Multimedia Games, Inc.
HOST:  Mr. Gordon Graves
DATE:  May 7, 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 second quarter earnings. I'd just like to read a short statement before we start.

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 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 30, 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.

MR. GRAVES: Thank you, Julia. This morning we released our second quarter numbers for FY 2001 and as most of you probably already know, we more than doubled our basic earnings per share over what we earned last year for the same quarter.

We made about $4 million in EBITDA and 17 cents per share after tax as compared to $2.7 million in EBITDA and 8 cents per share after tax in the second quarter of 2000.

Our staff continued to do a great job. We've been able to take advantage of the dot-com slowdown by hiring a number of extremely talented technical people who have expertise in (a) man/ machine software, (b) communication systems, (c) database design, and (d) game development.

So, our R&D staff has increased by more than 50 percent in size in the last six months, and we can see a significant improvement in our productivity as we take advantage of the more powerful software tools that are available to us today.

During our last conference call in January, I said that my gut feeling was that we could possibly double our earnings this year, 2001, but that a 30 to 40 percent growth rate was much more reasonable. Well, our new Class II electronic games have performed better than we expected, and we believe now that we will see maybe not a doubling, but at least an 80 percent increase in earnings per share for the year. And that's based on the same number of shares outstanding. That assumes that the 1.8 million warrants that we have outstanding and exercisable at $8.00 per share will not be exercised until after September the 30th, which of course is our [fiscal] year end.

If we continue to add player stations for our new games at the 200 per month rate that we've been doing and we don't see any deterioration in the earnings per machine, we'll do better than that. But that probably is expecting too much. Today we have more than 700 units installed and playing the first of our new generation Class II games which we call MegaNanza™. We've got an order backlog for about 1,000 units. From the interest that we're seeing from not only Oklahoma, but other states like California, Florida, Arizona, Mississippi, New York, and Wisconsin, we expect to see demand for our Class II electronic games remain at 2,500 units per year or a higher rate for a long time to come.

Presently there are about 200 tribes in the United States offering gaming. And presently we have our equipment in about 98 Native-American-owned facilities. I think we'll have an opportunity to add more than 50 percent more facilities in the next couple of years; in addition, I think we'll have an opportunity to add more games and equipment in practically every hall that we're in now.

We're just now coming out with a wider selection of themes for MegaNanza, and we'll introduce a pull-tab version of these same themes soon. In addition, we're speeding up all of our Legacy Class II games, including a much higher-speed version of our Big Cash Bingo™ game.

We've been discussing our MegaNanza game with the National Indian Gaming Commission and Tribal Regulators and we have already made a number of changes to the way the game works to satisfy their concerns, which have had a minimum impact on player appeal.

Our litigators, who won our previous four court cases regarding our Class II games, feel very comfortable that they'll win if they have to go to court to defend MegaNanza. We don't believe that we will have to go to court. Nevertheless, our new pull-tab electronic game and the speeded-up versions of our Legacy games will provide insurance that we will be able to continue delivering these game themes regardless of what happens with MegaNanza and the regulators.

We've added a new line to our income statement that's helpful to us in evaluating our performance, and I hope that it'll be helpful to you people as well. As most of you know, we account for recurring revenue from our Class II electronic games as the total hold or win of those games. Since we play such a major role in bringing these games to the customer, we think this accounting is proper, even though about 70 percent of that hold or win is actually retained by our tribal customers. Most technology suppliers to the gaming industries who have recurring revenue, account for that revenue as that portion of the total hold that they get paid as a fee. In our case, that accounting approach reduces our revenue to about 27 percent of what we show at the top line at the present time.

As I said, we show this information on our new income statement as the line "net revenue." For the first six months of 2001, our net revenue was $16 million, and our income before taxes was $2.1 million, or 13 percent of net revenue. For the second quarter, income before taxes was 17 percent of net revenue and after tax for the second quarter was 10.5 percent.

The key factor that has allowed us to see profitable growth is our proprietary network, Betnet. Betnet is unique in its ability to allow players to communicate interactively. There are other gaming suppliers that have progressive networks, but I don't know of anyone else that has anywhere near the broad-band two-way communication capability that we do. It appears to us that Metcalf's rule will be applicable to Betnet. Robert Metcalf, the inventor of Ethernet and founder of 3-Com, said that the potential value of a network is proportional to the square of the number of participants on that network.

Certainly as we get more players on Betnet, we can give away larger prizes, and larger prizes increase wager rates. We also find that interactivity increases the social value of the games, and as we get more younger people coming to play, we're able to interest them intellectually - they are interested intellectually in games where they can apply strategy interactively in order to increase their probability of winning. During our last conference call, we talked at some length about our internet activities. Internet gaming is one venue where it's extremely important to the players if a game challenges them intellectually.

We've completed the code writing of our proxy play system and it's in test at the present time. I expect we will deliver it to our customers for internet use in another 90 days or so. We still believe that each of our tribal partners that offer our electronic games on the internet via proxy play can recruit about 200 online players 24 hours per day. And if they do that, it still appears that we will generate an estimated additional revenue of about $144,000 per day, from which we'll realize an EBITDA of about $30,000 per day for every tribal customer. If we can serve three aggressive tribal customers with this proxy play software, we believe they can recruit 600 simultaneous players online for 24 hours per day, and we could realize a $30 million per year increase in EBITDA.

There remains tremendous uncertainty in this vision of the future that I've painted for MGAM here today. New laws that significantly change the intent of the Indian Gaming Regulatory Act to expand commercial gaming by the use of the latest technology on or off Indian land could eventually reverse the entire structure of Native American gaming.

However, we do not see that that's very likely for the foreseeable future. In the rapidly changing world that we live in today, the foreseeable future is probably less than two years. But things look very exciting for us.

Now I'd like to ask Clifton Lind, our President and Chief Operating Officer and Frank Rehanek, our Chief Financial Officer, if they've got anything they'd like to add.

MR. LIND: Gordon, this is Clifton. I just wanted to say that our management team remains committed to keeping MGAM a market leader in this segment of the gaming market that we're competing in and I'm confident that we have the talent on board to overcome any challenges that come our way.

MR. GRAVES: Okay. Well, thank you. Then I'd like to open it up for questions. If anybody has any questions they'd like to ask, we would be open to answer those questions now.

OPERATOR: Thank you, sir. The question and answer session will begin now. The first question in queue comes from Mr. Jim Devlin. Please state your affiliation followed by your question, sir.

MR. DEVLIN: Yeah. Hi, Gordon, Jim Devlin from Raymond James.

MR. GRAVES: Hi, Jim. How are you today?

MR. DEVLIN: Pretty good. How about yourself.

MR. GRAVES: Great.

MR. DEVLIN: Super quarter. The company looks tremendous. Nice write up in Barron's over the weekend, obviously. I had a couple of quick questions here. The first one, the play levels, I think we talked about - do you have a feel for what the play levels have been coming in on a daily basis?

MR. GRAVES: Well, right now they're still over 200 - for the new MegaNanza they're still averaging over $200 per day per machine. We've now, as I said, got a little over 700 installed right now. Obviously there's going to be some place down the road that if we keep installing them that the hold rate per machine is going to come down. I don't know where that'll be, but for the time being it's holding up there extremely well.

MR. DEVLIN: Okay. And are you seeing any attrition on in the older games? How are those doing?

MR. GRAVES: No. We're not see any attrition in the older games. They're hanging in there. In fact, doing a little bit better than they did this time last year.

MR. DEVLIN: Okay. Now there was a major competitor of yours, I don't know, but in the same space, the bingo space, but recently filed for their second bankruptcy, Stuart Enterprises.

MR. GRAVES: Yes.

MR. DEVLIN: They have hand-held electronic bingo units. Is that something you guys would be - is that another market segment that you guys might be interested in taking a look at?

MR. GRAVES: Yes, it is. And it's something that we are studying at the present time and I think one of the big advantages of that product line is that it would represent a good entry for us into the charity marketplace. Obviously, our MegaNanza type of games and even our older Legacy type of games in the charity marketplace would probably do better than they do in Indian country because you're much closer to a population base.

But in order to get into the charity marketplace, in most cases it requires some changes in at least regulations and maybe in laws. And to do that - you have a lot better chance of doing that if you're already doing business in the charity marketplace. And so if we had that type of a product, it would make it easier for us to enter into that market.

MR. DEVLIN: Okay. And my last question here, again, another competitor of yours, GameTech International, has recently started doing some beta testing for I guess parts of Canada [that] have opened to electronic bingo. And I think they've also branched out into Europe in some English bingo halls. Is there that type of opportunity for the MegaNanza product or just your product lines in general, foreign venues for, you know, jurisdictional growth?

MR. GRAVES: Most definitely it's a big opportunity for us. You know, we've got such a tremendous demand in the US right now in Indian country that we're being pretty cautious about expanding, but there's no question there's a great opportunity internationally.

MR. DEVLIN: Okay. Great. Thanks a lot. Great quarter you guys.

MR. GRAVES: Thanks so much.

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

MR. EMERSON: Steve Emerson, Emerson Investment Group. Congratulations, great quarter.

MR. GRAVES: Thank you, Steve.

MR. EMERSON: You mentioned something about a pull-tab version. What is that? Is that a different lever?

MR. GRAVES: Well, right now - last November, the Federal Circuit Courts came down with three decisions having to do with electronic Class II games, which include bingo and other games like bingo, and the pull-tab game is one of the games similar to bingo that the courts clarified were legal in electronic form.

MR. EMERSON: Oh!

MR. GRAVES: And a pull-tab product typically is a piece of paper much like a scratch-off ticket, a lottery scratch-off ticket, except rather than scratching you pull a little window open.

MR. EMERSON: Okay.

MR. GRAVES: And in November, the circuit court in Washington, D.C. ruled that an electronic machine that dispenses a pull-tab and at the same time shows the results on a video screen as a slot machine display or any other type of display is in fact a legal Class II game. So it's just another way, Steve, of doing the random number generation.

MR. EMERSON: Got you. And when should you have your beta site units out?

MR. GRAVES: Well, there's a lot of work going on that right now. But I would say it'll be less than six months and we'll have it out.

MR. EMERSON: Excellent. And would that be in the same states you're in?

MR. GRAVES: Yes, most definitely. Those very same states.

MR. EMERSON: Okay. And you seemed to imply that you've got some orders for MegaNanza outside - in some of these other states. Where have you some trial units?

MR. GRAVES: We have some trial units in California -

MR. EMERSON: Okay.

MR. GRAVES: - and that's really the only place we have them right now.

MR. EMERSON: Okay.

MR. GRAVES: And they're doing pretty good up there. I think they're going to work fine in that environment. I think that's an environment where the tribes are looking at their 2,000 limit on how many slot machines they're going to put in. And obviously making a decision on how they're going to move forward and meet the demand that they've got for more than 2,000 slot machines is a big decision for them. This Class II approach is an alternative that looks very attractive to them, and we see a lot of interest. And we think there's a relatively high probability that that market will move forward with our product.

MR. EMERSON: Excellent. Going into your description of the opportunity in internet, tribal internet gambling, do you have any trial dates or are any of these tribes doing it in a non-game - a non-paid version? Or do you perhaps hazard a guess as to when you might have some paid trials?

MR. GRAVES: I think some place this summer I think that we will - it looks like right now like we'll have a paid trial some time this summer.

MR. EMERSON: Okay. And will that be limited to that state or will it be really accessible to the country?

MR. GRAVES: It'll be international.

MR. EMERSON: So it'll be out of the country or will it be located in the US?

MR. GRAVES: Maybe I should say it's throughout the country as well as international.

MR. EMERSON: Excellent. And you haven't been promised a massive legal fight the minute you open up?

MR. GRAVES: Well, we have a letter from the National Indian Gaming Commission that says that the use of this proxy play technique is legal in Class II. And we feel very strong that the Indian Gaming Regulatory Act gives the Indians the right to do this. But on the other hand, I think that any tribe that does it is probably going to have to - [there's a] high probability they're going to have to fight a legal fight. Right now we are dealing only with tribes that are willing to fight that legal fight themselves where we wouldn't have to enter into that except on a minor support role. And I think that's healthy for the entire industry that tribes are getting to the point that they're willing to take that leadership role.

MR. EMERSON: Okay. And could you go over that model? Obviously this is a fabulous impact where you got to the $30 million a year. I know you said if you had six strong tribes with 600 simultaneous -

MR. GRAVES: No. No. I said three tribes with a total, a total of 600 -

MR. EMERSON: 600, right.

MR. GRAVES: - 600 players -

MR. EMERSON: Yeah.

MR. GRAVES: - and they would be spending on the average of $30 per hour.

MR. EMERSON: Okay.

MR. GRAVES: - 24-hours a day -

MR. EMERSON: Uh-huh.

MR. GRAVES: And of that we get 30 percent. So you just go through that arithmetic of the 600 units, 24 hours a day, $30 an hour -

MR. EMERSON: Okay.

MR. GRAVES: - and unless I made an arithmetic mistake then it's -

MR. EMERSON: Okay. Does this - have any online casinos in the world done those kind of numbers, 24 x 7 times the number, 600 users? I mean what I'm saying is that a number that -

MR. GRAVES: - is that a wild speculation? You know, I just don't know -

MR. EMERSON: Okay.

MR. GRAVES: We just don't know.

MR. EMERSON: Okay. No problem.

MR. GRAVES: I would suspect there are people out there doing that much, but most of those companies are private.

MR. EMERSON: Okay. Now will it be one tribe or will it be a consortium of tribes that is willing to foot the bill for the legal fight?

MR. GRAVES: I think it'll be multiple tribes.

MR. EMERSON: Okay. Thank you very much. Excellent.

MR. GRAVES: Thank you, Steve.

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

MR. EHLERS: Yes. Las Vegas Investment Advisors. Great looking quarter, guys. I've got just a couple of brief questions and these are. Are you seeing - as you well know the warrants no longer sell at any premium relative to common stock. They sell for about an $8 difference and for a long time they did sell at a premium. Now that should suggest, if history is any guide, that you are probably getting at least some minor exercise of those warrants. Is that the case? Can you give us any light on that?

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

MR. LIND: Sure.

MR. GRAVES: I don't know of any exercise or even request for exercise that we have had. We have not yet got the shares underlying those warrants registered. The registration on those, we submitted the registration statement. We got comments back. We've responded to those comments and I think that was about two weeks ago that we did that. Clifton, do you want to answer that question?

MR. LIND: Sure. We got initial comments back. We responded to those. We got some follow-on comments. We responded to those and we expect to hear momentarily about the registration of the underlying shares. And, Dave, although we've had inquiries about the process that they would go through, we have not had any exercised at the current - to date.

MR. EHLERS: That may be because, Clifton, and I don't know, you just kind of answered that. Do you think that's because I'm sure that most of these people wouldn't care to take a registered piece of paper, the warrants and exchange them for an unregistered paper? So if there's been discussions it is possible and can you comment or not that these people will in fact do some exercising of those warrants when they can get back a piece of paper that they can sell.

MR. LIND: We certainly think with the stock at the level that it's at today that we'll start to see some coming in between now and November the 12th. That is correct.

MR. EHLERS: Okay. And I've got - can you indicate - you've got to be developing a fair amount of cash. I looked at your - I estimated your pre-tax income and I missed that during the conference call. Am I right that the pre-tax income was about $1.3 million in this quarter? And with your depreciation can you - do you care to comment on your financial condition -

MR. LIND: Right.

MR. EHLERS: - and your cash position, and what may have happened with respect to your debt?

MR. LIND: Certainly. That is continuing to hover down about a $4 million level, Dave. We are generating a great deal of cash, but at this particular point of time we are gearing up to deliver the back order of MegaNanza machines that we have. And so we're putting quite a bit of money into the pipeline to build this new equipment. However, we will have net free cash flow - significant net free cash flow by the end of the fourth quarter. And so in addition to the cash that we're generating if these warrants come in, we're going to have a sizable amount of money to make astute investments with -

MR. EHLERS: And my last question is, guys, could we get back to the - I believe it was Steve Emerson - let's get back to these, if we've got three tribes using this equipment, this new equipment that's coming on-stream in six months, if I understand that correctly. We think we can get - am I right in saying we think we can get 600 players doing about $30 an hour times 24 times 90 and that should give us our gross - that should give us the gross win? And am I right in assuming that the EDITDA will be 28 to 30 percent of the - your revenue will be 28 to 30 percent of that total number? How badly have I got that confused?

MR. GRAVES: I don't think you've got it very confused except that I think that you - the only thing I think that's important, Dave, is that obviously there's tremendous uncertainty in that projection because, you know, we don't have the product even out there yet at all. And I think once we get it out there I think it'll take a year or so to build to those type of numbers. But, yeah, I think that the basic numbers and basic arithmetic - I think that actually getting 600 players is reasonable. I know there are sites now that have more than 600 players playing bingo, mostly for free by the way, but there are sites that have people playing bingo - there's probably over 2,000 or 3,000 people playing bingo simultaneously on the internet at all times now. So the market size is there. Whether we can capture it, I think there's a lot of uncertainty. But, yeah, I think your arithmetic was right. Clifton?

MR. LIND: Yes. Gordon, it just depends on what kind of effort the tribes nationwide put into marketing this game and what sort of marketing support that we give them, of course. And, Dave, one of the things - we already have literally millions of people trained in the bingo halls playing these games. And so we're going to start off with an advantage over other sites and have great cross-promotion opportunities in all of the existing facilities. So Gordon is correct. We're going to have to build players and of course there's always a question of whether there will be a reaction to this proxy play by the regulators -

MR. GRAVES: Or Congress -

MR. LIND: - Or Congress. But we're starting with a great base of players who already get in a car and in many situations drive a great deal of distance to play our games. So we may be pleasantly surprised with the response we get to these at-home plays.

MR. EHLERS: Okay. Again, fellows, congratulations. It was a great quarter and I'm sure that you're very pleased and very hopeful for the future. Thanks.

MR. LIND: Thank you.

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

MR. JOBSON: Hi, Gordon, my congratulations on a wonderful quarter as well.

MR. GRAVES: Thanks, Charlie.

MR. JOBSON: I just wanted to outline, you know, with your new manufacturing agreement with Alliance Gaming, when do you think you can have 2,000 MegaNanza games running in the field? And as you see it today what's your view of the total number of machines market potential for MegaNanza?

MR. GRAVES: Would you answer that, please, Clifton?

MR. LIND: Okay. We will certainly have 2,000 machines playing by the end of our fiscal year if not before. That is both based on our continued in-house manufacturing capacity and the additional machines that we'll be buying from Alliance Gaming. The total potential of these machines is clearly a reflection of how many new jurisdictions we are successfully able to get them into. And we are currently talking with tribes from at least four other states where we do not currently have a significant number of machines. But in those states they would be interested in putting in significant numbers of our MegaNanza or our pull-tab system games. And so certainly the number can grow very large and be several times what we have out in the field today with our legacy systems.

MR. JOBSON: Would it be fair to say that 4,000 machines would be a reasonable estimate of the market potential or is it larger than or smaller?

MR. LIND: No. It's much larger than 4,000.

MR. JOBSON: Okay.

MR. LIND: And it just depends on in how many jurisdictions that the tribes see this as a viable substitute for maybe some gray-area gaming that they're doing today or to augment as Gordon said earlier markets such as California where they have a machine limit on the number of Class III games that they can run.

MR. JOBSON: Okay.

MR. LIND: And it's one of the complications there is that, you know, you may get in a jurisdiction where, for example, the tribes - the state might say if we're going to let them do more Class II gaming where we're not getting any income. You know, the states do not get any income off of Class II gaming and they get a significant amount of income off Class III gaming is that, you know, these machines may run for a while in a particular state and the state may say we might as well let them have full slots, at least we're getting a share of the hold on those machines. So that's a little bit of the long-term uncertainty, but we are convinced that with our ability to let players have interactive play and actually be playing against each other rather than the machine, that we will be providing the most entertaining content in the future. So we're excited about our ability to go head-to-head even with Class III slots because of the benefits of Betnet brings us as far as players actually getting to use strategies and have the enjoyment of playing against each other rather than just playing against the machine.

MR. GRAVES: Clifton, let me add - I think another reason we're going to have an advantage that will allow us to at least compete and be a player even if the large slot suppliers are able to come in against us in these Indian markets. Even if that happens I think that another advantage we've got is that with this interactive online system that we've got, we've got the ability to downline new software to a player station overnight. And we're getting where we're seeing that in many cases a new game has a relatively short life. And so being able to automatically change those games on those player stations overnight without having to go out and change the actual chips in each player station is another big advantage that we've got.

MR. JOBSON: Okay. Great. One question - also on MegaNanza, what's your strategy for refreshing the product going forward, you know, with your licenses and so forth? And then also, you know, how far in the future will you start introducing new Class II games?

MR. GRAVES: Clifton, you want to take that one?

MR. LIND: Sure. On our Legacy systems we'll bring out a minimum of one totally new Legacy game a quarter. We put quite a bit of effort into promoting the games, and so we get into some practical point where if the game is not trailing off in entertainment value, we like to promote it and leave it out there as long as we can. But we have the ability certainly to roll out one a quarter. We could go to two a quarter if we wanted to -

MR. GRAVES: I might point out that a new game really is actually a multiple number. As far as the player's concerned, it looks like a multiple number of games.

MR. LIND: Right. There'll be different graphics faces, games faces on it. In the MegaNanza game, we will probably get up to where we have 20 or more game faces on that running in the next nine months. And depending on how large the haul is, you know, 20 may be an adequate number or we may have to in certain halls have 30 different game faces running. The variety for our players and our customers is very important right now. But we have the ability to turn out games, and certainly faster than anybody in our market segment, and we're getting close to the point of being able to turn out games in competition with much larger organizations than ourselves.

MR. JOBSON: Okay. Great. And the last question with regard to California. I know you've gotten a lot of interest from the larger tribes that want to go over the 2,000 machine limit. How many machines - how many California orders do you have in the backlog and what do you think the timing and market potential of California will be for MegaNanza?

MR. GRAVES: I don't think we've got any in the backlog right now that I've quoted. But I think that there'll be at least - I think that - I think there's a good chance we can get at least 2,000.

MR. JOBSON: Okay. And you think that'll happen starting in the second half of this year and on into '02?

MR. GRAVES: Yeah.

MR. JOBSON: Okay. All right. Thanks a lot, guys.

MR. GRAVES: You bet.

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

MR. TIGERT: Hi, this is Peter Tigert of TriNet Capital Management. Congratulations, gentlemen, on a fantastic quarter.

MR. GRAVES: Thank you.

MR. TIGERT: My question is a follow up to the last conference call, a question on what is the progress that has been made since the last conference call to promote the company to analysts - to get the analysts on Wall Street more aware of the company?

MR. GRAVES: Well, we're now in conversation with at least five analysts that cover the gaming market -

MR. TIGERT: Yes.

MR. GRAVES: - and I'm optimistic that at least one or two of those will make a decision to write something on us in the next 90 days.

MR. TIGERT: That's fantastic. Well, congratulations. That's all I had to ask and keep up the great work.

MR. GRAVES: Thank you.

MR. TIGERT: Thank you.

OPERATOR: Thank you. Our next question in queue comes from Mr. Jim Devlin. Please state your affiliation followed by your question.

MR. DEVLIN: Yeah. Hi, Gordon, I just had two quick follow-up questions. At this point you guys have none of the MegaNanza games or the older games in any charitable halls? That is a correct assumption, right?

MR. GRAVES: Well, we've got some of our - we've got a few of our MegaMania - well, of our Legacy electronic interactive games running in one charity on a test basis at the present time.

MR. DEVLIN: Okay. Now, I know that Michigan within the last six months went to no maximums and you can roll jackpots to whatever level in the State of Michigan. I don't know if there are other states that are doing the same thing, but the charities keep complaining about getting beaten up by the casinos. Is there an opportunity for Multimedia Games in the charity market? And if not, why not?

MR. GRAVES: Yes, there is, there's a big opportunity. And there are a few states like Michigan that are starting to make changes that are going to make it possible to run our type of games and so it's something that's going to happen. It's just a matter of how fast it's going to happen. Typically from my experience in the lottery business and the charity business, once one state - one or two states, maybe three states have changed the law or the regulations to allow a new type of gaming, then it starts happening pretty fast elsewhere. But, you know, I don't know whether that's going to be in the next six months or the next year, or the next two years. My gut feeling is that we'll see it in the first state on a statewide basis or the first jurisdiction I should say, on a jurisdiction-wide basis in the next six months.

MR. DEVLIN: Okay, that's fair. Now the other question I had is, I guess November 12th is the day these warrants are due to be called in?

MR. GRAVES: I think that's right.

MR. LIND: That is correct.

MR. DEVLIN: Okay. At that time you guys will raise close

MR. GRAVES: No. I think it's $1.8 million at $8.

MR. DEVLIN: Okay.

MR. GRAVES: So it'll be a little - it'll be more like $15 [million].

MR. DEVLIN: Okay. About $15 million of cash.

MR. GRAVES: Yeah.

MR. DEVLIN: I mean you obviously won't need that type of money to ramp products at that point. They should kind of ramp themselves on the amount of machines you'll have installed. Do you guys have any specific plans you can share as to what the future looks like as far as a source of those proceeds?

MR. GRAVES: Jim, I think it's a little premature for us to talk about that much. We're seeing a couple of types of opportunities that we're excited about. One of those opportunities is to - we see some cases where there are some tribes that have more demand for machines, but who don't have the space for those machines.

MR. DEVLIN: Okay.

MR. GRAVES: And so we see some opportunity for us to use some of our capital to help some of the tribes increase the amount of space that they've got.

MR. DEVLIN: So either help them lease more machines or help them actual build physical structures?

MR. GRAVES: Build some physical structure. If you look at our machine, which takes up about 20 square feet, it costs us about $4,000 to build.

MR. DEVLIN: Okay.

MR. GRAVES: So if we put together a facility, a small facility to put around our machines, that facility's going to cost us on the order of $150 per square foot -

MR. DEVLIN: Uh-huh.

MR. GRAVES: - or another $3,000.

MR. DEVLIN: So actually building a Class II casino for an Indian tribe to kind of insulate your business.

MR. GRAVES: Or an expansion on their existing facility in most cases is I think a better way to look at it.

MR. DEVLIN: Okay. Great. Thanks a lot.

MR. GRAVES: So that's one opportunity, and then obviously there's some acquisition opportunities that we've got which obviously we're going to be very, very careful about. But we're starting to see some better opportunities in that respect as well.

MR. DEVLIN: Okay. Very good. All right, guys. Great. Thanks a lot again.

MR. GRAVES: Thank you.

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

MR. SCOTT: Hello. I'm from Xeron Heavy Industries and, Gordon, I have three questions. First of all, I'm very intrigued by your plans for building casinos and then filling them with MegaNanza. But have you considered stepping up buying back options in stocks and especially for the options - a dollar invested today may be worth $2 or $3 before the end of the year.

MR. GRAVES: We're really not considering that right now.

MR. SCOTT: Okay. For California and the MegaNanza there, would those be mainly going on the main casino floor or do you see them going into bingo halls?

MR. GRAVES: I think it's different in different facilities and it's a function of how much space they have on the casino floor. There's some of the tribes who have enough casino floor that they could accommodate more machines and others it would have to go into their bingo hall.

MR. SCOTT: Okay. And -

MR. GRAVES: And I don't have a real good handle on that, but from what I've seen so far I'd guess that's about 50/50.

MR. SCOTT: Okay. And also concerning the Barron's article, I wanted to ask you if you had any corrections or comments that you wanted to make on the article?

MR. GRAVES: No. I don't think that it's really appropriate for us to comment on that right now.

MR. SCOTT: Okay. Thank you.

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

MR. GAMBILL: Hi, Emergent Financial. Good afternoon you guys.

MR. GRAVES: Hi. How are you? We thought you were dead.

MR. GAMBILL: No. I'm back a second time. I had a question with all these orders popping up. If I remember right, your last quarter's backlog was around 1,000 units. It sounds like we're still there, so things are obviously holding up pretty good in the pipeline. With some of the stuff you're mentioning going forward, potential 2,000 orders, this kind of stuff, are we looking for a necessity to expand capacity in here somewhere? Is there a concern?

MR. GRAVES: You mean as far as manufacturing is concerned?

MR. GAMBILL: Yeah, that's right.

MR. GRAVES: No, I don't think so. We feel real good about this relationship we've got with Bally and their ability to build machines for us -

MR. GAMBILL: Okay.

MR. GRAVES: And we feel like we've got a lot more expertise in network management and game design than we do in inventory management and manufacturing. And think that this is a wonderful deal for us that for a very reasonable price we can get product without having to expand our manufacturing capabilities.

MR. GAMBILL: Super. Thank you.

OPERATOR: Thank you. Our next question comes from Mr. Peter Tigert. Please state your question, sir.

MR. TIGERT: Yes. This is a follow-up question. Gordon, are you seeing an increase in the number of people coming on the market, specifically programmers, better quality type of people with the slow down in technology?

MR. GRAVES: Yes, very much so.

MR. TIGERT: So you're able to hire those better quality people?

MR. GRAVES: Yes, sir.

MR. TIGERT: Okay. That's great. All right. Thank you very much.

MR. GRAVES: Yeah. It's the best - from that standpoint it's the best situation that we've seen in years.

MR. TIGERT: Yeah. I imagine so. That's good to know. All right. Thank you. Keep up the good work.

MR. GRAVES: Thank you.

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

MR. EMERSON: Yeah. The Bally relationship, is that also going to apply for your MegaNanza machines or is it strictly your original Class IIs?

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

MR. LIND: Right. No. We have an order in with Bally right now for a very large number of machines specifically for the MegaNanza product, and we are also ordering machines that we use in our Washington video lottery system as well.

MR. EMERSON: And are you also going to be using some of the Bally slot machine themes -

MR. LIND: We're using -

MR. EMERSON: - on some of your MegaNanzas?

MR. LIND: We have a license agreement on - for our Washington games to use all of the Bally themes in Washington State except the latest linked games that they have out. And they are favorably disposed to let us use their themes, after we negotiate a license of course, in other - in any other Class II venue that we wish to do that. Our ability to turn out our own games right there has currently positioned us in the market quite well and there is a plan for not only Bally, but hopefully for Williams and other manufacturers as well to put other manufacturers' game themes on our Betnet network.

MR. GRAVES: Let me add one thing to that. Bally has publicly said that they expect to have all their games converted over to the Microsoft platform by the time of the World Gaming Show in October. And I think once that they have converted those over, it will be a lot easier for us to technically convert those games over to run on our platform.

MR. EMERSON: Excellent. Congratulations. Keep it up.

MR. GRAVES: Thanks so much.

OPERATOR: Thank you. Our last question in queue comes from Archie McCall. Please state your affiliation followed by your question.

MR. MCCALL: I'm a lawyer in Dallas. Gordon, how are you?

MR. GRAVES: I'm fine, Arch, how about yourself?

MR. MCCALL: I'm great. Nice to hear your voice. I'm just so tickled to hear all this good news. My question was, has the company given any consideration to giving a senior citizen discount by issuing some sort of card, so in anticipation of getting large numbers of people who are also just coincidentally members of AARP, so that if there were to be legislation or regulatory moves that were unfavorable to the company that you would have sort of a built-in popularity among a large group of organized people?

MR. GRAVES: We haven't given that particular concept much thought. I think it's a good idea and it's something that we'll think about. Clifton, had you given any thought to that concept?

MR. LIND: Well, Arch, one of the features is our player's club, which runs across all of our player platforms, and we have just put an executive level position onboard to specifically promote the player's club functionality of our gaming system. Of course one of the things that we can do with that is track and reward various demographics. So I think it's a great suggestion - we had not thought specifically about AARP, but certainly have thought a great deal about how we appeal to and promote games and design games specifically to appeal to certain demographic groups.

MR. MCCALL: Good. Well, and the only other follow up to that - and it's a real tiny market and I don't know how you identify it or attract it - but early on the game had been promoted as sort of electronic busing, and it was convenient for those who were shut-ins and what not, who really could not get out, or take a bus, or get to the casinos, or Indian gaming places. And I wonder if that could also be part of your player club identification, you know, so that it did attract people who would otherwise not know about it, for example, and they could log on and their bingo fans - so that again you have something that's a protected group under the law like the Americans with Disabilities Act. So if it came to a regulatory or legislative fight that you've got some sort of built-in protection there, with a) AARP as I mentioned, with an organized group, and, b) with the Americans with Disabilities Act.

MR. LIND: Certainly there are gaming companies who have been successful in the past who have relied upon the American Disabilities Act for some expansion of their gaming opportunities, and that's one of the things that our litigators and advisors had suggested if proxy play in spite of the letters that we have -

MR. MCCALL: Uh-huh.

MR. LIND: - happens to get challenged. That's of course a good -

MR. MCCALL: Avenue -

MR. LIND: - response to that. Yes.

MR. MCCALL: Good.

MR. GRAVES: I would say that at some - I think in terms of proxy play, that might be more appropriate. In terms of just electronic bingo in the Indian bingo facilities, I think these three Circuit Court decisions give us such strong and clear case law -

MR. MCCALL: Uh-huh.

MR. GRAVES: - that it's just not anything -

MR. MCCALL: That's not a concern.

MR. GRAVES: - that's of concern, right.

MR. MCCALL: Good. Well, great. Congratulations and more power to you in the future.

MR. GRAVES: Thanks so much, Arch.

MR. MCCALL: See you later.

MR. GRAVES: All right.

MR. MCCALL: Bye-bye.

OPERATOR: Thank you. At this time there are no further questions. I will now turn the conference back to Mr. Graves to conclude.

MR. GRAVES: All right. I thank everybody very much and look forward to talking to you next quarter.

OPERATOR: Ladies and gentlemen, that concludes our conference for today.

BACK