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Multimedia Games Reports Mixed Results

AUSTIN, Texas -- (PRESS RELEASE) -- Multimedia Games, Inc. (NASDAQ: MGAM) reported operating results for its fiscal third quarter, ended June 30, 2004, as summarized below:

                         Summary of Q3 Results
       (In millions, except per-share and player terminal data)


                                                Three Months
                                               Ended June 30,
                                                2004     2003  Change
                                               ------   ------ ------
Net revenue                                  $  36.9  $  37.9   (2.6%)
EBITDA(1)                                    $  23.0  $  20.0   15.1%
Net income                                   $   9.8  $   8.9   11.0%
Diluted EPS(2)                               $  0.32  $  0.30    6.7%
Average installed player terminals:
   Class II
   (Legacy and Reel Time Bingo(TM) games)      9,917    8,683   14.2%
   Class III Washington State                  3,162    2,244   41.0%
   Other gaming units
   (Charity and C-TILG(3) games)               1,639      ---    N/A
--------------------------------------------

Clifton Lind, Multimedia Games' ("Multimedia's") President and Chief Executive Officer, commented, "Today, Multimedia reported mixed operating results for the fiscal third quarter, reflecting both the growing importance of our initiatives to diversify our sources of revenue through the placement of new products in new and emerging markets, and lower-than-expected results from our Class II operations. Our Class II operations were impacted by a decline in the number of player terminals deployed, and a lower-than-anticipated hold per unit, which we believe were primarily due to the ongoing proliferation of games that may not meet the legal requirements for Class II games, according to published guidelines established by regulatory bodies.

"Our lower-than-expected third quarter results were partially offset by lower compensation expense resulting from lower employee incentive provisions, and a one-time adjustment from the over accrual of prior years' taxes that, combined, amounted to an aggregate of approximately $2.6 million after tax, or $0.08 per diluted share.

"During the quarter, the Company entered into two significant contracts for the sale of non-Class II player terminals. Recently, we concluded, after significant review, analysis and consultation with our Audit Committee and outside auditors, that these complex transactions did not meet certain revenue recognition criteria. The two sales would have contributed approximately $5.4 million in revenue and approximately $0.06 in diluted earnings per share of our fiscal third quarter budget. In both cases, we expect these units to be placed in service in the current quarter; however, we do not exercise final control over when purchasers actually place the player terminals in their facilities.

"Our revised full-year guidance acknowledges our lower installed base of Class II player terminals at the beginning of the period, the delay until early in fiscal 2005 of a significant order for non-Class II player terminals which until recently was planned for Q4, and the anticipated removal of our remaining Class II player terminals at one facility, which are being displaced by games that may not meet the guidelines for Class II games established by regulatory bodies, and which are being offered at lower economic participation levels than we are willing to agree to. As such, we are adjusting our full-year 2004 guidance to a range of $93.6 million to $96.2 million in EBITDA, and $1.20 to $1.25 in fully diluted EPS.

"While we are disappointed in the Q3 results and revised outlook for the balance of fiscal 2004, we continue to be focused on the long-term growth prospects for Multimedia, based on the application of our industry-leading technology in new and exciting markets. The contributions from these new markets accounted for approximately 18.7% of our total Q3 '04 revenue. Developments in these new markets include:

"As of today, our player terminal placements in the Alabama charity market have grown to approximately 1,600 units. We believe our strong and growing position in this market since first entering it in December 2003 is a direct result of the excellent performance of our offerings, as evidenced by our ability to garner a majority market share for incremental placements related to facility expansion over the last six months. Both of the first two Alabama charity facilities have reported plans for significant further expansions by the end of calendar 2004, and we expect to participate in those expansions. Consistent with our experience in other markets, we anticipate that new units placed in charity bingo facilities to meet peak weekend customer demand will have the effect of optimizing net revenue and EBITDA from these opportunities, but will result in a lower average hold per day.

"Late in the third quarter, we made our first player terminal placements in Louisiana, thereby entering our second charity jurisdiction.

-"Our California Tribal Instant Lottery Games ("C-TILG") products, which are offered at two California tribal casinos, now generate the highest average hold per day of any Class of games on our entire network. As the C-TILG units are converted to the same cashless, ticket in/ticket out 'currency' currently used on the Class III units operating in these facilities, customers will be able to move readily from terminal to terminal. In the near future, these C-TILG units will also be converted to the same currency platform and player tracking system. We expect this conversion will further elevate player interest in the product, and we continue to anticipate increased unit placements at existing C-TILG facilities, as well as at a number of additional tribal casinos in the state, even if additional tribes enter into expanded gaming compacts with the state.

-"In late June, Monticello became the fourth casino to go on line on the New York central determinant system."

Lind continued, "During the third quarter, we garnered meaningful market share for Class II placements in new or expanded facilities. For example, we secured 80% of the new floor space, or about 320 player terminals, at a recently opened facility in the Tulsa area. However, these incremental machine placements were offset by declines in units and/or revenue contributions at several other facilities, including the loss of more than half the revenue from a New York Class II facility whose operator opened an adjacent Class III casino, and the loss of approximately 150 units at a Kansas City tribal facility pursuant to ongoing jurisdictional uncertainty. Also, a significant number of player terminals were removed from several sites in Oklahoma, resulting from what the Company believes was our decision to adhere to our current economic participation model in response to a tribe's request for reductions in our participation.

"As noted above, our installed base of Class II player terminals was also impacted by the ongoing proliferation of games that may not meet the legal requirements for Class II games according to guidelines established by regulatory bodies. As such, we are eager for a resolution of proposed Oklahoma gaming legislation in the November voter referendum, which we believe would level the playing field by giving us the opportunity to offer the same types of games currently offered by our competition.

"During the quarter, we made the decision not to launch new gaming engines in the Oklahoma market. However, early in the fiscal fourth quarter, we began installing a new game in that market, one that has quickly proven to be more competitive than our other game offerings against the numerous games that may not meet the guidelines established by certain regulators for Class II games. The first 100 units of these new Class II standard-sequence-driven bingo games were installed in early July for one of our tribal customers, and to date, we have approximately 400 such games installed at 15 tribal gaming facilities throughout the state. As expected, this game has proven to be very popular with players, and in early installs, is producing roughly 35% better hold per day than our network average. Given current indications of demand, we expect that by the end of this quarter, the installed base of this new Class II offering will be approximately 1,500 units.

"Including new placements at new or expanded facilities in Oklahoma and reflecting the above noted anticipated removal of our remaining player terminals at one tribal facility, we currently anticipate placing more than 1,000 net new player terminals in Oklahoma before fiscal 2004 year end. In fact, as we now serve multiple markets, over the next two quarters, meaning by the end of calendar 2004, we expect to achieve the highest levels of player terminal placements for any six-month period in the Company's history.

"Our focus on developing products for new markets and on helping our customers expand in existing markets enables Multimedia to pursue a wide range of growth opportunities. Based on our success to date with our diversification strategy, we will continue to seek entry into other new markets where the application of our innovative systems, games and gaming engine technology will allow us to realize growth. My optimism for Multimedia's future is as strong as ever; this enthusiasm is based on expectations for the highest levels of player terminal placements in the Company's history early in fiscal 2005, as well as a growing number of new international opportunities, lottery market opportunities, new products for the domestic gaming and casino markets, joint venture possibilities, and new facility funding arrangements outside of Oklahoma.

"We ended the June quarter with approximately $30 million of cash on our balance sheet compared to approximately $36 million at March 31, 2004. The reduction reflects our investments in player terminals placed, funding of new facilities pursuant to previously announced development agreements, and the acquisition of inventory. Our cash affords us great flexibility to capitalize on the many growth opportunities that exist for us to further diversify our sources of revenue. We also ended the quarter with inventory levels at $27.2 million. We carefully manage our inventory to match levels to anticipated demand based on contracts and expansions. We believe the June 30 inventory levels will allow us to proceed with the growth in unit placements that we expect before year end, and we have excellent OEM relationships with manufacturers that we can call on to meet any new market demand that we generate."

Fiscal 2004 Fourth Quarter Financial Guidance

Multimedia Games provided Q4 2004 financial guidance and adjusted its FY 2004 guidance, which was last updated on April 29, 2004, as detailed in the table below.

Multimedia's Q4 FY 2004 guidance reflects the benefit of the expected placements of approximately 1,500 player terminals under our development agreements, and the expected placements of approximately 1,000 player terminals in other Class II facilities and the charity market. Our guidance also considers our current estimate of the Q4 FY 2004 impact from the reduction of player terminals in the Oklahoma Class II market at the beginning of the period, as well as some anticipated further reductions at facilities, as noted above. The fourth quarter guidance also reflects the recent introduction of new Class II and charity market products, the completion of the roll out of the Company's Gen4 gaming platform earlier this month, and the anticipated conversion of the C-TILG offering to a universal currency system currently deployed in the tribal casinos where the units are installed. Q4 2004 results are also expected to benefit from the two player terminal sales contracts in the non-Class II markets, which should result in an estimated $0.06 in diluted earnings per share. In addition, Q4 2004 and FY 2004 guidance reflect ongoing expenses for and investment in the New York video lottery operations. The Company expects to benefit from its role as the central determinant system provider and operator in calendar 2005, once the anticipated openings of the Yonkers and Aqueduct facilities occur.

Fiscal 2004 Third Quarter Results:

The decline in Q3 2004 net revenue compared to Q3 2003 primarily resulted from the sale of 1,062 player terminals in the prior quarter, compared to 30 player terminals sold in the current quarter, offset by an increase in the installed base of New Generation games and the entrance into C-TILG and charity markets. Multimedia and its customers continue to place incremental player terminals at facilities to meet peak demand periods, which has the effect of lowering the average hold per day while maximizing revenue and EBITDA contributions. As a result of these incremental placements and the continued impact from competitor games in Oklahoma that, according to guidelines established by regulators, do not appear to be legal Class II games, Multimedia experienced a lower average hold per day across its Class II network.

The impact on net income by the lower hold per day in the third quarter 2004 was offset by a benefit from an adjustment made to the federal and state tax provisions of $1.7 million, or $0.06 per diluted share, and a reduction of the Company's incentive accrual discussed below.

SG&A expenses increased $2.4 million, from $10.6 million for the June 2003 quarter to $13.0 million for the June 2004 quarter. The increase, as in previous quarters, continues to reflect higher salaries and wages and the related employee benefits and taxes due to the additional personnel hired to address gaming and system development needs and for the Company's New York Lottery operations. Additionally, travel costs rose, due to the entrance into new markets, primarily C-TILG and charity, and continues to be higher than normal due to the temporary assignment of employees to New York operations. Third quarter 2004 SG&A expenses benefited from a reduction of the Company's fiscal 2004 incentive accrual and resulting reversal of $1.4 million in compensation expense from the first six months of the year.

Income tax expense for the three months ended June 30, 2004 includes a benefit relating to an over-accrual from the prior year's state and federal income tax provision, resulting in a decrease in the current fiscal year-to-date effective rate from the expected rate of 38.2% to 33.7% for the nine months, and 26.0% for the three month period.

Inventory increased form $17.3 million at March 31, 2004 to $27.2 million at June 30, 2004 due to the purchase of additional component parts in order to have sufficient inventory required to produce player terminals the Company expects to deploy in the near future. As of June 30, 2004, Multimedia had 888 finished player terminals and 1,586 substantially completed player terminals in inventory at a cost of $5.4 million and $6.9 million, respectively, and component parts inventory of $14.9 million.

Notes receivable increased from $7.4 million as of March 31, 2004, to $9.1 million as of June 30, 2004. The increase was the result of advances made under development agreements of approximately $4.1 million, offset from payments made by customers on equipment notes of approximately $2.1 million.

During the quarter ended June 30, 2004, Multimedia capitalized $622,000 in costs related to the internal development of its gaming products and systems, compared to $501,000 during the quarter ended March 31, 2004.

For the quarter ended June 30, 2004, total additions to property and equipment ("P&E") were $22.9 million, representing cash cap-ex of $21.7 million and financed cap-ex of $1.2 million. For the quarter ended June 30, 2004, total additions to property and equipment ("P&E") were $22.9 million, representing cash cap-ex of $21.7 million and financed cap-ex of $1.2 million.

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