BULKY DOCUMENTS
`
`(exceeds 300 pages)
`
`Proceeding] Serial No: 9.1 162078
`
`Filed: 03-27-2006
`
`Title: Trial Brief; Notice of Filing; Depositions
`and Deposition Exhibits; and Index to Notice of
`Reliance Documents
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`Part 10 of 10
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`INDEX 226
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`Page 175
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`107 of 978 DOCUMENTS
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`Copyright 2005 The Deseret News Publishing Co.
`Deseret Morning News (Salt Lake City)
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`May I 1, 2005 Wednesday
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`LENGTH: 624 words
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`HEADLINE: Travel dollars stretch far with $8 dinners - even in Las Vegas
`
`BYLINE: Valerie Phillips Deseret Morning News
`
`BODY:
`
`Food Network host Rachael Ray travels around finding "Great Eats on $40 a Day," according to the title of her book
`and TV series. Well, I could call my family's spring vacation "Great Eats on $8 a Dinner."
`
`Here's my tale of three great meals, each around $8:
`
`Bright Angel Restaurant, Grand Canyon: After a four—mile hike on the Bright Angel Trail, we headed for some
`refreshment in the nearby lodge. The Adobo Chicken Sandwich, a grilled chicken breast marinated in spicy adobo, topped
`with a chunky guacamole and pepper jack cheese, hit the spot. It came with thick—cut french fries, for $7.95. I thought
`it was a great buy, until I saw an old menu from the early l900s framed on the wall. A halibut dinner for 90 cents! (Of
`course, wages were a lot less then, too.)
`
`Mr. Lucky's 24/7, Hard Rock Hotel, Las Vegas: I discovered this cofi'ee shop's "steak and shrimp special" in 2000,
`when it was $5.99. Now, at the lucky number of $7.77, it's still about the only thing in Vegas I'll bet on. It's not listed
`on the menu — you just have to ask for it You get a salad of crisp romaine lettuce, a juicy 8-ounce sirloin strip steak, a
`skewer of three grilled shrimp and a pile of garlic mashed potatoes (you can't sub fries or a baked potato — that's just how
`it comes, the sewer told us).
`
`While waiting for your meal, you can browse all the memorabilia scattered around the hotel — display cases devoted
`to the Beatles and Elvis; outfits worn by Mick Jagger, Sheryl Crow and Sarah McLachlan; Carlos Santana's snakeskin suit
`with original Woodstock tickets ($6 per day!); a drum set from Blink l82's Travis Barker— and lots of stuff from rockers
`better known to my teenage kids.
`
`Sunset Station's Around the World Buffet, Henderson, Nev.: We'd spent the day kayaking on the Colorado River but
`had just enough stamina lefi to indulge in this $7.99 econo—meal at our hotel. Fortunately, this buffet was nothing like the
`chow line of weird casseroles and rubbery Jell-O shown in "Vegas Vacation," the 1997 Chevy Chase movie.
`
`In a departure from the cafeteria mentality, there were separate stations featuring Chinese, Mexican, Italian, Barbecue
`and American specialties. My I7-year—old son, Eric, called it a dream "come tme. We thought he and our l5-year—old,
`Lonn, would single-handedly bankrupt Nevada's gaming industry — or at least eat each other under the table — as they
`feasted on egg rolls, pasta Alfredo, ribs, tacos and more, followed by a root-beer float "sudden death" match. Luckily, no
`one exploded. Lonn called the episode "A Fridge Too Far."
`
`But probably the most memorable meal was the picnic lunch we shared while kayaking on the Colorado River below
`Hoover Dam. Being somewhat paddle-impaired, I had trouble getting to shore while fighting the river's current and the
`outcropping of rocks.
`
`A man sitting on the shore directed me to an easier inlet on the other side of the rocks, even wading out in the water to
`help my husband pull me in. His name was George, and he was a sea captain — after dealing with big tankers, my little
`kayak was -nothing.
`
`George said he'd had a miserable time visiting the Las Vegas Strip — "I spent more money in three days than I make
`in three weeks, and nobody was nice unless they wanted your money."
`
`So he hiked into the canyon and camped along the river for a couple days. He told us how to hike up to some pools of
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`Deseret Morning News (Salt Lake City) May 1 1, 2005 Wednesday
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`hot springs and saved our gear from being swept away in the river while we were gone. We urged him to eat with us, but
`he was content with only a couple of turkey slices for his sandwich, a brownie and a drink. But he did allow us to slather
`him with sunscreen. Then we got back on the river, leaving him to the peaceful canyon, fresh air and a good book. E-
`mail: vphillips@desnews.com
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`LOAD—DATE: May 11, 2005
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`Page I77
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`I l2 of 978 DOCUMENTS
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`Copyright 2005 Voxant, Inc.
`All Rights Reserved.
`Copyright 2005 CCBN, Inc.
`All Rights Reserved.
`FD (Fair Disclosure) Wire
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`May I I, 2005 Wednesday
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`TRANSCRIPT: 051 l05ae.784
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`LENGTH: 9266 words
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`HEADLINE: Ql 2005 CryptoLogic Inc. Earnings Conference Call - Final
`
`BODY:
`
`OPERATOR: Good morning, ladies and gentlemen. Welcome to the CryptoLogic first—quarter 2005 financial results
`conference call. I would like to turn the meeting over to Mr. Lewis Rose, President and Chief Executive Officer. Please go
`ahead, Mr. Rose.
`
`LEWIS ROSE, PRESIDENT, CEO, CRYPTOLOGIC, INC.; Thank you. Welcome, ladies and gentlemen. Thank you
`forjoining us today for CryptoLogic's 2005 first—quarter conference call. ‘I'm Lewis Rose, President and Chief Executive
`Officer of CryptoLogic. With me today are Jenifer Cua, our Interim Chief Financial Officer, and Nancy Chan-Palmateer,
`our Director of Communications.
`
`After a year of achieving strong results and initiating major investments for the future, we continued this momentum
`into 2005 with excellent returns. We also reaffirmed our position as the blue-chip e—garning sofiware company. In the first
`quarter, CryptoLogic again achieved record revenue, strong earnings growth and healthy cash fiow, all by maintaining our
`disciplined, focused approach in the fast-growing lntemet, casino and poker markets.
`
`CryptoLogic's first—quarter revenue grew 33% to $20.3 million. We netted a 27% increase in earnings to $4.8 ‘million,
`and this amounted to $0.34 per diluted share.
`
`CryptoI.ogic's4market strength was firrther highlighted this year when we were added to the main S&P/TSX composite
`index, as you know, the premier benchmark for Canadian equity markets. In the UK, we expanded our shareholder base
`by attracting a number of prominent institutional investors.
`
`Our success comes down to three core imperatives that are working for us - first, international diversification, which-
`means maximizing opportunities in the highest-growth markets worldwide; second, market-oriented products, which
`means helping our customers profit from the games their players wish to play; and third, regulatory leadership, which
`demonstrates our dedication to integrity and transparency, raising the bar in the Online gaming industry.
`
`Let me now speak to how staying this course has continued to help us realize our growth in the most recent quarter.
`First, we continue to see that the benefits of a geographically diversified business — thanks to our strong presence in key
`markets worldwide. That resulted, as you've seen, in revenue generated from licensees intemational players rising to more
`than 65% of first-quarter revenue, up from over 60% in ‘2004. In particular, this quarter, the UK and European markets
`each grew to account for more than 30% of total first—quarter revenue.
`
`As part of our global strategy, CryptoLogic recently released Version 6 of our casino sofiware to key European
`markets, and players now_can enjoy a larger game variety in their native languages, including Spanish, French, Italian and
`Gemian.
`
`So, what we've done is focus on a small number of high—quality international customers. This is proving to be the
`right strategy for CryptoLogic. For some time, we have emphasized ROE, or what we call Retum On Effort, philosophy
`to focus or business decisions on those opportunities that generate the highest return in exchange for our time and effort.
`That's why, in the first quarter, we reduced our licensee basis by another two, who together represented less than 1% of
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`total revenue. So we now have nine core licensees, all of whom continue to grow.
`
`Second, success in the competitive global Online gaming industry also means delivering market—oriented products
`to help our licensees develop loyal players. Internet garners play more often than their land—based counterparts, and it's
`easier and more convenient than a destination stop of land—based casinos. As a result, Online gamers demand new games
`and fresh concepts more frequently to keep them interested and coming back. That's why we continue to invest in new
`games and enhancements of both our Internet poker and Internet casino software.
`'
`
`The buzz just continues to build around Intemet poker and for good reason. The experts predict that Internet poker
`should continue its spectacular momentum and increase more than 100% in 2005. Our licensees central poker room
`continues to reach new heights in popularity, and the central room now attracts more than 6,000 simultaneous Online
`players. According to poker polls, the independent web site which tracks the Online poker industry, from the first quarter
`of 2004 to the first quarter of 2005, the industry grew ll5%, while our licensees grew more than 200%. In fact, I'vejust
`received and seen some fresh numbers for April, and the top five poker rooms which now represent about 80% of the
`market— and of those top five poker rooms, our licensees room grew the fastest over the past year. For CryptoLogic, this
`is very exciting news, and that's why we continue to invest in our poker sofiware and network scalability to support our
`licensees‘ growth.
`
`A contributing factor was the release of innovative features, including our new six—seat poker tournament option.
`We call this commencement SIXPAK. It's our brand, our trademark, and it gives Online poker players exciting "final-
`table" action throughout an entire tournament in every hand. SIXPAK also expands our licensees‘ toumament strategy and
`provides great marketing draw for players.
`
`Now, if poker is the sizzle of Internet gaming, then casino is the steak, and some say that the lntemet casino business ,
`is more established and maturing. Well, there's no question that the segment is more developed and growing at a more
`moderate pace after a decade of tremendous growth. Yet, lntemet casino still has tremendous room to grow, accounting
`for less than 5% of the world's land—based casino markets.
`
`In the first quarter, Internet casino continued to be a strong cash contributor for CryptoLogic. This segment grew 6%
`over Q1 2004 revenue, and we continue to enjoy solid performance by offering innovative and market—targeted games.
`For example, we led the way last quarter with the first introduction ever of "Fruit Machines" on the Internet. This week,
`we announced an exclusive, five—year licensing agreement to be the first to bring p|ay—for-real slot version of Bejeweled
`to the Internet. Bejeweled, as you are probably aware, is one of the most popular online games on sites such as AOL,
`Yahoo! and MSN, and it will be an exciting addition to our product offering scheduled for release this fall.
`
`Third, our regulatory leadership has remained steadfast. We've consistently advocated a regulated and transparent
`Online gambling environment for the protection of players and for the credibility of our industry. We're seeing positive
`developments. In April, the UK, one of the premier markets for CryptoLogic and one of the world's most developed
`nations, took a historic step. The British government enacted a law to regulate Online gaming for the first time on its
`soil. CryptoLogic welcomed this landmark event to establish world-class standards for responsible, Online gaming
`entertainment. This marks a major milestone in our view, although there are many steps ahead before we see the final rules
`~ and regulatory framework. Given our regulatory experience, we will seek every opportunity to provide input -to foster a
`commercially competitive regulatory environment in the UK. The first license applications are expected to be accepted in
`2006 with licenses granted and the new regime underway by 2007.
`4
`
`Now, in the U.S., the picture is still not clear, even though recent developments highlight how some U.S. policymakers
`have taken a different direction in other parts of the world. For example, the World Trade Organization has pointed out the
`inconsistency of American efforts to ban Online gaming. It's interesting. On the other hand, a growing number of states,
`such as North Dakota, Illinois and Georgia, have proposed regulation of certain forms of Online gaming. Nonetheless,
`federal legislation seeks prohibition — sorry, federal legislation that seeks prohibition is expected to reemerge again
`shortly. This continued uncertainty validates CryptoLogic's European focus, and the reality is that CryptoLogic stands as
`one of the few providers in the world where software has already passed the world's highest regulatory tests. This gives us
`a competitive advantage as more jurisdictions make the sensible choice to regulate Online gaming.
`
`Before Jenifer speaks to our financials, I want to advise you that we have just completely settled the WebSports claim
`to CryptoLogic's satisfaction and with no material effect. This now closes the WebSports matter.
`
`It's now my pleasure to turn the call over to Jenifer Cua, who will speak to our first-quarter results.
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`JENIFER CUA, INTERIM CFO, CRYPTOLOGIC, lNC.: Hello. I am pleased to speak to highlights of our first-
`quarter results for 2005. Please note that all figures are in U.S. dollars.
`
`Revenue for the first quarter of 2005 increased 33% to $20.3 million, versus $15.2 million for the same period last
`year, marking a new record for CryptoLogic. Internet poker continued to be a significant growth driver. Fees from this
`segment jumped more than 200% over Ql of 2004. As well, lntemet casino revenue continued to perform solidly and
`grew 6% over the same period last year.
`
`Operating costs were $12.8 million for the quarter, compared to 9 million in Q1 of 2004. Higher expenses arose from
`several initiatives, including the following — developing and integrating new casino games, enhancing our poker software,
`enhancing the capacity and resiliency of our poker system, improving our back—oflice offering, and augmenting our e-
`cash management system. Given the early returns we are achieving from our major investment program initiated last year,
`it is clear that this type of strategic investment is important to accommodate our growth. To that end, we're making further
`enhancements. This extends our investment program to the end of the year, now planned at $12.5 million. More than 65%
`or $8.4 million of this program has been invested to date. This included 3.2 million in operating costs, another 3.2 million
`for purchases of capital assets, and $2 million for capitalized software development related to the program. Also, growing
`transaction volumes arising from the growing business resulted in increased processing fees.
`
`Even with higher expenditures, we delivered solid EBITDA and net margins of 29 and 24% respectively. This
`compared to 30% and 25% in Q1 of 2004.
`
`In the quarter, we added to our strong balance sheet. At March 31, 2005, we had no debt. Our cash reserves grew to
`$90.2 million or $6.35 per diluted share. Working capital rose to $70.3 million or $4.96 per diluted share.
`
`Operating cash flow for the first quarter of 2005 was $2.6 million versus $5.1 million for the same period last year.
`The decline was primarily due to the following — increased receivables resulting from two licensees responsible for their
`own e—cash processing, prepayment of royalty licensing these for new games in development, and reduce payables and
`accruals.
`
`Looking ahead, we estimate capital expenditures for the full year of 2005 to be $12 million, ofwhich 35% relates to I
`our normal-course investment. The balance includes a move to a new office premises later this year to accommodate our
`growing organization, as well as the remaining portion of our major investment program to be capitalized.
`
`We've continued to foresee strong growth in both top of bottom—line performance. For the second quarter, we forecast
`revenue in the range of l9.2 to $19.6 million with earnings of4.2 to $4.4 million, or $0.29 to $0.30 per diluted share. This
`guidance assumes 14.5 million weighted fully diluted shares outstanding.
`I will now turn the call back to Lewis.
`
`LEWIS ROSE: Thank you, Jenifer. We would be pleased to take questions at this time.
`‘ OPERATOR: We will now begin the question—and—answer session. (OPERATOR INSTRUCTIONS) Brian Kinstlinger
`from Sidoti Capital.
`‘
`
`BRIAN KINSTLINGER, ANALYST, SIDOTI & CO.: The first question I wanted to talk about were the investments.
`I wanted to see how the remainder of the $12.5 million, what's left, plays out in the three quarters, so that's an even (ph)
`across. Then if revenue continues to ramp as it has, will 2006 bring on an additional investment plan in order to capitalize
`on the future of growth there?
`
`LEWIS ROSE: The answer to the first question is —— how much has been spent and how much is remaining? Of the
`major capital program, 12.5 million, we've spent approximately 8.4 million, or about two-thirds, so the balance will the
`over the — (multiple speakers).
`
`BRIAN KINSTLINGER: Evenly? Evenly in the three quarters?
`
`JENIFER CUA: Pretty much so, Brian.
`
`BRIAN KINSTLINGER: The second question was, if revenue continues to ramp as it has, do you expect to initiate
`a new plan in 2006 that will further pressure margins a little bit of where they possibly could be, or do you thin_k the
`investments will able (sic) to cease at that point?
`
`LEWIS ROSE: Right. Well, there's no question that staying competitive in the business will require continued
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`investment. If we continue to experience and benefit from the significant growth we've achieved to date, we will continue
`to invest to accommodate further growth. Obviously, we've seen the industry continue to expand dramatically, and we
`have to ensure that we can maintain the pace of growth of the industry for CryptoLogic and our shareholders. We will be
`prudent It's premature at this point for us to predict what the investment program is going to be through the end- of next
`year, but what we can say is that we expect that we will continue to invest prudently and appropriately to ensure that we
`maintain the growth opportunities we have in front of us.
`
`BRIAN KINSTLINGER: Sure. If I look your second—quarter guidance, when I look historically at your business,
`there's obviously been seasonality in the second quarter, which has had some weakness — and you document that. I'm
`wondering if that could turn a little bit, going forward, given the seasonal nature of your tournament and poker software,
`which some of it you didn't have last year and now we're headed into the World Series of Poker here. The offerings, as I
`look on your sites, there's a ton of toumaments. Maybe casino would be seasonally weak but would poker necessarily be
`seasonally weak in this second quarter here?
`
`~ LEWIS ROSE: That is a very astute comment, Brian. Our view is that poker is expected to continue to grow. You
`remember that our experience with casinos spans ten years, so we have significant casino experience. Our casino story is
`a significant contributor to our revenues, so we do expect seasonal impact from the casino business. From poker, we do
`hope, though, that business will continue to grow.
`'
`
`BRIAN KINSTLINGER: That's how I see it. A couple of questions — it sounds like you said you lost —' you didn't
`lose necessarily, you ceased your relationship with two clients. I missed — how much of revenue did those account for?
`Do you see any more chances of pairing clients?
`
`The second question to that— I saw, in your l0~I(, something you haven't really talked about lately is some new client
`opportunities, the whales that you talk about You know, what's out there right now? What are the potential losses that
`you maybe planned to have, going forward?
`
`LEWIS ROSE: Well, let's answer each of the three individually. The first question -— what is the impact on revenue of
`the termination of the two licensees that occurred in the first quarter? The answer is less than l% of revenue, so clearly
`not material.
`
`‘The second question is — are we expecting further reductions in the number of licensees? The answer is no. At this
`point, we have nine licensees, all of whom have growth potential, so certainty, in the short term, we don't anticipate any
`reduction in the number of licensees.
`
`The third question was about new customer opportunities. As you correctly point out, we've made it quite clear that
`we're going to focus on a limited number of high-quality, profitable, growth-oriented customers who have the brand name
`that works on the Internet, that have a database of customers that are fertile for our type of business. The third element is
`that they have both the marketing funds and the commitment to marketing to grow.
`
`We've also said publicly that we would focus on and be happy with signing one or two large international brand-name
`licensees each year. As you know, our growth plans for this year are not contingent on signing new licensees. But you are
`also correct in saying that we are effectively looking for "whales". The new licensees will only be signed if they meet
`the stringent criteria. We've had numerous approaches from all sorts of shapes and sizes of organizations who would be
`interested in licensing our software, but as we've said many times, that our resources are as a scarce resource and we want
`i to focus very much on high-quality international brand—name licensees.
`
`BRIAN KINSTLINGER: So can I characterize that as the pipeline for what you call whales is picking up compared
`to maybe where you were six months ago, or is that not accurate?
`
`LEWIS ROSE: Well, no, we always have a pipeline ofwhales. It's a question of the sales lead cycle. Obviously, we'd
`like it to be quicker but generally, if you're speaking with whales, it's a competitive process and decisions like that take
`time. So yes, we are obviously optimistic that, at some point, we will be signing new licensees. I cannot commit, on a
`conference call like this, for sure but it something that we focus on, and we've said publicly that wewould be happy with
`one or two per annum.
`
`BRIAN KINSTLINGER: Great. Two quick questions and I will be through. The first is related to the DSO. It clear
`why it's increasing. My question is, do you expect more of your license to take on their e—cash system? If that's the case,
`where do you see DSO ending up? The other question, what is your cash. You've talked about acquisition in the past.
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`Where is that in the pipeline as well? Thanks a lot.
`
`LEWIS ROSE: Okay. On the DSOs, just for everybody's benefit ,I assume you are referring to Days of Sales
`Outstanding, which is the terminology for the Accounts Receivable.-We've said that Accounts Receivable has increased
`because of the fact that two of our licensees have taken on responsibility for their own e—cash, and obviously, with a
`growing business, you'd expect that to occur. We don't have any plans today for any of our licensees to take on e—cash
`themselves. Clearly, there is discussion in the industry that an integrated account is the way to go, and we are speaking to
`existing and prospective licensees about that.
`
`BRIAN KINSTLINGER: So does that mean you don't expect right now that your other licensees will take on their
`own e—cash systems?
`-
`-
`
`LEWIS ROSE: No, at this point not.
`
`BRIAN KINSTLINGER: So, the two that you do have are the DSOs. Are those DSOs more like in the 30 days and
`the ones that you have alone are below 10? Is that accurate?
`LEWIS ROSE: Yes.
`
`BRIAN KINSTLINGER: Then the final question I had was about the acquisition and acquisition potential and what's
`going on out there in the market.
`
`LEWIS ROSE: Well, we've said that, from industry data, a year ago there were probably I,800'Online gaming sites.
`Today, they are down to about 1,200. So either the smaller sites are disappearing or there's certainly consolidation in the
`industry. We've said that, if you look at the poker landscape or the poker environment, the top ten rooms represent about
`90% of the business, but the top five rooms represent about 80% of the business. We certainly see the consolidation of that
`occurring over the next three or four years and maybe sooner, so from CryptoLogic's point of view, we are in the fortunate
`position of having a very strong balance sheet, both to invest in our existing business and to be aware of and be primed
`for acquisition opportunities, should they arise.
`-
`
`Our business plan does not depend on acquisitions but nonetheless, we are actively looking at a number of
`opportunities. We would only make an acquisition if the price is right, and then we will act accordingly. We have criteria
`that we've established for acquisition potentials that include,_one, it has to strengthen our core business; and two, it has to
`either accelerate growth into new technologies, new channels, emerging game areas and/or geographic expansion; three,
`it has to be complementary to our strategy; and then finally, it has to be synergistic in value and accretive.
`
`BRIAN KINSTLINGER: Okay, thanks, guys.
`
`OPERATOR: David Shore from Desjardins Securities.
`
`.
`
`DAVID SHORE, ANALYST, DESJARDINS SECURITIES: Just a couple of questions — taxes for the quarter came
`in a little bit lower than I was expecting. Where do you see that going for the rest of the year?
`
`LEWIS ROSE: It's likewe've said; we maintain that the tax rate will be around I5 to l7%.
`
`DAVID SHORE: Sorry, so that was 15 to I7% is what you expect for the rest of the year? I
`LEWIS ROSE: Right.
`_
`
`DAVID SHORE: That is where your guidance for Q2 is dependent on?
`
`LEWIS ROSE: Right.
`
`DAVID SHORE: Okay. Where does the headcount stand?
`
`LEWIS ROSE: The current headcount, David, is 325.
`
`DAVID SHORE: Okay. I-Iow much of that would be in development?
`
`LEWIS ROSE: Oh, the vast bulk, well over 60%. Obviously well over 66%.
`
`DAVID SHORE: Okay. Anything happening with bingo?
`
`LEWIS ROSE: Bingo, as you know, has been a business that we launched in 2003, 2002-2003. In our view, it has
`shown substantial resilience but it has not shown the growth that we've benefited from in poker. It's important to us in
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`tenns of complementing our casino and poker offering, and it enables us to have a well rounded complete offering for
`customers. The 2005 bingo revenue is between I and 2% of our total revenue, so it's not material in that respect, but it's
`important for us as a premier Online gaming company to have the product offering available to customers should they
`wish to take it up.
`
`DAVID SHORE: Okay. Any progress on the CFO search?
`
`LEWIS ROSE: We continue to look for the CFO, as you all know. If there's anybody on the phone who has
`recommendations, please let us know. We've been working with (indiscemible), who as you know is a highly respected
`international executive search firm, to identify the best person for the role. It's a very, very important role and it requires
`some specific credentials and we've been very thorough in our evaluation. We've narrowed the focus down toseveral
`candidates and for whatever reason we've not concluded with any individual person.
`
`In the meantime, we continue to achieve excellent financial results, we have a strong cast position, and I can confirm
`to that we are in very good hands with Jenifer Cua acting as our Interim CFO. She's done a superb job in the interim.
`
`DAVID SHORE: Thanks. What about new game developments, specifically on the mobile side’?
`
`LEWIS ROSE: Well, we look at that question in two parts actually, David. In tenns of new games, we continue to
`innovate and develop new games. As we mentioned, we were the first to bring "Fruit Machines" to market and beyond
`that, we are the first to bring Bejeweled to the Internet. So from our point of view, we've been very, very proactive in
`terms of new games. We will be delivering a new series of games towards the end of the second quarter and all being well
`again, one new package of games by the fourth.
`
`As far as the mobile business is concerned, we've said for a long time now that while we are of the view that mobile
`and interactive TV are very romanticiand sound like they have universal application, we are very skeptical. We have
`developed four games for wireless ourselves, but we're not convinced that the economic model justifies the capital
`expenditure. We understand Online gaming; we understand the revenue model; we understand the potential. We'd been
`doing this now for ten years. We've got $25 billion in transactions that we've processed for 2 million players around the
`world in 240 countries. We know what we're doing in Online gaming.
`
`As far as wireless is concerned, there are a number of intermediaries who would want their slice of the pie, so our
`view is, at this point, given the take-up, given the technology challenges, given the user or the player experience, and
`given the revenue model, we're notconvinced that right now is the time for us, based on our philosophy of retum on
`eIfort,_to concentrate on wireless. We still see tremendous growth potential in our two core businesses of Online casino
`and Online poker, and that's where we will spend our focus over the next while.
`
`DAVID SHORE: Okay, last question — anything new to report as far as Asia goes?
`
`LEWIS ROSE: Well, David, Asia offers tremendous growth potential, and we're looking at payment providers to lead
`the way because, you know, frankly, it's much easier to look at the geographic size of Asia on the map or the number of
`people, the number of cellphone users or the number of Internet connections, but frankly, the challenges of both, one, the
`fragmented legislation and secondly the payment alternatives have dissuaded us from a huge push into Asia. You have
`to look at each country on an individual basis. While we've seen some encouraging traction in our Japanese—language
`version, China is much slower to develop, given the absence of international credit cards for players to make deposits. So
`yes, Asia is a tremendous opportunity; it's one that we believe will happen in the future, but not in the immediate future.
`
`OPERATOR: Traci Mangini from ThinkEquity Partners.
`
`TRACI MANGINI, ANALYST, THINKEQUITY PARTNERS: Good morning. I just had a question regarding the
`regulatory environment in the U.S. You mentioned that a bill was upcoming. I was just wondering if you could comment
`on your level of concem regarding the-Kyle Bill and particular work-arounds that might be in place, in the event that it
`would pass. Also, have you stated any goals for U.S. revenue contribution, for example in '06?
`
`LEWIS ROSE: Right, well, the first question is about the current state of play in the U.S. It appears to us, Traci, that
`Senator Kyle is preparing to launch and introduce a prohibition bill shortly. Unlike the other Kyle bills, this one seeks
`to ban U.S. financial institutions from processing payments for unlawful lntemet wagers. But it doesn't seem to clarify
`what is or what is not legal. So, as a result, it doesn't contain any carve-outs, including any exemptions for the Online
`horse racing industry. As you know, the horse racing industry today is a legal Online activity in California, and it's today
`generating hundreds of millions of dollars for states in which it is currently legal. So, it's reasonable to assume that the
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`horse racing industry would have a problem with this bill if it were introduced and so they wouldn't be able to get their
`payments processed for Internet wagers. Now, if that happens, then what you will see is a position of various carve-
`outs for various industry segments. You know, Online gaming is hereto stay; it's not going anywhere. So, the stakes for
`online gaming, which is now expected to reach $l2 billion this year, is high. So you have a significant number of various
`industry groups who are allocating tremendous amounts of time and energy to growing their business. So if there were
`to be legislation with any carve-outs, you can be assured that each of the various specific industry lobby groups will be
`fighting to ensure their su