Multimedia Games, Inc.
HOST:  Mr. Gordon Graves
DATE:  July 16, 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 this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference up 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 morning, everyone, and welcome to the Multimedia Games Investor conference call for our third quarter earnings.

I'd 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 actual results to differ materially from those expected including, but not limited to those described under "Item 1. Description of Business Risk Factors" contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000, which are incorporated herein by this reference.

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

MR. GRAVES: Thanks, Julia. As most of you know by now we more than doubled our basic earnings per share over what we earned for the same period last year.

We made almost $2 million in after-tax earnings on outstanding basic shares of 5.65 million, or 34 cents per share, compared to 14 cents per share for the third quarter last year. Last year after-tax profits were $832,000 with 5.6 million basic shares outstanding.

Our EBITDA for this quarter was $6.1 million as compared to $3.7 million for the third quarter last year, and 3.95 million in EBITDA for the second quarter of 2001.

We're very proud of this outstanding growth. It reflects on the quality of our people, but it also is very much a result of what I think is unparalleled market strength that we've got in Indian country, and the success of our new generation of games, which are the MegaNanza™ series of bingo games.

We continue to see a remarkable demand for this product. A little over 60 days ago when we held our second quarter conference call, we had 700 MegaNanza player stations installed. Thirty days ago, on June 15th, we had 1,000 units installed. On June 26th, we had approximately 1,160 stations installed, and today that number has increased to 1,477 units. The average installation for the third quarter was about 260 units per month.

We've been a little bit pleasantly surprised that although we've seen a little bit of reduction in hold per machine that we're still up above the $200 per machine per day unit. Our average daily hold per MegaNanza player station for the week ending last Tuesday, which was our last full week measurement, was $204 per unit, and we continue to receive a fee of 30% of that hold.

Of course, we still expect the average daily hold per machine to gradually decrease in the feature as we put in more and more player stations to get to the optimum number in terms of impacting our earnings as well as the hall's earnings, but it's holding up very well. Further, we continue to secure new orders and our backlog today is still substantial at approximately 700 units. We've now installed about 500 of our Fruit Cocktail™ version of MegaNanza in 5-cent, 10-cent, and 25-cent wager denominations.

We found that the quarter version is performing better by far than the lower denominations and we're in the process of working with our customers to adjust the mix of denominations for Fruit Cocktail to optimize the hold per machine across all denominations. Within the next 90 days, we expect to release at least nine new MegaNanza themes, which I believe will bring us a surge of additional orders.

As of today, about 404,000 of the 1.8 million publicly traded class A and B warrants have been exercised, increasing the company's net worth by $3.2 million. We continue to believe that most of the remaining 1.4 million public warrants will be exercised by the redemption date of August the 10th, next month. As of the end of March, there were 5.26 million net common shares outstanding and this number has increased to 6.16 million as of the end of June. As a result of these other exercises, we expect the number of net outstanding shares to reach approximately 8.0 million by the end of this fiscal year which is September the 30th.

And even with this dilution, as I've said recently, we believe our basic weighted average earnings per share for this fiscal year will exceed last year's by closer to 100% than 80 percent, which was our last guidance on this matter. That's assuming that we continue to place 200 machines per month in the fourth quarter, and I see no reason we won't be able to do that.

We expect our proxy play system for internet customers to be installed for the Lac Vieux Desert Chippewa Tribe of Michigan in the next few weeks. The tribe has decided to test it in a beta free-play mode for a few weeks, probably at least 60 days. Before they convert the system to play for money, they still plan to file with the federal courts for protection against any prosecution or forfeiture action by the Department of Justice.

We believe that the Indian Gaming Regulatory Act gives the tribes the right to offer bingo proxy play service that crosses state lines. But there is some contradictory case law on the subject, which we discussed in some detail in our 8-K that was filed on June the 26th. We will of course continue to monitor the legal landscape regarding this project and we could adjust our plans if the legal risk appears to outweigh the financial benefits.

We expect to continue to expand our fleet of Class II recurring revenue games for a long time to come. Presently there are about 200 tribes in the US offering gaming, and right now we have our equipment in about 100 native American-owned facilities. Over the next couple of years, I think we can add a meaningful number of new tribes and facilities to those currently using our technology and games. And I think we can gain additional business from practically all of our existing customers.

Our balance sheet is improving almost every day, and our new generation of games are gaining more and more political support from Indian country. Our quarterly earnings continue to grow at a remarkable rate, and we continue to build upon the strength of our middle management and software staff.

Our management team did a great job this quarter. Our return on equity was more than 40% on an annualized basis as compared to 25% last year. And our return on net revenue increased from 10% to almost 17% compared to last year. And probably most impressive to me was that Frank Rehanek and our financial staff was able to turn out this quarter's financial report in 15 days, including the Fourth of July.

We now have a lot more shares outstanding than we did before and since our stock price has done so well our number of fully diluted shares is even higher. Consequently, we probably won't see anything like 140% EPS growth rate or 40% ROI in the coming year. But we are very confident that we can continue to grow at a rate that we can all be very proud of and to become an even more significant player in bringing new innovative technology to the gaming industry.

Clifton, do you have anything you'd like to add?

MR. LIND: I'm sorry, Gordon?

MR. GRAVES: Do you have anything you would like to add?

MR. LIND: Sure. I'd like to say first that I think that our company's been very fortunate, and that our management team of Gary, Skip, Brendan, Ed, and Frank have worked very hard to help us take advantage of this opportunity that the long-fought legal battle to get this new generation of games into the forefront has let us benefit from.

I'm very proud of the progress that Jeff, Joe, and Bo, our software team leaders are making. And I'm especially proud of the progress that we've made in the areas of field service and customer support.

You know this very impressive growth in our number of MegaNanza machines out there included an installation of a new system and a new network at every one of the facilities that we're in.

And I can't underestimate the many long hours that customer support staff, field service staff have put in to bring these new games to our customers. And I am very, very pleased with the way this team of 180 people who put their oars in the water every day to help Multimedia Games, and therefore their shareholders, have performed under good times and bad times, and sure that even though Gordon and I spend most of our time trying to anticipate the opportunities and the challenges of the future that as we found out in these last four years that both the opportunities and the challenges will be different than we see them today.

But I can't think of a stronger team or a more exciting team to represent the shareholders and I am very confident in our ability to continue to do a good job for the shareholders because of the staff that we've been able to put in place over the last few years.

MR. GRAVES: Thanks, Clifton. Frank Rehanek, our Chief Financial Officer is with us today. Frank, do you have anything that you'd like to add?

MR. REHANEK: No, nothing that wasn't covered in the press release. We're real happy about the increase in our revenues. We're real excited about the contribution to revenue that the new generation of games has made and we just look forward to the future.

MR. GRAVES: Thanks, Frank. All right. I'd like to open it up for questions if we could.

OPERATOR: Thank you. The question and answer session will begin now. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1-4 on your pushbutton telephones. Should you wish to withdraw your question, press 1-3. Your questions will be taken in the order they are received. Please stand by for your first question. The first question comes from Dave Ehlers. Please state your question.

MR. EHLERS: Good morning, gentlemen. Congratulations on a nice quarter. Could you tell us something about your net cash position at the present time and how far the debt -- the very much declining debt has been paid down? And you commented on your dilution effect, and I wonder if you could tell us also what your depreciation was in the just ended quarter?

MR. GRAVES: Clifton, would you like to answer that?

MR. LIND: Sure. Dave, how are you this morning?

MR. EHLERS: Pretty good, Clifton.

MR. LIND: Thanks for the question. We currently have about $3 million in cash balances as of today. And as you are aware, we have a floor in our bank debt of $4 million. So our bank debt is still $4 million, and in addition to that we have about $1.4 million that we owe as a result of the NGI settlement.

We should -- we plan to refinance the bank line after the 10th of August and I'm working on that now with a number of interested major banks, at which time we'll -- because of the refinancing -- be able to reduce our prepayment fee and to pay the bank line down to zero.

So by the end of the year or the middle of September we expect to be out of bank debt altogether and also to have paid down -- paid off the NGI settlement. We'll probably have $10 to $12 million in the bank as of August the 15th and that'll probably get down to $7 or $8 million by the end of the year.

We have -- we'll of course invest that in some secured interest-bearing near-cash investment that rolls periodically. We're going to go ahead and invest probably another $2 to $3 million in more equipment to take care of expected new-generation orders.

And in addition to that, many of our tribes are asking for our help in arranging for expansion of their facilities, which would enable us to be the primary occupant. Either through making small loans to them to actually do some small improvement in the permanent real estate or most often it's to move in some portable trailers or portable buildings which will let them add to the number of machines that we have.

So we'll probably look at $1 to $2 million of those type of investments between now and the end of this calendar year, which will of course pay for themselves through us retaining an increased share of the hold until we get back whatever cash investment we've made. And then thereafter of course we would maintain the right to have the great majority of the equipment in any of those small expansions that we helped with.

MR. EHLERS: Clifton, can you give us some -- thank you very much. Can you give us some example -- what can you tell us about developments in other states or jurisdictions at this time?

MR. LIND: Well, we have -- as you know, we have put our first bunch of machines into New York. We expect to not only increase the number of machines that we have in those existing facilities, but also to place machines with another tribe. And as you're aware, we have run a successful test in California and we intend in the next quarter to start placing machines selectively in a few halls in California, where they have reached their maximum number of machines and are in a position to need more equipment to satisfy their players. And we -- there is another contract that we expect to sign this week to deliver the first bunch of machines to another gaming state. And although the first order is only going to be for a hundred machines, we expect that to grow quite substantially between now and the end of the calendar year.

MR. EHLERS: I remember when you used to think a hundred machines was a lot of machines.

MR. LIND: Yeah.

MR. EHLERS: I thought you were going to say about ten machines there.

MR. LIND: That's why I went to work for you, Gordon.

MR. EHLERS: Listen -- Frank, would you like to say something about our depreciation expense?

MR. REHANEK: Yes. For the quarter, we had roughly $2.6 million in depreciation and amortization expense and then for the year to date that brings the total to roughly $7.2 million. Most of the increase is due to -- goes along with what Clifton was saying about with the additional machines being placed in the field.

MR. LIND: Just to further comment on that, Dave, we were coming to the end of the depreciation schedule of most of our existing equipment. So in the next three or four quarters our depreciation expense from older equipment is going to be falling off. So as long as we keep placing these rental machines at the rate we're doing, we'll of course be offsetting that. But I don't expect to see an increase overall, a significant increase in the amount of depreciation that we've been seeing on a quarterly basis.

MR. EHLERS: Okay. Very good. One other thing and that is - has there been anything that -- I think most investors in this -- most investors as you guys have made - so patently and carefully made us all aware of -- anything the NIGC may do? Is there anything new with respect to Cadillac Jack, that finding that by that staff member? What if anything can you tell us about that whole activity?

MR. GRAVES: Well, I can say that it looks like Cadillac Jack is going to challenge that case, and I think they've got a good chance winning on that. We haven't heard anything with regard to MegaNanza. We haven't heard anything formally. But I suspect there's a good chance we're going to have to challenge them in court, maybe not. We might not have to. But we're now working on and talking to the tribes about a number of different options for both new MegaNanza-type bingo games and instant ticket games that will allow us to be responsive to any reasonable changes that the NIGC might make us or want us to make to MegaNanza. So if they're willing to sit down and talk with us, and they said they would, I think we can avoid a court case.

MR. EHLERS: Could you tell us anything about the composition of the NIGC now at the present time? Monty Deer is apparently the chairman and you've got two other ladies that are lawyers and both tribal members. Is that correct?

MR. GRAVES: That's correct. And, you know, there's -- as in any small group like that, well there's differences of opinions among the different commissioners, and sometimes they vote together and sometimes they don't. I would say that -- well, it's difficult to talk too much about or speculate on where they're coming down. You know, as I said, they've said they'd sit down with us, but from past experience in dealing with the federal government it's difficult for us or the tribes to take too much comfort in them saying that. I think that we can design a game that will work under just about any set of rules. We just need the NIGC to set a set of ground rules and know that they're not going to try to change them on a weekly or a monthly basis.

I do get the impression that some of the tribes are even thinking about a preemptive strike in bringing a suit against the NIGC very, very soon. I don't know for sure whether that'll happen. But if it does, let me say that we and the tribes both have a lot more money and a lot more savvy than we did when we fought and won the MegaMania case. Further there's much, much stronger case law in our favor now than there was back then. And we, and when I say we, I mean Indian country, we have the law on our side and the money to fight for our rights without jeopardizing our financially driven goals. And so whatever happens, we feel confident that we're going to prevail.

MR. EHLERS: That's very helpful. Do you have anything to comment with respect to - there has been a tremendous surge in the number of machines outstanding since the time of the annual meeting, which as I recall was around nine [hundred] or nine and a quarter. And you indicate now there's --

MR. GRAVES: 1,400.

MR. EHLERS: 1,477 units.

MR. GRAVES: Yeah.

MR. EHLERS: With 1,477 these have -- the install base of these units has sharply accelerated in the last - if you take a look at how long it took you to get the first half of that, the second half came much faster. What about your supply -- you've indicated that Bally is -- is Bally able to supply you as much product as you need?

MR. GRAVES: I think so. They've already delivered us about 500 units and they seem to be doing a pretty good job. And I know that we're getting ready to place some more orders with -- Clifton, would you like to comment on that?

MR. LIND: Sure. In addition to Bally -- first, we've been very pleased with the rate of delivery from Bally and we expect to have a long-term relationship with them. In addition to that, you know, subject to our review of the final agreement, we're also going to be purchasing some equipment from another major vendor out there and we're excited about that as well, and I'm sure we'll be purchasing more equipment from Bally.

With the volume of upgrades and modifications that we do through our own plant and because of the overcapacity in the industry right now, it is really kind of an optimum situation for us to buy some equipment from other vendors and us focus on just doing the upgrades and the modifications to take advantage of the new systems we're bringing out internally. So that's been a very pleasant relationship and one that we expect to continue and grow.

MR. EHLERS: Very good. That concludes my questions.

OPERATOR: Our next question comes from Larry Kaplan. Please state your question.

MR. KAPLAN: Hi, actually this is Stan Kaplan of Gro-Vest Inc. My question is to Gordon, Gordon, did the earnings report of Harrah's Casino have anything to do with the volatility of the Multimedia stock?

MR. GRAVES: I think it did. You know, I think there were a couple of things that caused that volatility, maybe three. I think that the fact that Harrah's announced they weren't going to meet their target and mostly because of the economic situation, I think that led a lot of people to believe that all the casinos more than likely were going to see their numbers being less than they had anticipated. And therefore they wouldn't have as much money to spend on capital equipment and therefore all of the -- virtually all of the equipment suppliers to the casino industry saw a big decline in their stock price. They've just about all recovered now.

I think that for us I think that the other thing that has affected us is of course we now have people exercising those warrants. So there are additional shares probably being put on the market from those shares. And then I think we got some, you know, back in the last 60 to 90 days I think we got some momentum buyers in our stock that probably didn't have any business being in our stock. And so I think it turns out that it was frightening to us all, but I think it probably was pretty healthy, too, what happened with that last week. I think that's basically what happened.

STAN KAPLAN: Thank you.

MR. GRAVES: Let me also say, I don't think -- the Harrah's thing I don't think affects us too much. I think that the bingo -- Indian bingo market is not nearly as impacted by the economic conditions as the casino industry where people have to spend a lot of money to travel.

STAN KAPLAN: Thank you, Gordon.

MR. GRAVES: You're welcome.

OPERATOR: Our next question comes from Charlie Jobson. Please state your question.

MR. JOBSON: Hi, Gordon and Clifton.

MR. GRAVES: Hi, Charlie.

MR. JOBSON: My first question is just kind of an income statement question. Do you guys have a forecast for salaries and wages and SG&A for '01 and '02?

MR. LIND: Yes, it's going to be growing fairly significantly. As you are aware, we've nearly quadrupled the size of our technical staff here in the last 14 months. And in addition to that, because of the growth in the number of the machines in the field we've added pretty substantially to the customer service and to the field support staff. And we've added to our marketing staff and particularly in the area of market research and we're rolling out the new player's club feature of all of our games. And so we've added some marketing people to support that. So I think that you will see that line item growing, but we do -- we think that the growth in that line item will be offset in savings that we have in other SG&A areas. So we do not expect SG&A expense to be an increasing expense percentage-wise, but we're going to invest heavily in people, which we think is going to prepare us to take advantage of the growth that we see in the marketplace out there, and particularly as we enter new markets, which we're doing even as we speak.

MR. JOBSON: So I've got you down for SG&A for $11.5 [million] for 2000. Would $13 million be a good estimate for '01?

MR. LIND: I think that's a pretty fair estimate, and again the relationship between that gaming revenue and SG&A we don't -- if anything we expect it to either stay flat or improve a little bit.

MR. JOBSON: Okay. And the salaries and wages -- that was $4.8 million in '00. Is that say, $6 million for '01?

MR. LIND: That would be a great estimate, yes.

MR. JOBSON: Okay. And now that we're really profitable, what would be the tax rate I should use for this year and next?

MR. LIND: We always put 40% in our projections and obviously we like to do better than 38 percent. And if we can work it down to 37 percent, I'll be happy with what we do. We have some discussions underway with the IRS right now, both on our tax books and on our financial books. We pretty aggressively, more aggressively than anyone else in the industry, write off our equipment. And the IRS right now is trying to get us to view our equipment as a slot machine with a seven-year life and we're trying to get them to view it as computer equipment with a much shorter life. And of course, as you know, on our financial books we write them off over 36 months. And so the tax rate is a little bit in flux here because we're, you know, and of course it's all timing issues. But we're working very hard on that. Our auditors and the tax folks at BDO have been very helpful with us in our discussions with the IRS. So we expect to prevail, but it's always a challenge to work with the bureaucracy.

MR. JOBSON: Okay. Thanks for that. And the bingo prize line item on the income statement is that -- is that going to be up a good deal or is that going to stay relatively constant?

MR. LIND: Well, that line item directly relates to our business in the MegaBingo line, and we are rolling out a new game in the next 30 days.

MR. GRAVES: The MegaBingo game, by the way, is our TV game.

MR. JOBSON: Yeah.

MR. GRAVES: That's run once a night.

MR. LIND: And we're rolling out a totally new version of that game, the first time in nearly 18 years it has had a face lift, and we're excited about it. We expect that line to grow, but we also expect the net gaming revenue to grow very dramatically.

MR. JOBSON: Okay. And last -- a question on the Oklahoma market. You've -- the vast bulk of the 1,477 have gone into Oklahoma. In the next six months do you expect that market to absorb what you put in there and do you expect continued sharp growth in the Oklahoma market?

MR. LIND: I think that we will continue to place equipment there. It will not be at the rate that we placed it in Oklahoma in the past. There's going to have to be some facilities expansion in order for them to just take more equipment. Right now our customers are taking out our competitors' equipment and putting our equipment in. But they get to some point where they need to maintain a variety of games. And so, as I discussed earlier, we're going to help them with that dilemma by providing access to some rental facilities or even in some cases some permanent expansion to their small facilities. We'll continue to place equipment there, but not at the rate we've done it. And it will pick up as soon as this additional floor space starts to come on line.

MR. JOBSON: Okay.

MR. LIND: By the way, in the two facilities where we have made arrangements for portable structures to go in, we've been very excited about the play and the ambiance that's been created in those portable structures. So we think it's a good opportunity for us.

MR. JOBSON: Do you think the market can absorb another 600 machines by the end of the year in Oklahoma?

MR. GRAVES: You mean by the end of this year?

MR. JOBSON: In the calendar, yeah, sorry.

MR. GRAVES: Oh, yeah.

MR. JOBSON: No problem with that.

MR. GRAVES: Yeah. By the end of this calendar year, sure.

MR. JOBSON: All right. Thanks a lot.

OPERATOR: Our next question comes from Steve Emerson. Please state your question.

MR. EMERSON: Congratulations on a great quarter.

MR. GRAVES: Thanks, Steve.

MR. EMERSON: What is your objective in terms of game mix between MegaNanza? You mentioned you have 500 of the Fruit Cocktail machines and then I know you do have other machines that are shortly to be out. But can you give us a flavor as to where you see this going?

MR. GRAVES: Clifton, would you like to answer that.

MR. LIND: Sure. Steve, I don't know if your question will be answered specifically by what I'm about to say. If it's not, just ask again. Obviously the mix of our product within a hall is determined by the absolute number of our machines that they have in the hall. Right now we have only a few titles out and we have more machines playing the same game than we would like to have. As you read in Gordon's release, we're going to have nine additional games out in the next 90 days. And that will bring us up to a total of 13 games on this particular system.

In addition to that, we have three different version of electronic pull-tab games that are in the engineering process, one very close to completion. So we'll start putting those games out and we'll leverage on the graphics that we're already using in Washington State, but continue to bring out our own titles as well.

We hope to negotiate some agreements, although we're sure they'll be non-exclusive agreements, to bring some other vendors' content -- some of our -- some of the folks we have relationships with up in Washington State, putting their content on our system. So I think that by the end of the calendar year we'll probably have 18 to 20 MegaNanza titles and also some pull-tab titles out there that you don't see today. And even in our largest facility that will reduce a number of machines playing each game to a small enough number that we'll be happy with the variety that we have on the floor.

MR. EMERSON: Okay. And can you characterize what the National Indian Gaming Commission's [NIGC's] point of view is? Are they after one particular game or one particular algorithm? Have you been able to smoke out what the bug in their ear seems to be?

MR. LIND: Gordon, do you want me to speak to that?

MR. GRAVES: Well, let's both speak to that because I'm sure we've got different opinions on it. But the way I see it is that the -- when Congress was passing the Indian Gaming Regulatory Act, the Justice Department went and testified and said if you allow -- if you put in this bill that the tribes can have electronic or electromechanical bingo or a game similar to bingo, you're going to end up with the equivalent of slot machines in these places. And Congress listened to that and then they finished their bill and put it out with electronic and electromechanical bingo approved.

Well, the Justice Department didn't -- wouldn't really let it sit there and I don't think that's anything that -- they continued afterwards to try to make law themselves. And I don't think there's any racial bias or reason for that. I think it's kind of like what Attorney General [John] Ashcroft said recently regarding racial profiling: That you can't just change the rules and expect the law enforcement people to follow those new rules -- that they've grown up in a culture and it takes lots of time and lots of training to change that culture. And I think that's kind of the situation here. They have tried as hard as they can to stop the successful games that do play as well as slot machines even though the law says very clearly that you can do it. And their primary focus -- and they have been successful also in lobbying and getting some of the people, as many people as they can in the legal area and some at the commission levels from the Justice Department over working in the NIGC. So all those people that come from a real strong background with the Justice Department are quite frankly, I think, trying to find someway to stop the expansion of gaming in Indian country.

And so if you look at -- we submitted five different games to the NIGC for approval. We -- after MegaNanza we didn't get any -- we've only had one game that they've given a comment on, and that was a game called EverGreen that did very, very well, and that's the only game that they've given us an opinion on and it was a negative opinion. It was a negative opinion that I'm sure we can go back to court and challenge now and win on it based on these court decisions we've got in the past. But the fact is that we've got a number of people in the NIGC that see their role as stopping the expansion of gaming, and then there's another group of people in the NIGC that see their role as in fact doing what Congress said, and that was to help the tribe to expand gaming through technology, and for their main focus to be on stopping organized crime from being involved and making sure the games were fair. So I don't -- it's impossible to sit and say is the NIGC is giving this message or this message. There's different people in the NIGC that have different agendas and I don't know whether that answers your question. Clifton, do you have anything you want to add to that?

MR. LIND: No. I just think that none of the regulators could have anticipated the way that technology enables the high-speed play of bingo games. And it's going to take time for the bureaucracy to change its culture to accept what the law clearly allows us to do. And I think, Gordon, as you and I have been told personally and as we know, the Justice Department's number one enemy is the speed of play. And the thing that we do so well is make bingo games play quickly. And so -- because of that dichotomy of views right there, there's going to be some conflicts and we're going to, as you said earlier, you know, they can't lay down any set of rules that I think [would prevent] our team [from] design[ing] an exciting game for our players to play.

MR. EMERSON: Sounds excellent, gentlemen. And I'm looking forward to these new games. I think the gist of my question was, "Are they after a particular game?" and it sounds like you have enough variety of games right now that it's going to be very hard for them to put a particular game out of business that you haven't already designed around as you said in your earlier comments.

MR. GRAVES: I believe that's correct.

MR. EMERSON: Excellent. How many fully diluted shares are we going to report on next quarter assuming full exercise of the warrants, and the stock stays around $20?

MR. GRAVES: Well, fully diluted will probably be still close to nine [million] like it was this quarter.

MR. EMERSON: Okay. Gentlemen, I think you very much for an excellent quarter. Keep up the good work.

MR. GRAVES: Thanks so much.

OPERATOR: Our next question comes from Scott Gambill. Please state your question.

MR. GAMBILL: Good morning, guys. I have a couple of questions here. The first is we'd expected some dropping off of the Legacy games once MegaNanza came out, so I was wondering how that was doing? I'm also curious if there's been any increased interest in the sector because of the IGT/Anchor Gaming deal? And then since you mentioned you have some product going into California following a successful test, can you talk a little bit about how well the games were doing? Are they --

MR. GRAVES: Legacy games -- for the month of June, the Legacy games -- total hold for the Legacy games was off about 30% from what it was a year ago.

MR. GAMBILL: Okay.

MR. GRAVES: And most of that -- a couple of the games are really -- in terms of hold per machine -- are higher than they were last year. One of them is down, but most of that I believe is as a result of reduction in number of machines. We've taken quite a few machines and converted them over to MegaNanza. Clifton, would you like to comment on that?

MR. LIND: No. Other than to say, Scott, that we've been pleased. We had forecast about a 40% decrease and so we're pleased that the games have held up better than we had forecast. The fact is there are an awful lot of loyal bingo players who have been playing our other Legacy games for four to five years. And as we found in Washington State, they're going to continue to play those games even though we bring out these new exciting games. We don't think we're going to ultimately totally cannibalize those games. We think our new games are bringing new players into the bingo halls and casinos, and so that's good for the industry and good for us as well.

MR. GRAVES: In terms of the IGT/Anchor merger, I think that that's going to keep IGT -- I don't think it's going to have much impact on us. I think that it'll keep IGT and Anchor pretty busy absorbing each other and working out all the problems that you always have with a merger. So that's going to keep them pretty busy I think for a couple of years or at least a year and a half. And I doubt if they'll -- I think the probability of them getting into a new business like Class II gaming goes down as a result of the merger. I think the primary impact on us is that it probably will increase the amount of discussion going on about consolidation in the rest of the industry and that could have some impact on us. But I don't think there's much direct impact at all.

MR. GAMBILL: Good.

MR. GRAVES: And on your third question I'd like Clifton to answer that because I can't remember it. What was the other question, Scott?

MR. GAMBILL: You had some successful activity in California and you expected some orders. I was wondering if you had -- if you could talk about how well the machines were doing in relation to the rest of the MegaNanza games out there? Are we performing about the same level of hold or --

MR. LIND: No. It's a little less.

MR. GAMBILL: A little less.

MR. LIND: They do about $150 per machine on the weekend and a little less than that during the week.

MR. GAMBILL: Those are still good numbers.

MR. GRAVES: Those are good numbers and we can get that up I think. We've got -- it's one thing when you go into California and we end up being the primary game and, you know, our game is a game where you play using a plastic card. It's a cashless system, so if you go into an environment where it's mostly cash, and you're just a small percentage of the floor, then you'd lose all those impulse buys that you get in Oklahoma. And we're coming out with a version that allows the cash player to just come up and start playing the machine to get those impulse buys. I think once that happens we'll be up relatively close to what we're doing in Oklahoma. I think everybody's going to be happy including us if it does $150 a day and I think that strategically that might be in everybody's best interest in the short-term.

MR. GAMBILL: Super. Thanks a lot.

MR. GRAVES: You're welcome.

OPERATOR: Our next question comes from Ronald Rotter. Please state your question.

MR. ROTTER: Hi, guys. Most of the questions have already been answered, but could you talk about what's going on in New York State? Could you talk about how long the machines have been there and what the daily win is out there? And also you talked about how on the Fruit Cocktail machines you're having much greater success with the 25 cent version versus the nickel version; could you maybe expand upon that and tell us what the average daily wins have been on the 25 cent version versus the nickel version?

MR. GRAVES: Clifton, would you like to answer that?

MR. LIND: Sure. The Fruit Cocktail game is out in the three versions, the nickel version, the dime version, and the 25-cent version. The hold on the nickel version, which was originally designed and put in to be an entertaining machine for the player that didn't have much money to spend, has been on the average since it went in probably about $116. The dime version has probably averaged about $150 and the 25-cent version has been way up there in averaging more than the average of our other games. So it varies a great deal.

MR. ROTTER: So that's over $200.

MR. LIND: Over $250, yeah, and that varies a bit by location. That is a game that we have found out that only the most sophisticated game players play the 64-coin bet. Most of them play an eight-coin bet, and so we're going to bring that out in even higher denominations here in the future. So that in the locations that have a lot of transient traffic where people stop by and want to bet a lot, and have a chance to win a lot in a short period of time, we're going to put out some 50-cent and dollar versions of that as well. So we're very pleased. Again, the nickel game is doing what everyone needs to do and that's provide some economical play for the regular locals. And then these other versions let the more spirited player get his thrill as well.

MR. GRAVES: In terms of New York, last week -- the week ending last Tuesday, one of the two facilities up there did about [the same as] our average. The other one did a little less -- did quite a bit less. Looking this weekend, looking at the numbers we did in both of those facilities it looks to me like those machines in both places are up doing at least as well as the average overall. We haven't run a detailed analysis on that and won't run until tomorrow. But it looks like it's coming up -- they're coming up where they're going to do as well as the rest of the network.

MR. LIND: And then we expect them to - as Gordon says - to continue to grow. I mean these are new machines in those new markets and --

MR. ROTTER: A learning curve.

MR. LIND: -- a learning curve as people learn to deal with our cashless system. And in fact to go back to the question about California, I mean one of the reasons that our equipment didn't do as well in California as the other equipment on the floor is that you do have to deal with a new cashless system. And we're modifying a version of the system so that we can come out with a version that's similar to the currency experience that most of the players have been trained on, so that they won't have to be dealing with a drastically different system. So that will help us in the future California market we think.

MR. ROTTER: Okay. Great. And then one final question. How long do you expect it to take to work off the 700 machines you have in the backlog?

MR. GRAVES: I think we can expect -- we'll do 200 a month for the next three months. But I think by that, you know, we're going to get a lot of additional orders I think.

MR. LIND: So we'll continuously be adding machines; the overall backlog might fall off a little bit, but we still expect to be able to place 200 machines a month on an ongoing basis.

MR. ROTTER: Great. Thank you.

OPERATOR: Our next question comes from Charlie Jobson. Please state your question.

MR. JOBSON: Gordon, a follow up question on Steve's question. If, say, the NIGC ruled negatively on MegaNanza some time in the [future], you know, six months from now or whatever, what would be the company's response to that, and can you outline your various alternatives?

MR. GRAVES: Yeah. If they did rule negative, the tribes would bring suit immediately and stop any type of enforcement action from getting started. And there's absolutely -- well, there practically would be no chance that they wouldn't be successful in that. And then I think that, you know, then we would argue that case in court and we'd argue it basically on the decisions that we've got on MegaMania and the court decisions that we already have in place. I can't imagine anything that they would come up with that the court decisions wouldn't cover. And in addition to that, by that time we'll have other versions -- we'll have pull-tabs and another version of bingo out and we'll start converting over to those other random number generator alternatives.

As that lawsuit goes along, so that by the time that -- there'd be a decision on that down the road whatever it might be, a year or two, we'd have a lot of them already converted over and be able to convert the rest of them over immediately by the small probability that we might even lose that case. I think our alternative is that we're going to challenge it -- well, the tribes are going to challenge it and we'll be right in there with them if that happened. And then we would accelerate the conversion over to these different -

MR. JOBSON: And is the conversion process just a matter of putting in a new chip and a different face glass on the machine or is there more to it than that?

MR. GRAVES: Well, it's -- we have to put a printer in for one version. We have to add a printer. And the other versions -- I guess the other versions are all just software. Is that right, Clifton?

MR. LIND: Yes. Of course, our machines can be ordered in a number of configurations. But the addition of the printer for the pull-tab games is the major distinction. Other than that it's a glass change and a software change. As you are aware, there are no chips in our system that have to be switched out and we can download it all from Central Control if we want to.

MR. JOBSON: Okay.

MR. GRAVES: We've got a lot of resources working on that back-up plan, Charlie.

MR. JOBSON: Okay. With the addition of a new manufacturing partner hopefully shortly, is there any reason why you couldn't start delivering more than 200 machines a month?

MR. LIND: To increase that number of machines delivered in a month, we're going to have to break open some of these markets, which we intend to do. You know, in the gaming supply business, most casino operators and tribal governments don't want to bet the bank on a new product until it's proven. So as we go into each of these markets, as we start off with a relatively small order compared to the size of the potential order, right now we are the market leader in the performance of the machines. And we expect in these new states that we're going into that we will receive very large follow-on orders, you know, some before the end of this year and certainly some in the next year. But our growth at greater than 200 a month is going to depend on us breaking into one of these other markets in a big way.

MR. GRAVES: Yeah. I'd say that just a little differently, basically the same thing. But we want to be in a position so that when we get one of these large orders, we're going to [be able] to respond and deliver a lot of units in hurry.

MR. JOBSON: Uh-huh.

MR. GRAVES: And so we kind of want to keep our powder dry. We would hate to miss a big order because we can't deliver a large number in a short length of time. So I think -- we kind of think the healthiest thing for us right now is to kind of hold it at 200 until one of these big orders breaks.

MR. JOBSON: Okay. All right. Thanks. And just a minor question. You know your forecast for this year of EPS up 100% up the range from 80% - is that off a base of the 46 cents last year before the charge or is that after the charge of the 38-cent number?

MR. LIND: That's off of the 48-cent number.

MR. JOBSON: 46-cent. Okay. All right. Thanks a lot.

MR. GRAVES: You bet.

OPERATOR: Our next question comes from Steve Emerson. Please state your question.

MR. EMERSON: In the quarterly expenses were there a decent amount of what you'd call non-repeatable items that held back your earnings a bit? Maybe you could comment. And as a comment it would save a lot of time on the call if you had a lot more detail about income statement and balance sheet items in your press release. Thank you.

MR. GRAVES: Clifton, would you like to answer that?

MR. LIND: Sure. There is -- if you take the quarter and even the year as a whole there are not a significant amount of non-recurring charges that have been in there. We've had -- we've been very aggressively adding to our field staff and our hardware staff and so we've seen a good growth in this last quarter in salary expenses. And also a good bit of growth in marketing expenses that weren't in the quarterly numbers before. In many regards these are catch-up areas for us that we were just keeping it so lean that we couldn't help to continue the growth in excess of 200 machines if we didn't add to our staff. But, no, there were not any large non-recurring items in there. But as you know because of the way that -- because of Frank's and my conservative background, we very aggressively expense and write-off capital items and very aggressively expense items that in other companies in our industry we find companies capitalizing. So I don't expect a fundamental change in our approach to doing business in the future. We prefer to let our earnings do our bragging for us.

MR. GRAVES: I'd say that we're seeing a tendency from the SEC (SIDE ONE ENDS) -- to try to cut out some of the conservativeness that we think makes sense. It seems right now -- you might kind of look at it as the non-recurring in types of -- (TAPE GOES QUIET) non-recurring item. But I don't know whether that'll happen or not. Clifton, what do you think?

MR. LIND: Well, I think that the SEC is focusing on income recognition as their number one topic right now and are trying to reduce management's ability to control earnings from quarter to quarter. And I think that by any standards, that both the accounting industry, our independent auditors, and our SEC reviewers will find our accounting practices to be among the most conservative in the industry. And so we may be -- we will do what's right and we will do what our auditors, our independent auditors want us to do, again, consistent with the conservative nature with which you and I, and Frank like to approach this sort of thing. But just because of the attention that income recognition is receiving in the entire financial accounting world right now, particularly the public accounting world, I think that there will be stronger rulings and stiffer guidelines that we will be having to comply with in the future. I can tell you this - it would shock me if any of our shareholders were ever hit with any negative surprises out of the way that we do our accounting.

MR. EMERSON: Oh, excellent, gentlemen.

OPERATOR: Our next question comes from Dave Ehlers. Please state your question.

MR. EHLERS: Yeah. I just had one more follow-up to this guidance of earnings per share being about double. That would indicate earnings per share this year of approximately 92 or 96 cents. To me that would indicate that your fourth quarter is going to be in the range of 40 cents or above. Is that a correct assumption?

MR. LIND: Of course a great deal of that, Dave, is going to be determined by our weighted average basic shares that are out there. But depending on what the correct assumption is for that, you know, that would be a good number. And as you're aware, you know, since next quarter is the end of our fiscal quarter, we focus on what the earnings are going to be for the year and we've seen some pretty dramatic growth here in the outstanding shares. And we've got a little bit of a lag as weighted average basic shares catch up with us. But that is the right range depending on how aggressively people come in with the exercise, not only of the public warrants, but we have some non-public warrants that are out there whose underlying stock has now been registered, and so people can exercise those as well.

MR. EHLERS: Clifton, what is the exercise price range on those remaining? Do I recall it was in the --

MR. LIND: $9.44.

MR. EHLERS: How much?

MR. LIND: $9.44.

MR. EHLERS: It's $9.44

MR. LIND: And it's $7.00 also.

MR. EHLERS: Okay.

MR. LIND: Yeah. Relatively small numbers.

MR. EHLERS: Okay.

MR. LIND: 20,000 shares at $7.

MR. EHLERS: Okay. But [what] would you think the weighted number in addition to the 1.7 million that we'll see being exercised now, [what] would you think the difference [would be] between that number and the next roughly million shares of dilution or thereabout? Would the weighted average price be in the $6.00, $7.50 area overall?

MR. LIND: Oh. It would be higher than that.

MR. EHLERS: What?

MR. LIND: It'll be higher than that.

MR. EHLERS: Well, I'm trying to get out to Christmas and see how much cash you've got and what not. But it seems to me that --

MR. LIND: By Christmas time we should have a sizable war chest of cash, Dave. Because we will see some more of these non-public warrants come in and we'll also see some of our very loyal employees who have waited so long for a financial pay day [exercise their options]. We'll continue to see them exercise some of their employee stock options which we're not at all concerned about.

MR. EHLERS: Yes. Those vest over five years probably.

MR. LIND: They vest over four years.

MR. EHLERS: Over four years, and so you've got -- they're not going to go out and exercise all their options and then, you know, go to, excuse the expression, Las Vegas.

MR. LIND: Yeah. But the largest -- you're absolutely right. But the largest block of shareholder options have to do with our 1996 plan, and many of those are totally vested at this time.

MS. SPENCER: Actually -- this is Julia, correcting that [earlier statement]. - The largest number of outstanding other non-public warrants are at $7.00, not $9.44. So there are about 262,500 of the $7.00 warrants and then 20,000 of the $9.44 warrants.

MR. EHLERS: But anyway, it's not $2.00. So it's a number like $7.00, be it $6.50 or -- I mean the weighted average has got to be a $7 to $8 number, which is still more incremental cash.

MR. LIND: That's correct. Julia, there are 20,000 shares at $9.44 and then you are correct, the larger number is at the $7.00 figure. Thank you for correcting that. I appreciate that.

MR. LIND: But anyway it's a large number, Dave, yeah.

MR. EHLERS: Well, it's an exciting story, guys and we're certainly glad to be aboard as we've told you many times.

MR. GRAVES: Thanks, Dave.

OPERATOR: At this time should anyone else have a question, please press 1 followed by 4 on your pushbutton phone at this time. I'm showing no further questions in queue.

MR. GRAVES: Thank you very much.

OPERATOR: Ladies and gentlemen, that concludes our conference for today. Thank you all for participating and have a nice day.

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