sure that the management team is keenly aware of the impact that early installations and quick promotion of these new facilities plays in our ability to deliver earnings growth to our shareholders.

STEVE NEREN: You mentioned a large increase in reorder expenses in the fourth fiscal quarter. Can you break out those expenses?

MR. NOUIS: We will post on our website an expanded balance sheet and income statement, so that any interested investor or analyst can go to it and extract that information.

STEVE NEREN: In the past, we have talked about the possibility of a [wide-area] progressive [game], either doing it yourself or with a joint venture partner. Is there any further contemplation about that?

MR. LIND: Yes.

STEVE NEREN: Anything to report?

MR. LIND: We expect to be involved in wide-area progressives, early on, after the end of the calendar year, in a number of jurisdictions, including current and new jurisdictions for us. But to go beyond that would only help our competitors and cause deals to fall apart at this time.

STEVE NEREN: Thank you.

MR. NOUIS: Getting back to your legal question, the legal expense from the fourth quarter was actually down from the third quarter. As you are aware, in the third quarter we had significant charges relating to the offering, while the [other] legal expenses were down pretty significantly, but still for the year, which we disclosed in the press release, legal expenses went up for the entire year.

STEVE NEREN: In the fourth quarter, the biggest impact you had was the period of time when the Chickasaws were down, or when you were replacing the machines with the Reel Time, and the disruption in player familiarity and speed of the game. Is there any way to actually quantify what that cost you in the quarter?

MR. GRAVES: There's no question that we could come up with an estimate of that. I want to say that we are focused on building the revenue in the future and the past is the past.

STEVE NEREN: Thank you.

BILL BRADY, PRESIDIO MANAGEMENT: In your [FY 2003 EPS] guidance of $0.47 to $0.50 and $2.30 to $2.60, what is the number of machines that you base that on?

MR. LIND: There are no major installations included in that forecast for this quarter. Just our normal growth in excess of a net 200 machines per month, phased in evenly over the quarter.

BILL BRADY: The $2.30, the downside would be, again, 2,400 machines? Six hundred a quarter?

MR CLIFTON LIND: I'm sorry. I though your question involved the first quarter. For the year, we have included in our forecast placing 3,000 additional Class II machines, and are confident that we will do that.

BILL BRADY: So it's 600 for the first quarter and 3,000 for the year?

COMPANY REPRESENTATIVE: That is correct.

DAVID PYLE, BOSTON PARTNERS: Could you help me explain SG&A being $19 million? This is for fiscal year 2001 -- you listed it as $19.5 million, but in the 10-K, it is $15.3 million. Tell me how I reconcile those two. I realize that on the 10-K there's more detail and breakdown, and I'm just trying to put those two numbers together.

MR. NOUIS: For last year’s 10-K, there were some reclassifications that we made to last year's numbers. So [that] we can compare apples to apples, we made those changes and put it into the press release.

DAVID PYLE: But operating income did not change.

MR. NOUIS: That is correct.

DAVID PYLE: It is just moving from one bucket to another.

MR. NOUIS: That is correct.

DAVID PYLE: On the inventory, the machines that you have an inventory of -- are they able to go into all different jurisdictions -- with the exception of Class III, obviously -- but they can go into all different jurisdictions, so you do not have to build a machine specifically for Oklahoma or for other jurisdictions?

MR LIND: All of our machines are built to Class III standards, and we have to change out glass, obviously, and we have to change out, in many cases, a button panel, but other than that, all of our equipment is designed and built to be able to be switched back between Class II and Class III jurisdictions, or vice versa.

DAVID PYLE: You signed a few deals in the quarter with regards to game titles, with several companies. Could you just update us where those titles are in developing, and when you expect to roll those out?

MR LIND: On each of those deals, that are several games that are in design, and we will roll out games from both of those relationships probably at the end of the first calendar quarter.

DAVID PYLE: Do you see those as new placements of machines, or as replacing existing machines, or a combination?

MR LIND: It would be a combination of that. These will not be the only deals that you hear about. We are working on other proprietary relationships with people who have particularly good assets that we can take into Class II gaming. So these will just be the first of many. Let me add that with our system, we are able to change the game on a player station with great ease – with very little effort.

DAVID PYLE: Thank you.

SCOTT GAMBILL, EMERGENT FINANCIAL: I recall that this transition of management issue was brought up at the annual meeting back in May of 2000, so since you brought up the issue of people being hoodwinked, or the market possibly been manipulated by shorts, I just wanted to point out that it is not something that just happened overnight. As a matter of fact, I recall Gordon decided he had to stay on because of the needs of the company, for an extra year or so.

MR. LIND: On that, let me say that somebody says it's not good to change horses in the middle of the stream. But you're always in the middle of the stream. This thing is something that was long overdue, and thank God we are in a position now where everybody feels like it is the right thing to do. I think the excitement level around here is high. I think we are all enthusiastic about this transition. I know I am. It was hard work. I thought when we got involved, all you had to do was announce that we were going to have this transition and it was a done deal, and it is much more complicated than that, especially inside my own brain. Our staff did a great job. Our Board of Directors did a great job, and the future really looks bright for us.

SCOTT GAMBILL: My question has to do with the Mikohn licensing deal. I really did not see much more about that. Can you detail that a little better for me, how that fits with some of the other design groups?

MR. NOUIS: It is one of our standard licensing deals, where they have given us the right to take their titles into Class II gaming venues, and upon additional negotiation, certain other video lottery venues,. We have two of their game titles under development, currently.

SCOTT GAMBILL: Can you say which ones? Or do want to not disclose that at this time?

MR. LIND: We have a highly trained and skilled game design team who gets real upset with me when I make decisions for them.

SCOTT GAMBILL: Understood. Can you say when you plan to have something in the market?

MR. LIND: It will probably be on (indiscernible) -- a more recent one. It will probably be April when the first two games – as you know, we go through extensive testing. All of the major providers to the gaming industry have to be particularly diligent now, so although we can design a game very quickly, we test it internally for a long period of time, send it to the gaming lab for certification, and in many cases have to send it to state labs, as well, to get it tested, and we do not want to prematurely roll a game out there before we have had a chance to do a thorough job of testing it for game integrity. We have the tools and the people and the proprietary technology to implement games very quickly – the testing portion of that is, by far, the long pole in the tent on getting our games out there.

DAVID SCIALLY, KINGSFORD CAPITAL: Can you give some explanation -- you had growth sequentially of about 7 percent in player stations, but the net revenue is down by 8 percent.

MR. LIND: As we discussed, in June, we took 25 percent of our Class II player stations out of the system, and they were down for a number of weeks before we first started rolling out the beta version of the skipped generation standard sequence bingo game. It took us throughout the end of the fourth quarter to get that game optimized to the point that it was earning equal to what the other game that it replaced was, so we had a rather dramatic dip in revenue from a large group of our player stations, which affected our growth in revenue by shadowing the growth we were having in the other venues.

DAVID SCIALLY: Another housekeeping question. In the full year, you said the SG&A was $34.2 million, and the quarter was $9.5 million, but when you do the calculation on the nine-month number, you come up to a little bit higher SG&A being attributable in the fourth quarter. Can you explain the differential there? Is it, again, a reclassification?

MR. NOUIS: It was just a reclassification. We went back and on a go-forward basis, we've come up with our groupings for SG&A, and it includes the salaries and wages, has no impact on operating income, and so it is just our classification, going forward.

DAVID SCIALLY: Cap[ital] ex[penditure] spending in Q4?

MR. NOUIS: The cap ex spending for Q4 was about $6.6 million.

DAVID SCIALLY: What do you anticipate next year being?

MR. NOUIS: For next year, the way we look at cap ex spending is really – the big driver in that is our player stations that we placed in the Class II markets, and going on the fact that we generally have about 200 new player stations put out per month, times 12, a good estimate might be 2,400, at an average price of about $5,000 to $5,500 per unit. That generally represents about 75 percent of our total Cap Ex, so as you expand that out, we are looking at probably in the $17.5 million range.

MR. LIND: Let me add that that does not include the capital equipment we will put up in regard to the New York Lottery contract once it is finalized. However, we have the ability to finance that through a number of sources, if we choose to do so, and in addition, that does not include any of our potential commitments on these major new venues that might be open during the second, third and fourth quarters of this next calendar year. So timing, just as I had to give a range to you on the earnings, we would also have to say that that Cap Ex could grow rather dramatically if we have good news to report early on in the year.

DAVID SCIALLY: As far as the inventory, you had said that there were 1,555 player stations in that $14 million?

MR. GRAVES: That is 1,555 new player stations in that number.

DAVID SCIALLY: How do we equal that – what is an apples-to-apples measure of that, versus that of the previous period?

MR. NOUIS: As of the prior period, the number was 300 and some odd. We said it in our press release.

DAVID SCIALLY: Okay. So roughly [a] 1,200 difference.

MR. NOUIS: Yes. Roughly 1,200 difference.

DAVID SCIALLY: What is the total value, right now, in your PP&E, of electronic player stations and book value?

MR. NOUIS: The total amount of net book value in our PP&E is about $40 million. 75 percent of that is player stations.

DAVID SCIALLY: Thank you very much.

CLIFF JOSEPHY, HD BROUS & CO.: Just to follow up on that SG&A reclassification from last year, could you just explain what was reclassified?

MR. NOUIS: The depreciation and amortization we kept as a separate line item, as well as the cost of electronic player stations sold. Everything else is pretty much grouped together, and included in the SG&A. That would include salaries, legal -- everything else.

CLIFF JOSEPHY: So the SG&A from last year was $15.325 million, and the salaries and wages were $6.176 million, so that shows us $21.501 million, and now it is $19.508. What is the difference here? Exactly?

MR. NOUIS: We will have to get back with you on that one. It is a reclassification, and again, it had no impact on operating income, so I would be glad to get back with you on that.

MR. LIND: We will post that information on the website. Let me say that we have simultaneously been doing -- with this telephonic conference call, we have also had a webcast underway. Most of the questions on the webcast have been asked an answered. However, we will answer all of them and post all of the questions on our website, so that all the investors can have the benefit of that.

MR. GRAVES: Thank you very much.

OPERATOR: Ms. Spencer, there appear to be no further questions. At this time, I would like to turn the call back over to you.

MS. JULIA SPENCER: Thank you so much for joining us. We will see you next quarter.

OPERATOR: This does conclude today's conference call. At this time, you may disconnect.

(CONFERENCE CALL CONCLUDED)

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