Edgar Filing: MULTIMEDIA GAMES INC

Date: August 9, 2007

Multimedia Games, Inc.

/s/ Randy S. Cieslewicz^†

Randy S. Cieslewicz

Chief Financial Officer

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-14551

Multimedia Games, Inc.

(Exact name of Registrant as specified in its charter)


Texas		74-2611034
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

206 Wild Basin Road, Building B, Fourth Floor Austin, Texas		78746
(Address of principal executive offices)		(Zip Code)

(512) 334-7500

(Registrant’s telephone number, including area code)

Registrant’s website: www.multimediagames.com

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 3, 2007, there were 26,229,471 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

FORM 10-Q

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements (Unaudited)

	Consolidated Balance Sheets (As of June 30, 2007 and September 30, 2006)	3

	Consolidated Statements of Operations (For the three months ended June 30, 2007 and 2006)	5

	Consolidated Statements of Operations (For the nine months ended June 30, 2007 and 2006)	6

	Consolidated Statements of Cash Flows (For the nine months ended June 30, 2007 and 2006)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 5.	Other Information	41

Item 6.	Exhibits	41

Signatures		42

Exhibit Index

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PART I

FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

MULTIMEDIA GAMES, INC.

CONSOLIDATED BALANCE SHEETS

As of June 30, 2007 and September 30, 2006

(In thousands, except shares)

(Unaudited)


	June 30, 2007		September 30, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,192	$	4,939
Accounts receivable, net of allowance for doubtful accounts of $1,239 and $1,007, respectively		17,428		17,825
Inventory		1,890		3,600
Prepaid expenses and other		3,005		2,562
Notes receivable, current portion		11,896		16,969
Deferred income taxes		1,322		1,623

Total current assets		37,733		47,518
Restricted cash and long-term investments		928		986
Leased gaming equipment, net		39,941		31,095
Property and equipment, net		70,788		86,264
Notes receivable, net		36,475		49,399
Intangible assets, net		36,296		46,120
Other assets		3,557		1,100
Deferred income tax		15,000		6,059

Total assets	$	240,718	$	268,541

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of revolving lines of credit	$	—	$	12,821
Current portion of long-term debts and capital leases		—		4,954
Accounts payable and accrued expenses		20,734		31,671
Federal and state income tax payable		3,976		2,125
Deferred revenue		1,294		1,782

Total current liabilities		26,004		53,353
Revolving Credit Facility, less current portion		43,172		—
Revolving lines of credit, less current portion		—		43,193
Long-term debts and capital leases, less current portion		—		1,340
Other long-term liabilities		928		2,710

Total liabilities		70,104		100,596

Commitments and contingencies
Stockholders’ equity:
Preferred stock:
Series A, $0.01 par value, 1,800,000 shares authorized, no shares issued and outstanding		—		—
Series B, $0.01 par value, 200,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 par value, 75,000,000 shares authorized, 32,041,263 and 31,422,818 shares issued, and 28,129,878 and 27,511,433 shares outstanding, respectively		320		314

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MULTIMEDIA GAMES, INC.

CONSOLIDATED BALANCE SHEETS – (Continued)

As of June 30, 2007 and September 30, 2006

(In thousands, except shares)

(Unaudited)


	June 30, 2007			September 30, 2006
Additional paid-in capital		78,845			74,121
Treasury stock, 3,911,385 shares at cost		(24,741	)		(24,741	)
Retained earnings		116,121			118,242
Accumulated other comprehensive income, net		69			9

Total stockholders’ equity		170,614			167,945

Total liabilities and stockholders’ equity	$	240,718		$	268,541

The accompanying notes are an integral part of the consolidated financial statements.

-4-

MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2007 and 2006

(In thousands)

(Unaudited)


	Three Months Ended June 30,
	2007			2006
REVENUES:
Gaming revenue:
Class II	$	9,416		$	20,363
Oklahoma compact		11,746			2,462
Charity		4,384			4,243
All other		3,679			2,061
Gaming equipment, system sale and lease revenue		1,181			1,765
Other		492			1,274

Total revenues		30,898			32,168

OPERATING COSTS AND EXPENSES:
Cost of gaming equipment and systems sold and royalty fees		1,023			624
Selling, general and administrative expenses		15,376			17,424
Amortization and depreciation		14,771			14,384

Total operating costs and expenses		31,170			32,432

Operating loss		(272	)		(264	)
OTHER INCOME (EXPENSE):
Interest income		924			577
Interest expense		(1,003	)		(1,123	)
Other		1,607			—

Income (loss) before income taxes		1,256			(810	)
Income tax expense (benefit)		571			(225	)

Net income (loss)	$	685		$	(585	)


Basic earnings (loss) per common share	$	0.02		$	(0.02	)


Diluted earnings (loss) per common share	$	0.02		$	(0.02	)


Shares used in earnings per common share

Basic		27,911			27,211

Diluted		29,747			27,211

The accompanying notes are an integral part of the consolidated financial statements.

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MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Nine Months Ended June 30, 2007 and 2006

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2007			2006
REVENUES:
Gaming revenue:
Class II	$	36,328		$	69,515
Oklahoma compact		27,618			6,396
Charity		13,617			14,055
All other		9,203			6,141
Gaming equipment, system sale and lease revenue		2,208			13,459
Other		1,700			3,096

Total revenues		90,674			112,662

OPERATING COSTS AND EXPENSES:
Cost of gaming equipment and systems sold and royalty fees		1,739			11,346
Selling, general and administrative expenses		50,521			50,964
Amortization and depreciation		44,209			42,856

Total operating costs and expenses		96,469			105,166

Operating income (loss)		(5,795	)		7,496
OTHER INCOME (EXPENSE):
Interest income		3,573			1,669
Interest expense		(3,534	)		(3,143	)
Other		2,718			—

Income (loss) before income taxes		(3,038	)		6,022
Income tax expense (benefit)		(917	)		2,602

Net income (loss)	$	(2,121	)	$	3,420


Basic earnings (loss) per common share	$	(0.08	)	$	0.13


Diluted earnings (loss) per common share	$	(0.08	)	$	0.12


Shares used in earnings per common share

Basic		27,708			27,070

Diluted		27,708			29,084

The accompanying notes are an integral part of the consolidated financial statements.

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MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended June 30, 2007 and 2006

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,121	)	$	3,420
Adjustments to reconcile net income (loss) to cash and cash equivalents provided by operating activities:
Amortization		4,975			4,886
Depreciation		39,233			37,970
Accretion of contract rights		4,383			2,996
Gain on disposal of long-lived assets		(493	)		(154	)
Provisions for inventory and long-lived assets		347			103
Deferred income taxes		(8,640	)		(6,917	)
Share-based compensation		956			2,061
Provision for doubtful accounts		562			394
Interest income from imputed interest on development agreements		(1,845	)		—
Changes in operating assets and liabilities:
Accounts receivable		585			5,647
Inventory		1,710			414
Contract costs in excess of billing		—			789
Prepaid expenses and other		(2,902	)		2,515
Federal and state income tax payable/receivable		1,851			(2,871	)
Notes receivable		(46	)		(473	)
Accounts payable and accrued expenses		(10,937	)		(9,119	)
Other long-term liabilities		(96	)		(229	)
Deferred revenue		(488	)		(1,449	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		27,034			39,983

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment and leased gaming equipment		(42,960	)		(28,106	)
Proceeds from disposal of assets		1,447			—
Acquisition of intangible assets		(3,088	)		(4,079	)
Advances under development agreements		(12,489	)		(28,409	)
Repayments under development agreements		31,505			9,377
Proceeds from development agreement floor space buyback		10,000			3,036

NET CASH USED IN INVESTING ACTIVITIES		(15,585	)		(48,181	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, warrants, and related tax benefit		3,774			4,090
Principal payments of long-term debt and capital leases		(5,124	)		(11,296	)
Proceeds from revolving lines of credit		14,500			40,000
Payments on revolving lines of credit		(70,514	)		(16,495	)
Proceeds from Revolving Credit Facility		50,172			—
Payments on Revolving Credit Facility		(7,000	)		—
Purchase of treasury stock		—			(1,456	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(14,192	)		14,843

EFFECT OF EXCHANGE RATES ON CASH		(4	)		1

Net increase (decrease) in cash and cash equivalents		(2,747	)		6,646
Cash and cash equivalents, beginning of period		4,939			118

Cash and cash equivalents, end of period	$	2,192		$	6,764

SUPPLEMENTAL CASH FLOW DATA:
Interest paid	$	3,324		$	2,436

Income tax paid	$	4,517		$	11,019

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Contract rights resulting from imputed interest on a development agreement on note receivable		2,082			—

The accompanying notes are an integral part of the consolidated financial statements.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes contained within the Company’s Annual Report on Form 10-K for the year ended September 30, 2006, as amended by Amendment No. 1 on Form 10-K/A thereto.

The financial statements included herein as of June 30, 2007, and for each of the three and nine months ended June 30, 2007 and 2006, have been prepared by the Company without an audit, pursuant to accounting principles generally accepted in the United States, and the rules and regulations of the Securities and Exchange Commission, or SEC. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The information presented reflects all adjustments consisting solely of normal recurring adjustments which are, in the opinion of management, considered necessary to present fairly the financial position, results of operations, and cash flows for the periods. Operating results for the three and nine months ended June 30, 2007, are not necessarily indicative of the results which will be realized for the year ending September 30, 2007.

For a description of the Company’s significant accounting policies, see Note 1, “Summary of Significant Accounting Policies,” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Reclassification. Reclassifications were made to the prior-period consolidated statement of operations and consolidated statement of cash flows to conform to the current-period financial statement presentation. This reclassification did not have an impact on the Company’s previously reported results of operations.

Recent Accounting Pronouncements Issued. On July 13, 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of Statement of Financial Accounting Standards, or SFAS, No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition, and for the measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect, if any, of FIN 48 on its consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 requires companies to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior-year misstatements on the current year financial statements. This pronouncement is effective for the Company in its fiscal year ending September 30, 2007. The Company does not believe SAB 108 will have a material effect on its consolidated financial statements and related disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and will be effective for the Company beginning in October 2008. The Company is currently evaluating the effect, if any, of SFAS 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,” which permits entities to choose to measure many financial instruments and certain other items at fair value with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective for the Company beginning in October 2008. The Company is currently evaluating the effect, if any, of SFAS 159 on its consolidated financial statements.

2. DEVELOPMENT AGREEMENTS

The Company enters into development agreements to provide financing for new gaming facilities or for the expansion of existing facilities. In return, the facility dedicates a percentage of its floor space to placement of the Company’s player terminals, and the Company receives a fixed percentage of those player terminals’ hold per day over the term of the agreement. The agreements

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

typically provide for some or all of the advances to be repaid by the customer to the Company. Amounts advanced in excess of those to be reimbursed by the customer are allocated to intangible assets and are generally amortized over the life of the contract, which is recorded as a reduction of revenue generated from the gaming facility. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of the Company’s floor space. In the past and in the future, the Company may by mutual agreement and for consideration, amend these contracts to reduce its floor space at the facilities. Any proceeds received for the reduction of floor space is first applied as a recovery against the intangible asset or property and development for that particular development agreement, if any.

The Company has recently committed to a significant, existing tribal customer to provide approximately 37.5%, or $56.3 million, of the total funding for a facility expansion. In return for this commitment to fund the expansion, the Company will receive approximately 30% of the 4,000 additional gaming units that are expected to be placed in the expanded facility in southern Oklahoma. The Company will record all advances as a note receivable and impute interest on the interest free loan. The discount (imputed interest) will be recorded as contract rights and will be amortized over the life of the agreement. The repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, will take place over twelve months at approximately $14.0 million per quarter. As of June 30, 2007, the Company had advanced $11.6 million toward this commitment.

Management reviews intangible assets related to development agreements for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the three and nine months ended June 30, 2007, there was no impairment to the assets’ carrying values.

The following net amounts related to advances made under development agreements and were recorded in the following balance sheet captions:


	June 30, 2007		September 30, 2006
	(In thousands)
Included in:
Notes receivable, net ⁽¹⁾	$	48,371	$	64,705
Property and equipment, net of accumulated depreciation ⁽²⁾		112		7,493
Intangible assets – contract rights, net of accumulated amortization ⁽³⁾		26,796		34,146

Total	$	75,279	$	106,344

(1)

The Company collected approximately $10.0 million and $31.5 million on development agreement notes receivable during the three and nine months ended June 30, 2007, respectively.

(2)

During the quarter ended June, 30, 2007, the Company was reimbursed $5.8 million under a development agreement for the net book value of property and equipment that was owned by the Company.

(3)

During the quarter ended June 30, 2007, the Company was reimbursed $4.2 million for intangible assets that were recorded by the Company under development agreements.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

3. PROPERTY AND EQUIPMENT AND LEASED GAMING EQUIPMENT

The Company’s property and equipment and leased gaming equipment consisted of the following:


	June 30, 2007			September 30, 2006			Estimated Useful Lives
	(In thousands)
Gaming equipment and third-party gaming content licenses available for deployment ⁽¹⁾	$	27,520		$	29,946
Deployed gaming equipment		91,666			84,958		3-5 years
Deployed third-party gaming content licenses		25,556			16,840		1.5-3 years
Tribal gaming facilities and portable buildings		5,494			18,874		5-7 years
Third-party software costs		8,417			7,969		3-5 years
Vehicles		3,499			6,843		3-10 years
Other		3,249			3,192		3-7 years

Total property and equipment		165,401			168,622
Less accumulated depreciation and amortization		(94,613	)		(82,358	)

Total property and equipment, net	$	70,788		$	86,264

Leased gaming equipment	$	150,920		$	123,397		3 years
Less accumulated depreciation		(110,979	)		(92,302	)

Total leased gaming equipment, net	$	39,941		$	31,095

(1)	Gaming equipment and third-party gaming content licenses begin depreciating when they are placed in service.

During the three and nine months ended June 30, 2007, the Company disposed of or wrote off $2.0 million and $2.9 million, respectively, of third-party gaming content licenses, installation costs, tribal gaming facilities and portable buildings, and other equipment.

4. INTANGIBLE ASSETS

The Company’s intangible assets consisted of the following:


	June 30, 2007			September 30, 2006			Estimated Useful Lives
	(In thousands)
Contract rights under development agreements	$	33,469		$	41,526		5-7 years
Internally developed gaming software		22,741			20,899		1-5 years
Noncompete agreement		—			2,053		5 years
Patents and trademarks		7,366			6,554		1-5 years
Other		2,376			2,172		3-5 years

Total intangible assets		65,952			73,204
Less accumulated amortization		(29,656	)		(27,084	)

Total Intangible assets, net	$	36,296		$	46,120

During the three and nine months ended June 30, 2007, the Company wrote off internally developed gaming software of $19,000 and $245,000, respectively.

During the three months ended June 30, 2007, the Company and its former Chief Executive Officer terminated the non compete agreement. The intangible asset and the related liability were written off as of April 27, 2007, and the Company recorded a gain of $1.4 million, which is included in “Other Income.”

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

5. NOTES RECEIVABLE

The Company’s notes receivable consisted of the following:


	June 30, 2007			September 30, 2006
	(In thousands)
Notes receivable, net from development agreements ⁽¹⁾	$	48,371		$	64,705
Notes receivable from equipment sales		—			963
Other notes receivable		—			700

Notes receivable		48,371			66,368
Less current portion		(11,896	)		(16,969	)

Notes receivable – non-current	$	36,475		$	49,399

(1)	The Company collected approximately $10.0 million and $31.5 million on development agreement notes receivable during the three and nine months ended June 30, 2007, respectively.

6. CREDIT FACILITY, LONG-TERM DEBT AND CAPITAL LEASES

The Company’s Credit Facility, long-term debt and capital leases consisted of the following:


	June 30, 2007			September 30, 2006
	(In thousands)
Revolving Credit Facility	$	43,172		$
Less current portion		—			—

Long-term Revolving Credit Facility	$	43,172		$	—

Revolving lines of credit	$	—		$	56,014
Less current portion		—			(12,821	)

Long-term revolving lines of credit	$	—		$	43,193

Term loan facility	$	—		$	3,750
Other long-term debt		—			1,705
Capital lease obligations		—			839

Long-term debt and capital leases		—			6,294
Less current portion		(—	)		(4,954	)

Long-term debt and capital leases, less current portion	$	—		$	1,340

Revolving Credit Facility. On April 27, 2007, the Company entered into a syndicated, fully underwritten $150 million Senior Secured Revolving Credit Facility, or the Revolving Credit Facility, which replaced the previous Credit Facility in its entirety. The Revolving Credit Facility provides working capital, the ability to finance development agreements and acquisitions, and provides working capital for general corporate purposes. The Revolving Credit Facility matures in five years and bears interest at a Base rate or a Eurodollar rate (8.06% at June 30, 2007). There are four levels of pricing, which are determined by total debt to EBITDA. The Revolving Credit Facility is collateralized by substantially all of the Company’s assets, and also contains financial covenants as defined in the agreement. These include (i) a minimum fixed-charge coverage-ratio of not less than 1.50 : 1.00; (ii) a maximum total debt to EBITDA ratio of not more than 2.25 : 1.00 through June 2008, and 1.75 : 1.00 from June 2008, thereafter; and (iii) a minimum trailing twelve-month EBITDA of not less than $52 million for the quarter ended June 30, 2007, $57 million for the quarter ended September 2007, and $60 million for each quarter thereafter. The Company was in compliance with these covenants as of June 30, 2007.

As of June 30, 2007, the Revolving Credit Facility had availability of $106.8 million. On July 13, 2007, the Company drew $25.0 million for the funding of its modified “Dutch Auction” Tender Offer. See Note 9, “Subsequent Events.”

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Credit Facility. The Company’s previous Credit Facility provided the Company with a term loan facility, or the Term Loan, a revolving line of credit, or the Revolver, and reducing lines of credit, or the Reducing Revolvers. This Credit Facility was replaced by the Revolving Credit Facility during April 2007.

Other long-term debt at September 30, 2006, represents various three-to five-year loans for the purchase of automobiles and property and equipment. The other long-term debt was paid off during the quarter ended June 30, 2007.

7. EARNINGS (LOSS) PER COMMON SHARE

Earnings (loss) per common share is computed in accordance with SFAS No. 128, “Earnings per Share.” Presented below is a reconciliation of net income (loss) available to common stockholders and the differences between weighted average common shares outstanding, which are used in computing basic earnings (loss) per share, and weighted average common and potential shares outstanding, which are used in computing diluted earnings (loss) per share.


	Three months ended June 30,					Nine months ended June 30,
	2007		2006			2007			2006
Income (loss) available to common stockholders (in thousands)	$	685	$	(585	)	$	(2,121	)	$	3,420

Weighted average common shares outstanding		27,911,379		27,210,798			27,708,412			27,069,786
Effect of dilutive securities:
Options		1,835,164		—			—			2,014,435

Weighted average common and potential shares outstanding		29,746,543		27,210,798			27,708,412			29,084,221

Basic earnings (loss) per common share	$	0.02	$	(0.02	)	$	(0.08	)	$	0.13

Diluted earnings (loss) per common share	$	0.02	$	(0.02	)	$	(0.08	)	$	0.12

The Company had the following options to purchase shares of common stock that were not included in the computation of dilutive earnings per share due to the antidilutive effects:


	Three months ended June 30,				Nine months ended June 30,
	2007		2006		2007		2006
Common Stock Options		720,233		5,340,081		4,736,268		1,604,294
Range of exercise price	$	8.95-21.53	$	1.00-21.53	$	1.00-21.53	$	7.61-21.53

8. COMMITMENTS AND CONTINGENCIES

Litigation

Diamond Games. On November 16, 2004, Diamond Games, Inc., or Diamond Games, filed suit in the State Court in Oklahoma City, Oklahoma, against the Company, along with others, including Clifton Lind, Robert Lannert, Gordon Graves, Video Gaming Technologies, Inc., or VGT, and its president, alleging five causes of action: 1) Deceptive Trade Practices; 2) Unfair Competition; 3) Wrongful Interference with Diamond Games business; 4) Malicious Wrong / Prima Facie Tort; and 5) Restraint of Trade. The Company filed a motion to dismiss the case, challenging subject matter jurisdiction of the Oklahoma state courts. The motion was denied. A motion to reconsider was likewise denied. Relief was sought from the Supreme Court of Oklahoma by an Application for a Writ of Prohibition. The application for a writ was denied on October 10, 2005. The case asserts that the Company offered allegedly illegal Class III games on the MegaNanza^® and Reel Time Bingo^® gaming systems to Native American tribes in Oklahoma. Diamond Games claims that the offer of these games negatively affected the market for its pull-tab game, Lucky Tab II. Diamond Games also alleges that the Company’s development agreements with Native American tribes unfairly interfere with the ability of Diamond Games to successfully conduct its business. Diamond Games is seeking unspecified damages and injunctive relief; however, the Company believes the claims of Diamond Games are without merit and intends to defend the case vigorously. The Company’s defense will include a continued challenge to the jurisdiction of the Oklahoma state courts over matters directly involving the self-governance of Native American tribes involved in Indian gaming, which has been recognized as a governmental enterprise. At the present time, the case is in the discovery phase. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

International Gamco. International Gamco, Inc., or Gamco, claiming certain rights in U.S. Patent No. 5,324,035, or the ‘035 Patent, brought suit against the Company on May 25, 2004, in the U.S. District Court for the Southern District of California. The suit claims that the Company’s central determinant system, as operated by the New York State Lottery, infringes the ‘035 Patent. Gamco claimed to have acquired ownership of the ‘035 Patent from Oasis Technologies, Inc., or Oasis, a previous owner of the ‘035 Patent. In February 2003, Oasis assigned the ‘035 Patent to International Game Technology, or IGT. Gamco claimed to have received a license back from IGT for the New York State Lottery. The lawsuit claimed that the Company infringed the ‘035 Patent after the date on which Gamco assigned the ‘035 Patent to IGT.

Pursuant to an agreement between the Company and Bally Technologies, Inc., or Bally, the Company currently sublicenses the right to practice the technology stated in the ‘035 Patent in Native American gaming jurisdictions in the United States. Bally obtained from Oasis the right to sublicense those rights to the Company, and that sublicense remains in effect today. Under the sublicense from Bally, in the event that the Company desires to expand its own rights beyond Native American gaming jurisdictions, the agreement provides the Company the following options: 1) to pursue legal remedies to establish its rights independent of the ‘035 Patent; or 2) to negotiate directly and enter into a separate agreement with Oasis for such rights, paying either a specified one-time license fee per jurisdiction or a unit fee per gaming machine.

Upon the motion of the Company, Gamco’s original complaint was dismissed for lack of standing. On March 27, 2006, Gamco filed its Supplemental and Second Amended Complaint. On April 17, 2006, the Company filed another motion to dismiss, challenging the sufficiency of the rights granted by IGT to Gamco to sue the Company for patent infringement. The court denied the Company’s motion but acknowledged that it was creating new case law by permitting Gamco to sue the Company for patent infringement, given Gamco’s limited patent rights. As a result, the court granted the Company’s request to certify the court’s ruling for direct review by the Federal Circuit. The Company’s Request for Interlocutory Appeal with the Federal Circuit was granted by the Federal Circuit. The matter is set for oral argument before the Federal Circuit on August 9, 2007. The Company’s motion to stay the case with the district court, pending the outcome of the Federal Circuit’s decision on appeal, has been granted.

The Company continues to vigorously defend this matter. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

Aristocrat Technologies, Inc. On January 27, 2005, Aristocrat Technologies, Inc., or Aristocrat, filed suit in the U.S. District Court for the Central District of California against the Company, alleging that deployment of the Company’s networked central-determinant instant lottery system infringes U.S. Letters Patent No. 4,817,951, entitled “Player Operable Lottery Machine Having Display Means Displaying Combination of Game Result Indicia,” or the ‘951 Patent. Aristocrat sought an injunction, damages, and a trebling of damages for willful infringement. On April 10, 2006, the Company filed a Motion for Summary Judgment challenging the validity of the ‘951 Patent under 35 U.S.C. §§ 112(2) and (6). On April 6, 2007, the court held a hearing on that motion and on April 13, 2007, the court granted the Company’s motion and awarded the Company its costs. Judgment was entered against Aristocrat and in favor of the Company on April 16, 2007. Aristocrat has appealed the district court’s order, which invalidates the ‘951 Patent, to the Federal Circuit Court of Appeals. The Company will continue to vigorously defend itself in connection with any further proceedings. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

Sherry Knowles. In May 2006, a civil lawsuit was filed against the Company and Macon County Greyhound Park in the Macon County Circuit Court. The plaintiff alleges that a credit screen on a bingo machine located at the Victoryland facility in Shorter, Alabama, momentarily showed that the plaintiff had won in excess of $41 million. The plaintiff alleges that she is owed the $41 million plus damages for loss of use and benefit of the monies, lost interest, and mental anguish and emotional distress. The Company has filed a motion to dismiss and a motion for summary judgment, arguing, among other things, that it owed no duties, contractual or otherwise, to the plaintiff with respect to her alleged win. The Court has not ruled on either motion. A trial date has not been set and the parties presently are engaged in discovery. The Company intends to vigorously defend the suit. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Cynthia Teel. In April 2007, a civil lawsuit similar to the Knowles suit was filed by a different plaintiff against the Company and Macon County Greyhound Park in the Macon County Circuit Court. The plaintiff alleges that a bingo machine located at the Victoryland facility in Shorter, Alabama displayed a prize of $42,975. The plaintiff alleges that employees of Victoryland, the Company, or both cleared her alleged winnings and informed her that it was invalid. The plaintiff claims that she is owed $42,975, plus damages for loss of use and benefit of the monies, lost interest, and mental anguish and emotional distress. The Company has filed a motion to dismiss, arguing, among other things, that it owed no duties, contractual or otherwise, to the plaintiff with respect to her alleged win. A trial date has not been set and the parties are presently engaged in discovery. The Company intends to vigorously defend the suit. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

HomeBingo Network, Inc. On May 16, 2005, HomeBingo Network, or HomeBingo, filed suit in the U.S. District Court for the Northern District of New York, against the Company and the gaming entity of the Miami Tribe of Oklahoma, alleging that deployment of Reel Time Bingo and other bingo games infringes U.S. Patent No. 6,186,892, entitled “Bingo Game for use on the Interactive Communication Network which Relies upon Probabilities for Winning.” As a result of a Markman hearing held November 20, 2006 in New York, the Court ruled in the Company’s favor on all contested claim construction issues, after which ruling the matter was settled. HomeBingo’s lawsuit against the Company was dismissed with prejudice on February 23, 2007, along with the Company’s counterclaims against HomeBingo. As part of the settlement, HomeBingo did not receive damages or other compensation from the Company and agreed to never sue the Company again on any patent matter.

Mifal Hapayis. In April 2006, Mifal Hapayis, or Mifal, operator of the Israeli Lottery System, filed a third-party claim against the Company seeking indemnity from damage that Mifal may incur due to an infringement suit filed against it by Ecotech Financial Systems Ltd., or Ecotech. The Company does not believe that it owes an indemnity obligation to Mifal with respect to the claims of Ecotech, particularly because the Company believes that its gaming system that is installed in Israel does not infringe the patent of Ecotech, and because the Company does not believe that the Ecotech patent is valid. The Company intends to vigorously defend the third-party claim. Although continuing to assert noninfringement and invalidity of the patent, the Company has tendered a settlement offer by which it would receive a worldwide right to practice the patent. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.

Support Consultants, Inc. On July 13, 2006, Support Consultants, Inc., or SCI, and Kevin McDonald, SCI’s sole owner, filed a suit in Superior Court for the County of Riverside, California against the Company. The complaint alleges that the Company owes $830,000 in unpaid commissions relating to the placement of Class II games in California. SCI also seeks recovery of prejudgment interest, court costs and attorneys’ fees. The Company removed the case to the US District Court for the Central District of California, Eastern Division, and the Company sought a declaration that SCI was not entitled to the $830,000. The Company agreed to settle with both plaintiffs for the total sum of $275,000. Both SCI and Kevin McDonald executed a full and final release of the Company, as well as any future claims to revenue generated by the Company at various tribal casinos in California. On June 28, 2007, the court dismissed the case with prejudice.

WMS Industries, Inc. In April 2007, WMS Industries, Inc., or WMS, a third-party game supplier from which the Company licenses games and purchases game machines, contacted the Company and claimed that the Company did not provide adequate reporting with respect to WMS game themes placed on gaming machines in the field. On April 25, 2007, the Company’s subsidiary, MegaBingo, Inc., received an invoice from WMS purporting to bill the Company for approximately $7 million of alleged unpaid license and related fees. The Company contends that neither the terms of the agreements with WMS nor the Company’s course of dealing with WMS support the invoice. In addition, the Company contends that, even if WMS’s interpretation of the terms of the relevant agreements were determined to be correct, the Company’s liability would be significantly less than the $7 million stated in the WMS invoice. The Company and WMS are engaged in a dispute resolution process. Nevertheless, any adverse determination in this dispute with WMS over this issue could have a material effect on the Company’s financial position, operating results and cash flows.

New York Sales Tax Audit. On August 6, 2007, the Company received a Statement of Proposed Audit Change for Sales and Use Tax with respect to equipment purchased and leased to customers in the state of New York. The proposed audit adjustment is for $811,691 in sales tax and $612,732 in interest and penalties. The Company disagrees with the position of the state of New York and intends to respond to this proposed adjustment. We have not recorded a reserve for the proposed adjustment because a liability is not probable at this time nor is it estimatable. If an assessment is ultimately made and upheld, our financial results could be materially impacted.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Johnson Act. In October 2005, the Department of Justice, or DOJ made available to the public proposed legislation the agency has drafted amending the Johnson Act. After conducting a series of consultation meetings with Native American tribes, the DOJ released a newly revised draft bill that, if enacted, could materially and adversely affect the Company’s Class II gaming market. The proposed legislation would classify electronic technologic aids used by Native American tribes in Class II games, such as bingo, as gambling devices, and would authorize the use of such Class II devices by Native American tribes only if such devices are certified by the National Indian Gaming Commission, or NIGC, as Class II technologic aids. The proposed legislation authorizes the NIGC to promulgate regulations regarding the use of technologic aids. The NIGC regulations must maintain a distinction between Class II technologic aids and Class III gambling devices based upon the internal and external characteristics of the gambling devices and the manner in which the games using gambling devices are played. The DOJ was unable to find congressional sponsors for its proposed bill during the 109^thCongress, which concluded in December 2006. To date, the DOJ’s proposed bill has not been introduced in the First Session of the 110^th Congress.

NIGC Class II Game Classification Regulations. The NIGC is in the process of gathering information in an effort to define the significant elements of the game of bingo. The NIGC has commissioned a study to determine the economic impact of the NIGC’s bingo elements. Depending on the results of the economic study, the NIGC may promulgate new Class II game classification rules. To the extent that the NIGC promulgates new regulations that restrict certain aspects of Class II games and makes the games less attractive to the customers, the Class II gaming market could be materially and adversely affected.

Development Agreements. In April 2004, the Company received a letter from the NIGC, advising it that its agreements with a certain customer may constitute a management contract requiring the approval of the NIGC Chairman. The Company has maintained that the agreement relied on by the NIGC was an outdated agreement that was not applicable to the customer’s gaming facility. To date, the NIGC has taken no further action in this matter.

On November 30, 2004, the Company received letters from the Acting General Counsel of the NIGC advising it that based on the fee the Company receives under its agreements with other tribes, collectively, the “tribes,” those agreements may evince a proprietary interest by the Company in the tribes’ gaming activities, in violation of the Indian Gaming Regulatory Act of 1988, or IGRA, and the tribes’ gaming ordinances. The NIGC invited the Company and the tribes to submit any explanation or information that would establish that the agreement terms do not violate the requirement that the tribes maintain sole proprietary interest in the gaming operation. The NIGC letters also advised that some of the agreements may also constitute management contracts, thereby requiring the approval of the NIGC Chairman.

The Company responded to the NIGC, and explained why the agreements do not violate the sole proprietary interest prohibition of IGRA, or constitute management agreements. Furthermore, the Company will vigorously contest any action by the NIGC that would adversely affect the Company’s agreements with the tribes. To date, the NIGC has taken no further action in this matter.

If certain of the Company’s development agreements are finally determined to be management contracts or to create a “proprietary” interest of ours in tribal gaming operations, there could be material adverse consequences to us. In that event, the Company may be required, among other things, to modify the terms of such agreements. Such modification may adversely affect the terms on which the Company conducts business, and have a significant impact on the Company’s financial condition and results of operations from such agreements and from other development agreements that may be similarly interpreted by the NIGC.

The Company’s contracts could be subject to further review at any time. Any further review of these agreements by the NIGC, or alternative interpretations of applicable laws and regulations could require substantial modifications to those agreements, or result in their designation as “management contracts,” which could materially and adversely affect the terms on which the Company conducts business.

Noncompete Settlement. Effective April 27, 2007, the Company and its former Chief Executive Officer agreed to terminate their noncompete agreement. As a result of this settlement, the Company has recorded income, included in other income, of approximately $1.4 million for the extinguishment of the related liability, during the quarter ended June 30, 2007.

Other Litigation. In addition to the threat of litigation relating to the Class II or Class III status of the Company’s games and equipment, the Company is the subject of various pending and threatened claims arising out of the ordinary course of business. The Company believes that any liability resulting from these various other claims will not have a material adverse effect on its results of operations or financial condition.

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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Other. Existing federal and state regulations may also impose civil and criminal sanctions for various activities prohibited in connection with gaming operations, including false statements on applications, and failure or refusal to obtain necessary licenses described in the regulations.

9. SUBSEQUENT EVENTS

Share Repurchase. During July 2007, the Company completed a modified “Dutch Auction” Tender Offer and purchased $25.0 million of its common stock and the associated preferred share purchase rights. The Company accepted, for purchase, an aggregate of 1,992,032 shares of its common stock at a purchase price of $12.55 per share, for an aggregate share repurchase of approximately $25.0 million. Additionally, the Company incurred costs of $387,457 related to the Tender Offer that will be recorded in treasury stock.

On July 31, 2007, the Company committed up to $3.6 million for a small facility expansion in southern Oklahoma. The Company will receive approximately 100 units in the expanded facility. The company will record all advances as a note receivable.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FUTURE EXPECTATIONS AND FORWARD-LOOKING STATEMENTS

This Quarterly Report and the information incorporated herein by reference contain various “forward-looking statements” within the meaning of federal and state securities laws, including those identified or predicated by the words “believes,” “anticipates,” “expects,” “plans,” or similar expressions with forward-looking connotation. Such statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the uncertainties inherent in the outcome of any litigation of the type described in this Quarterly Report under “PART II – Item 1. Legal Proceedings,” trends and other expectations described in “PART I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” risk factors disclosed in our earnings and other press releases issued to the public from time to time, as well as those other factors as described under “Part II – Item 1a. Risk Factors” set forth below. Given these uncertainties, readers of this Quarterly Report are cautioned not to place undue reliance upon such statements. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligations to update any such forward-looking statements.

Overview

We are a supplier of interactive systems, electronic games, and player terminals for the Native American gaming market, as well as to the racetrack casino, charity and commercial bingo, sweepstakes, and video lottery markets. We design and develop networks, software and content that provides our customers, among other things, comprehensive gaming systems delivered through a telecommunications network that links our player terminals with one another, both within and among gaming facilities. Our ongoing development and marketing efforts focus on Class II and Class III gaming systems and products for use by Native American tribes throughout the United States, video lottery systems and other products for domestic and international lotteries, products for charity and commercial bingo opportunities, and promotional sweepstakes and amusement with prize systems.

We derive the majority of our gaming revenues and income from participation agreements under which we place player terminals, player terminal content licenses, and back-office equipment, which we collectively refer to as gaming equipment. To a lesser degree, we derive revenue from the placement of gaming equipment in the Washington State Class III market under lease-purchase or participation arrangements, and from the small back-office fees generated by those video lottery systems. We also generate gaming revenues in return for providing the central determinant system for a network of player terminals operated by the New York State Division of the Lottery. A significantly smaller portion of our revenues is generated from the sale of gaming equipment in the Class III market in Washington State, except for a relatively few periods during which market conditions result in a temporary increase in the number of player terminals sold during the period (e.g., the opening of a new casino, or a change in the law that allows existing casinos to increase the number of player terminals permitted under prior law).

Class II Market

We derive our Class II gaming revenues from participation arrangements with our Native American customers. Under these arrangements, we retain ownership of the gaming equipment installed at our customers’ tribal gaming facilities, and receive revenue based on a percentage of the hold per day generated by each gaming system. Our portion of the hold per day is reported by us as “Gaming revenue – Class II” and represents the total amount that end users wager, less the total amount paid to end users for prizes, and the amounts retained by the facilities for their share of the hold. Currently, the majority of our customer sites have been upgraded with our Gen 5 gaming system. The product is replacing the Gen IV back-office system that we introduced in late 2003, which allowed us to enhance prior systems by adding bonus-round games and wide-area progressive jackpots to our extensive library of game titles. The Gen5 product features a more robust database for accounting, player tracking and database marketing, enhancing hardware and software redundancy, providing customers with currency accounting and player tracking support capabilities for third-party vendor games, and for offering the ability to include Class II and Class III compacted games on a single integrated system.

As the market has grown, we have seen new competitors with significant gaming experience and financial resources enter the Class II market. As the rules and regulations governing Class II gaming are clarified by court decisions and by new rule-making procedures, we expect there to be even more competition. New tribal-state compacts, such as the Oklahoma gaming legislation passed by referendum in 2004, have also led to increased competition. In addition, we continue to experience an extended period of inaction

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relative to enforcement of existing restrictions on non-Class II devices, which is forcing us to continue competing against games that do not appear to comply with the published regulatory restrictions on Class II games. As a result of this increased competition in Oklahoma, and continued conversion to games played under the compact, we have and may continue to experience pressure on our pricing model and hold per day, with the result that gaming providers are competing on the basis of price as well as the entertainment value and technological superiority of their products. We have also experienced and expect to continue to experience a decline in the number of our Class II games deployed in Oklahoma, in accordance with our recent conversion strategy. While we will continue to compete by regularly introducing new and more entertaining games with technological enhancements that we believe will appeal to end users, we believe that the level of revenue retained by our customers from their installed base of player terminals will become a more significant competitive factor, one that may require us to change the terms of our participation arrangements with customers. We will continue the deployment of one-touch, compact-compliant Class III games in Oklahoma, which will reduce the number of Class II machines in play. Because of the dynamics of our markets in Oklahoma and elsewhere, we believe that a simple business model based upon the average hold per player terminal per day has become less relevant in predicting our performance, as our participation arrangements with customers have become more complex.

Oklahoma Compact Market

During 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming at racetracks, and additional types of games at tribal gaming facilities, pursuant to a tribal-state compact. The Oklahoma gaming compact allows tribes to operate an unlimited number of electronic instant bingo games, electronic bonanza-style bingo games, electronic amusement games, and non-house-banked tournament card games. In addition, certain horse tracks in Oklahoma are allowed to operate a limited number of instant and bonanza-style bingo games and electronic amusement games. As of June 30, 2007, we had placed 3,973 player terminals at 31 facilities that are operating under the Oklahoma gaming compact. As of June 30, 2007, the majority of our games operating under the Oklahoma gaming compact are at a 20% revenue share.

Charity Market

As of June 30, 2007, we had 2,399 high-speed, standard bingo games installed for the charity market in three Alabama facilities. Charity bingo and other forms of charity gaming are operated by or for the benefit of nonprofit organizations for charitable, educational and other lawful purposes. These games are typically only interconnected within the gaming facility where the terminals are located. Regulation of charity gaming is vested with each individual state, and in some states, regulatory authority is delegated to county or municipal governmental units. We typically place player terminals under participation arrangements in the charity market and receive a percentage of the hold per day generated by each of the player terminals.

All Other Gaming Markets

Class III Market. The majority of our Class III gaming equipment in Washington State has been sold to customers outright, for a one-time purchase price, which is reported in our results of operations as “Gaming equipment, system sale and lease revenue.” Certain game themes we use in the Class III market have been licensed from third parties and are resold to customers along with our Class III player terminals. Revenue from the sale of Class III gaming equipment is recognized when the units are delivered to the customer, and the licensed games installed. To a considerably lesser extent, we also enter into either participation arrangements or lease-purchase arrangements for our Class III player terminals, on terms similar to those used for our player terminals in the Class II market.

We also receive a small back-office fee from both leased and sold gaming equipment in Washington State. Back-office fees cover the service and maintenance costs for back-office servers installed in each facility to run our Class III games, as well as the cost of related software updates.

State Video Lottery Market. Beginning in January 2004, we began the first operation of our central determinant system for the video lottery terminal network that the New York Lottery operates at licensed New York State racetrack casinos. As payment for providing and maintaining the central determinant system, we receive a small portion of the network-wide hold per day. This contract provides for a three-year term with an additional three one-year automatic renewal under certain conditions. In January 2006, we began installing video lottery terminals in Iowa. During the fiscal year ended September 30, 2006, legislation in Iowa required the removal of all video lottery terminals on or before May 3, 2006. During fiscal year 2006, all installed terminals had been removed. During the period the terminals were active, we effectively received hold-per-day-based payments for providing the player terminals, and an additional percentage of the hold per day for providing the system.

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International Commercial Bingo Market. On March 17, 2006, we entered into a contract with Apuestas Internacionales, S.A. de C.V., or Apuestas, a subsidiary of Grupo Televisa, S.A., to provide traditional and electronic bingo gaming, technical assistance, and related services for Apuestas’ locations in Mexico. As of June 30, 2007, we had installed 2,426 player terminals at eight sites in Mexico under this contract. To date, there are not as many permanent facilities opened as we originally projected, and the hold per day is below our original expectations. At June 30, 2007, all installed player terminals placed are pursuant to a revenue share arrangement that is comparible with our Oklahoma market.

Promotional Sweepstakes

On December 15, 2005, one of our subsidiaries leased a promotional sweepstakes system to the operator of the Birmingham Race Course, a greyhound race course in Birmingham, Alabama. The promotional sweepstakes system allowed a patron to obtain free sweepstakes entries either by purchasing a product or service or by other means whereby no purchase was necessary. There were a number of methods that allowed a patron to redeem sweepstakes entries, including having the predetermined outcome displayed by video card readers.

On December 22, 2005, the Jefferson County, Alabama Sheriff served a search warrant at the Birmingham Race Course. Pursuant to the search warrant, the sheriff shut down the promotional sweepstakes system. On January 31, 2006, the Jefferson County, Alabama Circuit Court issued a Declaratory Judgment and Injunction that declared that the promotional sweepstakes was legal under Alabama law. On March 22, 2006, the Jefferson County District Attorney appealed the judgment to the Alabama Supreme Court. On December 1, 2006, the Alabama Supreme Court issued an opinion, reversing the Jefferson County, Alabama Circuit Court and rendering judgment in favor of District Attorney Barber, finding that the promotional sweepstakes was unlawful under Alabama’s gambling laws.

As of January 31, 2007, we had disassembled the sweepstakes system and removed it from the facility. We recorded a write-off of $111,000 for all unamortized installation and software costs as of December 31, 2006.

Revenues from the promotional sweepstakes are included in “Other” revenues in statements of operations.

Development Agreements

As we seek to continue the growth in our customer base and to expand our installed base of player terminals, a key element of our strategy has become entering into development agreements with various Native American tribes to help fund new or expand existing tribal gaming facilities. Pursuant to these agreements, we advance funds to the tribes for the construction of new tribal gaming facilities or for the expansion of existing facilities.

Amounts advanced that are in excess of those to be reimbursed by such tribes for real property and land improvements are allocated to intangible assets and are generally amortized over the life of the contract. Amounts advanced that relate to personal property owned by us and located at the tribal gaming facility are carried in our “Property and equipment” and depreciated over the estimated useful life of the asset.

In return for the amounts advanced by us, we receive a commitment for a fixed number of player terminal placements in the facility or a fixed percentage of the available gaming floor space, and a fixed percentage of the hold per day from those terminals over the term of the development agreement. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of our floor space. In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment, have been repaid.

We have in the past and in the future expect to, reduce the number of player terminals in certain of our Class II facilities as a result of ongoing competitive pressures faced by our customers from alternative gaming facilities and pressures faced by our machines from competitors’ products. We have in the past and in the future may also, by mutual agreement and for consideration, amend these contracts in order to reduce the number of player terminals at these facilities.

We recently committed to a significant, existing tribal customer to provide approximately 37.5%, or $56.3 million, of the total funding for a facility expansion. In return for this commitment to fund the expansion, we will receive approximately 30% of the 4,000 additional gaming units that are expected to be placed in the expanded facility in southern Oklahoma. We will record all advances as a note receivable and impute interest on the interest free loan. The discount (imputed interest) will be recorded as contract rights and will be amortized over the life of the agreement. The repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, will take place over twelve months at approximately $14.0 million per quarter. As of June 30, 2007, we had advanced $11.6 million toward this commitment.

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Recent Developments

Treasury Stock. During July 2007, we completed a modified “Dutch Auction” Tender Offer and purchased $25.0 million of our common stock and the associated preferred share purchase rights. We accepted, for purchase, an aggregate of 1,992,032 shares of our common stock at a purchase price of $12.55 per share, for an aggregate share repurchase of approximately $25.0 million. Additionally, we incurred costs of $387,457 related to the Tender Offer that will be recorded in treasury stock.

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RESULTS OF OPERATIONS

The following tables outline our end-of-period and average installed base of player terminals for the three and nine months ended June 30, 2007 and 2006.


	At June 30,
	2007	2006
End-of-period installed player terminal base
Class II player terminals
Reel Time Bingo^®	4,624	7,635
Legacy system	353	376
Oklahoma compact games	3,973	1,593
Other player terminals⁽¹⁾	5,161	3,183


	Three Months Ended June 30,		Nine Months Ended June 30,
	2007	2006	2007	2006
Average installed player terminal base:
Class II player terminals
Reel Time Bingo	4,757	8,014	5,675	8,674
Legacy system	353	388	359	405
Oklahoma compact games	3,846	1,484	3,363	1,180
Other player terminals⁽¹⁾	4,555	2,886	3,768	2,719

(1)	Other player terminals include charity, Mexico, Iowa Lottery and Malta.

During January 2007, as a result of the Alabama Supreme Court decision, we removed all of the sweepstakes video readers that were installed in Alabama. At June 30, 2006, there were 1,318 sweepstakes video readers installed. The average installed base for the three months ended June 30, 2006 was 1,318. The average installed base for the nine months ended June 30, 2007 and 2006 was 502 and 676, respectively. These sweepstakes video readers are not included in the counts above.

Three Months Ended June 30, 2007, Compared to Three Months Ended June 30, 2006

Total revenues for the three months ended June 30, 2007, were $30.9 million, compared to $32.2 million, a decline of $1.3 million, or 4% for the same period of 2006. This decrease is primarily the result of the decrease in the average install base of Class II games, and to a lesser extent, a decrease in the revenue share percentage of these games. These decreases were due to competitive factors, including competing with new compact games in Oklahoma. These decreases were partially offset by an increase in the average number of Oklahoma compact games in place during the quarter.

Gaming Revenue – Class II

•

Class II gaming revenue was $9.4 million in the three months ended June 30, 2007, compared to $20.4 million in the three months ended June 30, 2006, a $11.0 million or 54% decrease.

•

Reel Time Bingo revenue was $8.7 million for the quarter ended June 30, 2007, compared to $19.6 million in the quarter ended June 30, 2006, a $10.9 million or 56% decrease. The average installed base of player terminals and the average hold per day decreased 41% and 11%, respectively. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, increased $405,000, to $1.4 million, or 43%, in the three months ended June 30, 2007, compared to $947,000 in the three months ended June 30, 2006. During fiscal 2007, we will continue to convert Reel Time Bingo player terminals to games played under the compact, which are included in “Gaming revenue – Oklahoma compact,” and we expect this trend to continue in the future as Reel Time Bingo competes with the higher hold per day of compact games. In addition, as a result of the conversion from Reel Time Bingo to games played under the compact, our revenue share percentage will decrease to the market rate for compact games.

•

Legacy revenue decreased $25,000, or 3%, to $696,000 in the three months ended June 30, 2007, from $721,000 in the three months ended June 30, 2006. The average installed base of Legacy player terminals decreased 9%, which was partially offset by a 7% increase in hold per day. We expect the number of Legacy terminals to continue to decrease as they are replaced with higher-earning Oklahoma compact player terminals.

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Gaming Revenue – Oklahoma Compact

•

In March 2005, we began converting Reel Time Bingo player terminals to games that could be played under the Oklahoma compact. These games generated revenue of $11.7 million in the three months ended June 30, 2007, compared to $2.5 million during the same period of 2006, an increase of $9.2 million. The average installed base increased 159% as the conversion of Class II player terminals to compact games continues. Hold per day increased 67%, primarily as a result of the higher installed base of the stand-alone units, which have a higher hold per day.

Gaming Revenue – Charity

•

Charity gaming revenues increased $141,000, or 3%, to $4.4 million for the June 2007 quarter, compared to $4.2 million for the same quarter of 2006. The average installed player terminal base and average hold per day increased 2% and 10%, respectively, in the three months ended June 30, 2007, compared to the same period in 2006.

Gaming Revenue – All Other

•

Class III rental and back-office fees decreased $127,000, or 12%, to $910,000 in the three months ended June 30, 2007, from $1.0 million during the same period of 2006. As of January 2006, we no longer have any rental customers. We continue to receive a small back-office fee from each of the twelve gaming facilities in the state of Washington where we are located.

•

Revenues from the New York Lottery system increased $892,000, or 134% to $1.6 million in the three months ended June 30, 2007, from $667,000 in the three months ended June 30, 2006. Currently, eight of the nine planned racetrack casinos are operating, with approximately 13,100 total terminals. The last of the planned openings is scheduled for fiscal 2008. To date, we have realized substantially less revenue than anticipated from our New York Lottery operations, in significant part due to delays in the opening of planned racetrack casino operations at several racetracks. At the current placement levels, we have obtained near break-even operations for the New York Lottery system and expect to achieve profitable operations after all of the facilities are operating.

•

As of June 30, 2007, we had installed 2,426 player terminals at eight sites in Mexico compared to 600 terminals installed at June 30, 2006. To date, there are not as many permanent facilities opened as we originally projected, and the hold per day is below our original expectations. Our revenue share is in the range of the other markets in which we operate. Due to the delays in opening facilities and the lower than expected hold per day, we have not achieved break-even operations in this market.

•

The Iowa Lottery system operated between January and May 2006, and generated revenues of $244,000 during the three months ended March 31, 2006. Pursuant to legislative actions, these units were disconnected from our central determinant system in May 2006.

Gaming Equipment and System Sale and Lease Revenue and Cost of Sales

•

Gaming equipment and system sale and lease revenue decreased $584,000, or 33% to $1.2 million for the quarter ended June 30, 2007, from $1.8 million for the same period of 2006. Gaming equipment and system sale revenue of $694,000 for the three months ended June 30, 2007, was generated by the sale of gaming equipment. Gaming equipment and system sale and lease revenue of $826,000 for the three months ended June 30, 2006, included 78 player terminals sales of $1.2 million, and Iowa Lottery lease revenue of $407,000. In the three months ended June 30, 2007 and 2006, gaming equipment sale revenue included revenues of $273,000 and $281,000, respectively, related to a certain equipment sale being recognized ratably over the term of the agreement. License revenues for the three months ended June 30, 2007, were $214,000, compared to $252,000 for the three months ended June 30, 2006, a decrease of $38,000, or 15%. Total cost of sales, which includes cost of royalty fees, increased $399,000, or 64% to $1.0 million in the three months ended June 30, 2007, from $624,000 in the three months ended June 30, 2006. The increase relates to the sale of certain gaming equipment in the quarter ending June 30, 2007, with minimal margin, and is partially offset by decreased royalty fees due to lower revenue on some licensed game themes in play.

Other Revenue

•

Other revenues decreased $782,000 or 61% to $492,000 for the quarter ended June 30, 2007, from $1.3 million during the same period of 2006. The decrease is primarily due to discontinuation of the promotional sweepstakes system in January 2007.

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Selling, General and Administrative Expenses

•

Selling, general and administrative expenses decreased approximately $2.0 million, or 12%, to $15.4 million for the three months ended June 30, 2007, from $17.4 million in the same period of 2006. This decrease was primarily a result of a) a decrease in salaries and wages and the related employee benefits of approximately $1.4 million relating to the reduction in staff in February 2007 (at June 30, 2007, we employed 404 full-time and part-time employees, compared to 489 at June 30, 2006); b) a decrease of $407,000 in share-based compensation due to a decrease in the number of unvested outstanding options; c) a decrease in travel costs of approximately $337,000 due to the ramp up in 2006 for new markets, primarily Mexico; and d) a decrease in legal, professional and lobbying services of approximately $173,000 primarily related to the entrance into new markets in fiscal 2006. These decreases were partially offset by an increase in miscellaneous expenses and other taxes and license fees of $363,000.

Amortization and Depreciation

•

Amortization expense decreased $102,000, or 6%, to $1.5 million for the quarter ended June 30, 2007, compared to $1.6 million for the same quarter of 2006. Depreciation expense increased $489,000, or 4%, to $13.3 million for the three months ended June 30, 2007, from $12.8 million for the corresponding three-month period ended June 30, 2006. The increase in depreciation expense primarily relates to the installation of stand-alone terminals in the Oklahoma compact market.

Other Income and Expense

•

Interest income increased $347,000, or 60%, to $924,000 for the three months ended June 30, 2007, from $577,000 in the same period of 2006. We entered into development agreements with a customer under which approximately $98.6 million has been committed under interest-free loans in which we will impute interest. For the quarter ended June 30, 2007, we recorded imputed interest of $554,000 relating to development agreements with an imputed interest rate range of 6% to 8.25%.

•

Interest expense decreased $120,000, or 11%, to $1.0 million for the third fiscal quarter of 2007, from $1.1 million for the same quarter of fiscal 2006, due primarily to a decrease in amounts outstanding under our previous Credit Facility. The previous Credit Facility provided us with a $20.0 million term loan facility, or the Term Loan, a $25.0 million revolving line of credit, or the Revolver, and $35.0 million and $9.5 million in reducing revolving lines of credit, or the Reducing Revolvers. During April 2007, we entered into a syndicated, fully underwritten $150 million Senior Secured Revolving Credit Facility, or the Revolving Credit Facility.

•

Other income was $1.6 million for the three months ended June 30, 2007, with no such income in the same period of 2006. Other income primarily consisted of the write off of an intangible asset and related liability due to the termination of a non compete agreement with our former Chief Executive Officer.

Income tax expense increased by $796,000, to $571,000 for the three months ended June 30, 2007, from an income tax benefit of $225,000 in the same period of 2006. These figures represent effective income tax rates of 45.5% and 27.8% for the three months ended June 30, 2007 and 2006, respectively. Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment.” is a revision of SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS No 123(R) includes several modifications to the way that income taxes are recorded in the financial statements. The expense for incentive stock option grants is only deductible for tax purposes at the time that the taxable event takes place, which could cause variability in our effective tax rates recorded throughout our fiscal year.

Our tax years ended 2002, 2003 and 2004 are currently under examination from the Internal Revenue Service, or IRS. We have received an assessment of approximately $686,000, primarily relating to the deductibility of certain lobbying expenses the IRS has determined should be disallowed. We have appealed the assessment to the IRS, and included in our appeal is a refund claim for overallocating nondeductible lobbying expenses. We have not recorded a reserve for the assessment because a liability is not probable at this time nor is it estimatable. If the assessment is upheld, our effective tax rate would be higher for the year ended September 30, 2007, or for the fiscal year in which the matter is settled.

Nine Months Ended June 30, 2007, Compared to Nine Months Ended June 30, 2006

Total revenues for the nine months ended June 30, 2007, were $90.7 million, compared to $112.7 million for the same period of 2006, a $22.0 million, or 20% decrease. This decrease is the result of decreased gaming equipment and system sale and lease revenue of $11.3 million, or 84%. During the nine months ended June 30, 2006, we recognized system revenues of $8.0 million and equipment sales of $3.8 million on 416 player terminals and other equipment. In addition, there was a decrease in the average install base of

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Class II games, and to a lesser extent, a decrease in the average hold per day and revenue share of these games. These decreases were due to competitive factors, including competing with new compact games in Oklahoma. These decreases were partially offset by an increase in the average number of Oklahoma compact games in place.

Gaming Revenue – Class II

•

Class II gaming revenue was $36.3 million in the nine months ended June 30, 2007, compared to $69.5 million in the nine months ended June 30, 2006, a $33.2 million or 48% decrease

•

Reel Time Bingo revenue was $34.2 million for the nine months ended June 30, 2007, compared to $67.3 million in the nine months ended June 30, 2006, a $33.1 million, or 49%, decrease. The average installed base of player terminals and the average hold per day decreased 35% and 12%, respectively. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, increased $1.4 million, to $4.4 million, or 46%, in the nine months ended June 30, 2007, compared to $3.0 million in the nine months ended June 30, 2006. During fiscal 2007, we will continue to convert Reel Time Bingo player terminals to games played under the compact, which are included in “Gaming revenue – Oklahoma compact,” and we expect this trend to continue in the future as Reel Time Bingo competes with the higher hold per day of compact games. In addition, as a result of the conversion from Reel Time Bingo to games played under the compact, our revenue share percentage will decrease to the market rate for compact games.

•

Legacy revenue decreased $96,000, or 4%, to $2.2 million in the nine months ended June 30, 2007, from $2.3 million in the nine months ended June 30, 2006. The average installed base of Legacy player terminals decreased 11%, which was partially offset by a 7% increase in hold per day. We expect the number of Legacy terminals to continue to decrease as they are replaced with higher earning Oklahoma compact player terminals.

Gaming Revenue – Oklahoma Compact

•

In March 2005, we began converting Reel Time Bingo player terminals to games that could be played under the Oklahoma compact. These games generated revenue of $27.6 million in the nine months ended June 30, 2007, compared to $6.4 million during the same period of 2006, an increase of $21.2 million. The average installed base increased 185% as the conversion of Class II player terminals to compact games continues. Hold per day increased 46%, primarily as a result of the higher installed base of the stand-alone units, which have a higher hold per day.

Gaming Revenue – Charity

•

Charity gaming revenues were $13.6 million for the nine months ended June 30, 2007, compared to $14.1 million in the nine months ended June 30, 2006, a $438,000 or 3% decrease. The average installed player terminal base remained unchanged while the hold per day decreased 2%.

Gaming Revenue – All Other

•

Class III rental and back-office fees decreased $812,000, or 23%, to $2.8 million in the nine months ended June 30, 2007, from $3.6 million during the same period of 2006. As of January 2006, we no longer have any rental customers. We continue to receive a small back-office fee from each of the twelve gaming facilities in the state of Washington where we are located.

•

Revenues from the New York Lottery system increased $2.2 million, or 118% to $4.0 million in the nine months ended June 30, 2007, from $1.8 million in the nine months ended June 30, 2006. Currently, eight of the nine planned racetrack casinos are operating, with approximately 13,100 total terminals. The last of the planned openings is scheduled for fiscal 2008. To date, we have realized substantially less revenue than anticipated from our New York Lottery operations, in significant part due to delays in the opening of planned racetrack casino operations at several racetracks. At the current placement levels, we have obtained near break-even operations for the New York Lottery system and expect to achieve profitable operations after all of the facilities are operating.

•

As of June 30, 2007, we had installed 2,426 player terminals at eight sites in Mexico compared to 600 terminals installed in the same period of 2006. To date, there are not as many permanent facilities opened as we originally projected, and the hold per day is below our original expectations. Our revenue share is in the range of the other markets in which we operate. Due to the delays in opening facilities and the lower than expected hold per day, we have not achieved break-even operations in this market.

•

The Iowa Lottery system operated between January and May 2006, and generated revenues of $616,000 during the nine months ended June 30, 2006. Pursuant to legislative actions, these units were disconnected from our central determinant system in May 2006.

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Gaming Equipment and System Sale and Lease Revenue and Cost of Sales

•

Gaming equipment and system sale and lease revenue decreased $11.3 million, or 84% to $2.2 million for the nine months ended June 30, 2007, from $13.5 million for the same period of 2006. Gaming equipment and system sale revenue of $1.0 million for the nine months ended June 30, 2007 includes two system sales and no player terminals. Gaming equipment and system sale and lease revenue of $11.7 million for the nine months ended June 30, 2006 included one system sale of $8.0 million, 416 player terminals sales of $3.0 million, and Iowa Lottery lease revenue of $681,000. In the nine months ended June 30, 2007 and 2006, gaming equipment sale revenue included revenues of $787,000 and $843,000, respectively, related to a certain equipment sale being recognized ratably over the term of the agreement. License revenues for the nine months ended June 30, 2007, were $391,000, compared to $919,000 for the nine months ended June 30, 2006, a decrease of $528,000, or 57%. Total cost of sales, which includes cost of royalty fees, decreased $9.6 million, or 85% to $1.7 million in the nine months ended June 30, 2007, from $11.3 million in the nine months ended June 30, 2006. The decrease relates to the decreased gaming equipment and system sale revenue discussed above, and decreased royalty fees due to lower revenue on some licensed game themes in play.

Other Revenue

•

Other revenues decreased $1.4 million, or 45% to $1.7 million for the nine months ended June 30, 2007, from $3.1 million during the same period of 2006. The decrease is primarily the result of the discontinuation of the promotional sweepstakes system in January 2007.

Selling, General and Administrative Expenses

•

Selling, general and administrative expenses decreased approximately $443,000 or 1%, to $50.5 million for the nine months ended June 30, 2007, from $51.0 million in the same period of 2006. These decreases were primarily a result of a) a decrease in salaries and wages and the related employee benefits of approximately $1.7 million relating to the reduction in staff in February 2007 (at June 30, 2007, we employed 404 full-time and part-time employees, compared to 489 at June 30, 2006; and b) a decrease in travel costs of $979,000, due to the ramp up in fiscal 2006 for new markets. Partially offsetting these decreases were increases in consulting and contract labor of approximately $1.3 million, primarily related to the design of new gaming cabinets and an increase in repairs and maintenance, transportation and related costs of $1.1 million and primarily due to units being refurbished for deployment in Mexico.

Amortization and Depreciation

•

Amortization expense increased $86,000, or 2% to $5.0 million for the nine months ended June 30, 2007, compared to $4.9 million for the same period of 2006. Depreciation expense increased $1.2 million, or 3%, to $39.2 million for the nine months ended June 30, 2007, from $38.0 million for the corresponding nine-month period ended June 30, 2006. The increase in depreciation expense primarily relates to the installation of stand-alone terminals in the Oklahoma compact market.

Other Income and Expense

•

Interest income increased $1.9 million, or 114%, to $3.6 million for the nine months ended June 30, 2007, from $1.7 million in the same period of 2006. We entered into development agreements with a customer under which approximately $98.6 million has been committed under interest-free loans in which we will impute interest. For the nine months ended June 30, 2007, we calculated imputed interest of $1.8 million relating to development agreements with an imputed interest rate range of 6% to 8.25%.

•

Interest expense increased $391,000, or 12%, to $3.5 million for the nine months ended June 30, 2007, from $3.1 million for the same period of fiscal 2006, due primarily to an increase in amounts outstanding under our previous Credit Facility. The previous Credit Facility provided us with a $20.0 million term loan facility, or the Term Loan, a $25.0 million revolving line of credit, or the Revolver, and $35.0 million and $9.5 million in reducing revolving lines of credit, or the Reducing Revolvers. During April 2007, we entered into the new Revolving Credit Facility.

•

Other income was $2.7 million for the nine months ended June 30, 2007, compared to no other income for the same period of 2006. Other income consisted of a distribution from a partnership interest, accounted for on the cost basis that we received during the nine months ended June 30, 2007. In addition, we had the write off of an intangible asset and related liability due to the termination of a non compete agreement with our former Chief Executive Officer as of April 27, 2007.

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Income tax expense decreased by $3.5 million, to an income tax benefit of $917,000 for the nine months ended June 30, 2007, from an income tax expense of $2.6 million in the same period of 2006. These figures represent effective income tax rates of 30.2% and 43.2% for the nine months ended June 30, 2007 and 2006, respectively. SFAS, No. 123(R), “Share-Based Payment.” is a revision of SFAS No. 123, “Accounting for Stock Based Compensation.” SFAS No 123(R) includes several modifications to the way that income taxes are recorded in the financial statements. The expense for incentive stock option grants is only deductible for tax purposes at the time that the taxable event takes place, which could cause variability in our effective tax rates recorded throughout our fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

We monitor new, generally accepted accounting principle and disclosure reporting requirements issued by the Securities and Exchange Commission, or SEC, and other standard setting agencies. Recently issued accounting standards affecting our financial results are described in Note 1 of our Unaudited consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

For a description of our critical accounting policies and estimates, refer to Part I – Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on our Form 10-K for the fiscal year ended September 30, 2006. We have not made any changes relating to the application of these policies in the nine months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007, we had $2.2 million in unrestricted cash and cash equivalents, compared to $4.9 million at September 30, 2006. Our working capital at June 30, 2007 was $11.7 million, compared to a working capital deficit of $5.8 million at September 30, 2006. The increase in working capital was primarily the result of the classification of the our debt as non current, in accordance with our new Revolving Credit Facility, and the payoff of the current portion of long term debt and capital leases. During the quarter ended June 30, 2007, we used $10.2 million for capital expenditures of property and equipment, $8.3 million for payments of accounts payable and accrued expenses, and we collected $20.0 million on development agreements, with $11.6 million advanced under development agreements. Under the Revolving Credit Facility, our availability as of June 30, 2007, is $106.8 million.

During July 2007, we completed a modified “Dutch Auction” Tender Offer to purchase up to $25.0 million of our common stock and the associated preferred share purchase rights. We accepted, for purchase, an aggregate of 1,992,032 shares of our common stock at a purchase price of $12.55 per share, for an aggregate share repurchase of approximately $25.0 million. Additionally, we incurred costs of $387,457 related to the Tender Offer that will be recorded in treasury stock.

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As of June 30, 2007, our total contractual cash obligations were as follows (in thousands):


	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Revolving Credit Facility⁽¹⁾	$	—	$	—	$	63,661	$	—	$	63,661
Operating leases⁽²⁾		2,197		4,235		572		20		7,024
Purchase commitments⁽³⁾		4,263		5,229		—		—		9,492
Development agreements⁽⁴⁾		44,687		—		—		—		44,687

Total	$	51,147	$	9,464	$	64,233	$	20	$	124,864

(1)	Relating to the Revolving Credit Facility, bearing interest at Prime + 0.75% (9.0% as of June 30, 2007) and at the Eurodollar rate (8.06% as of June 30, 2007).

(2)	Consists of operating leases for our facilities and office equipment that expire at various times through 2010.

(3)	Consists of commitments to purchase third-party gaming content licenses and for the purchase of player terminals.

(4)	Consists of a commitment to fund a gaming facility expansion in Southern Oklahoma.

During the nine months ended June 30, 2007, we generated $27.0 million in cash from our operations, compared to $40.0 million during the same period of 2006. This $13.0 million decrease in cash generated from operations over the prior period was primarily due to the timing in collections of accounts receivable and the lower earnings in fiscal 2007.

Cash used in investing activities decreased to $15.6 million in the nine months ended June 30, 2007, from $48.2 million in the same period of 2006. The decrease was primarily the result of a $45.0 million decrease in advances, net of reimbursements and floor space buybacks, under development agreements, and was partially offset by a $14.9 million increase in the acquisition of property and equipment and leased gaming equipment. During the nine months ended June 30, 2007, additions to property and equipment consisted of the following:


	Capital Expenditures
	(In thousands)
Gaming equipment	$	36,747
Third-party gaming content licenses		5,644
Other		569

Total	$	42,960

Cash provided by financing activities decreased to a usage of $14.2 million in the nine months ended June 30, 2007, from $14.8 million provided by financing activities in the same period of 2006. The decrease was primarily the result of a $36.3 million decrease in the net borrowings under the Revolving Credit Facility and the revolving lines of credit.

Our capital expenditures for the next twelve months will depend upon the number of new player terminals that we are able to place into service at new or existing facilities and the actual number of repairs and equipment upgrades to the player terminals that are currently in the field. As a result of the earnings potential of compact games in the Oklahoma market, it is our strategy to either place compact games or to convert our Oklahoma Class II games to the compact games. As part of our strategy, we will offer compact games developed by us, as well as games from two other gaming suppliers. As a result, we have entered into purchase commitments for future purchases of player stations and licenses totaling $4.3 million.

We have recently committed to a significant, existing tribal customer to provide approximately 37.5%, or $56.3 million, of the total funding for a facility expansion. In return for this commitment to fund the expansion, we will receive approximately 30% of the 4,000 additional gaming units that are expected to be placed in the expanded facility in southern Oklahoma. We will record all advances as a note receivable and impute interest on the interest-free loan. The discount (imputed interest) will be recorded as contract rights and will be amortized over the life of the agreement. The repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, will take place over twelve months at approximately $14.0 million per quarter. As of June 30, 2007, we had advanced $11.6 million toward this commitment and we have approximately $44.7 million remaining under this commitment.

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Revolving Credit Facility

On April 27, 2007, we entered into the new Revolving Credit Facility which replaced the previous Credit Facility in its entirety. The Revolving Credit Facility provides working capital, the ability to finance development agreements and acquisitions, and provides working capital for general corporate purposes. The Revolving Credit Facility matures in five years and bears interest at a Base rate or a Eurodollar rate. There are four levels of pricing, which are determined by total debt to EBITDA. The Revolving Credit Facility is collateralized by substantially all of our assets, and also contains financial covenants as defined in the agreement. These include (i) a minimum fixed-charge coverage-ratio of not less than 1.50 : 1.0; (ii) a maximum total debt to EBITDA ratio of not more than 2.25 : 1.00 through June 2008, and 1.75 : 1.00 from June 2008 thereafter; and (iii) a minimum trailing twelve-month EBITDA of not less than $52 million for the quarter ended June 30, 2007, $57 million for the quarter ended September 30, 2007, and $60 million for each quarter thereafter.

Share Repurchase

Stock Repurchase Authorizations

At June 30, 2007, excluding the Tender Offer, there were approximately 887,000 shares of common stock authorized for repurchase. The timing and total number of shares repurchased will depend upon available cash, prevailing market conditions, other investment opportunities, and capital commitments.

During the fiscal year ended September 30, 2006, we repurchased 159,146 shares of our common stock with cash, at an average cost of $9.15 per share. We repurchased no shares of our common stock during the nine months ended June 30, 2007, compared to our repurchase of 159,146 shares of our common stock during the nine months ended June 30, 2006, at an average cost of $9.15 per share.

Stock-Based Compensation

At June 30, 2007, we had approximately 4.3 million options outstanding, with exercise prices ranging from $1.00 to $21.53 per share. At June 30, 2007, approximately 3.8 million of the outstanding options were exercisable.

During the quarter ended June 30, 2007, options to purchase 100,000 shares of common stock were granted. During the three months ended June 30, 2007, we issued 331,000 shares of common stock as a result of stock option exercises with exercise prices ranging from $1.00 to $10.66.

SEASONALITY

We believe our operations are not materially affected by seasonal factors, although we have experienced fluctuations in our revenues from period to period.

CONTINGENCIES

For information regarding contingencies, see “PART I – Item 1. Condensed Financial Statements – Commitments and Contingencies” and “PART II – Item 1. Legal Proceedings.”

INFLATION AND OTHER COST FACTORS

Our operations have not been nor are they expected to be materially affected by inflation. However, our domestic and international operational expansion is affected by the cost of hardware components, which are not considered to be inflation sensitive, but rather, sensitive to changes in technology and competition in the hardware markets. In addition, we expect to continue to incur increased legal and other similar costs associated with regulatory compliance requirements and the uncertainties present in the operating environment in which we conduct our business.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks in the ordinary course of business, primarily associated with interest rate fluctuations.

Our Credit Facility provides us with additional liquidity to meet our short-term financing needs, as further described under “PART I – Item 1. Condensed Financial Statements – Significant Accounting Policies – Credit Facility, Long-Term Debt and Capital Leases.” Pursuant to our new Revolving Credit Facility, we may currently borrow up to a total of $150 million, and our availability as of June 30, 2007, is $106.8 million.

In connection with the development agreements we enter into with many of our Native American tribal customers, we are required to advance funds to the tribes for the construction and development of tribal gaming facilities, some of which are required to be repaid.

As a result of our adjustable-interest-rate notes payable and fixed-interest-rate-notes receivable described in “PART I – Item 1. Condensed Financial Statements – Note 5 – Notes Receivable and Note 6 – Credit Facility, Long-Term Debt and Capital Leases, we are subject to market risk with respect to interest rate fluctuations. Any material increase in prevailing interest rates could cause us to incur significantly higher interest expense.

We estimate that a hypothetical increase of 100 basis points in interest rates would increase our annual interest expense by approximately $434,000, based on our variable debt outstanding of $43.2 million as of June 30, 2007. We do not currently manage this exposure with derivative financial instruments.

We account for currency translation from our Mexico operations in accordance with SFAS No. 52, “Foreign Currency Translation.” Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments resulting from this process are charged or credited to other comprehensive income. We do not currently manage this exposure with derivative financial instruments.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of management’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) to ensure information required to be disclosed in our filings under the Securities Exchange Act of 1934, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives, and management is necessarily required to apply its judgment when evaluating the cost-benefit relationship of potential controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of June 30, 2007.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in management’s evaluation during the third quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are subject to litigation from time to time in the ordinary course of our business, as well as litigation to which we are not a party that may establish laws that affect our business. See “PART I – Item 1. Condensed Financial Statements – Note 8 – Commitments and Contingencies.”

ITEM 1A.

RISK FACTORS

We face legal and regulatory uncertainties that threaten our ability to conduct our business and to effectively compete in our Native American gaming markets. These uncertainties also may increase our cost of doing business and divert substantial management time away from our operations.

Historically, we have derived most of our revenue from the placement of Class II player terminals and systems for gaming activities conducted on Native American lands. These activities are subject to federal regulation under the Johnson Act, the Indian Gaming Regulatory Act of 1988, or IGRA, and under the rules and regulations adopted by both the National Indian Gaming Commission, or NIGC, and the gaming commissions that each Native American tribe establishes to regulate gaming. The Johnson Act broadly defines “gambling devices” to include any “machine or mechanical device” designed and manufactured “primarily” for use in connection with gambling, and that, when operated, delivers money or other property to a player “as the result of the application of an element of chance.” A government agency or court that literally applied this definition, and did not give effect to subsequent congressional legislation or to certain regulatory interpretations or judicial decisions, could determine that the manufacture and use of our electronic player terminals, and perhaps other key components of our Class II gaming systems that rely to some extent upon electronic equipment to run a game, constitute Class III gaming and, in the absence of a tribal-state compact, are illegal. Our tribal customers could be subject to significant fines and penalties if it is ultimately determined they are offering an illegal game, and an adverse regulatory or judicial determination regarding the legal status of our products could have material adverse consequences for our business, operating results and prospects.

Significantly, in October 2005, the Department of Justice, or DOJ, made available to the public proposed legislation the agency has drafted amending the Gambling Devices Act, 15 U.S.C. § 1171, et seq. (commonly referred to as the Johnson Act). The proposed legislation, if enacted, could materially and adversely affect our Class II gaming market. The proposed legislation would classify electronic technologic aids used by Native American tribes in Class II games, such as bingo, as gambling devices, and would authorize the use of such Class II devices by Native American tribes only if such devices are certified by the NIGC as Class II technologic aids. The proposed legislation authorizes the NIGC to promulgate regulations regarding the use of technologic aids. The NIGC regulations must maintain a distinction between Class II technologic aids and Class III gambling devices based upon the internal and external characteristics of the gambling devices and the manner in which the games using gambling devices are played.

In November 2005 Senator John McCain introduced legislation designed in part to expand the authority of the NIGC to review contracts between Native American tribes and their suppliers. It is likely that expanding the authority of the NIGC to include review of contracts such as those we typically enter into with our tribal customers, would significantly encumber our contracting process and may have the effect of delaying, modifying or preventing otherwise profitable contractual relationships.

The market for electronic Class II player terminals and systems is subject to continuing ambiguity, due to the difficulty of reconciling the Johnson Act’s broad definition of “gambling devices” with the provisions of IGRA that expressly make legal the play of bingo and tribes’ use of “electronic, computer, or other technologic aids” in the play of bingo. Issues surrounding the classification of our games as Class II games that may generally be offered by our tribal customers without a tribal-state compact, or as Class III games that can only be offered by the tribes pursuant to such a compact, have affected our business in the past, and continue to do so. Government enforcement, regulatory action, judicial decisions, or the prospects or rumors thereof have in the past and will continue to affect our business, operating results and prospects. Although some of our games have been reviewed and approved as legal Class II games by the NIGC, we have placed and continue to derive revenue from a significant number of player terminals running games that have not been so approved. Our business and operating results would likely be adversely affected, at least in the short term, by any significant regulatory enforcement action involving our games. The trading price of our common stock has in the past and may in the future be subject to significant fluctuations based upon market perceptions of the legal status of our products.

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Native American gaming activities involving our games and systems are also subject to regulation by state and local authorities, to the extent such gaming activities constitute, or are perceived to constitute, Class III gaming. Class III gaming is illegal in most states unless conducted by a tribe pursuant to a compact between a tribe and the state in which the tribe is located. The Class III video lottery systems we offer, such as the systems and terminals operating in Washington State, are subject to regulation by authorities in that state and to the terms of the compacts between the tribes offering such games and the State of Washington. Gaming activities under the new tribal-state compact in Oklahoma are subject to the terms of the compact between such tribes and the State of Oklahoma. Regulatory interpretations and enforcement actions by state regulators could have significant and immediate adverse impacts on our business and operating results.

In addition to federal, state and local regulation, all Native American tribes are required by IGRA to adopt ordinances regulating gaming as a condition of their right to conduct gaming on Native American lands. These ordinances often include the establishment of tribal gaming commissions that make their own judgment about whether an activity is Class II or Class III gaming. Normally, we will not introduce a new Class II game in a customer’s gaming facility unless the tribe’s gaming commission has made its own independent determination that the game is Class II gaming. Adverse regulatory decisions by tribal gaming commissions could adversely affect our business.

We also face risks from a lack of regulatory or judicial enforcement action. In particular, we believe we have lost market share to competitors who offer games that do not appear to comply with published regulatory restrictions on Class II games, and thereby offer features not available in our products.

It is possible that new laws and regulations relating to Native American gaming may be enacted, and that existing laws and regulations could be amended or reinterpreted in a manner adverse to our business. Any regulatory change could materially and adversely affect the installation and use of existing and additional player terminals, games and systems, and our ability to generate revenues from some or all of our Class II games.

In addition to the risks described above, regulatory uncertainty increases our cost of doing business. We dedicate significant time to and incur significant expense for new game development, without any assurance that the NIGC, the DOJ, or other federal, state or local agencies or Native American gaming commissions will agree that our games meet applicable regulatory requirements. We also regularly invest in the development of new games, which may become irrelevant or noncompetitive before they are deployed. We devote significant time and expense to dealing with federal, state and Native American agencies having jurisdiction over Native American gaming, and in complying with the various regulatory regimes that govern our business. In addition, we are constantly monitoring new and proposed laws and regulations, or changes to such laws and regulations, and assessing the possible impact upon us, our customers and our markets.

The manner in which certain of our Native American customers acquired land in trust after 1988, and have used such land for gaming purposes, may affect the legality of those gaming facilities. The Inspector General for the Department of the Interior recently testified before a United States Senate committee that his office was in the process of completing an inquiry into techniques used by certain tribes of acquiring land in trust for non-gaming purposes but subsequently opening a gaming facility on such trust land. Recently, the Acting General Counsel for the NIGC testified before the Senate Indian Affairs Committee that, as a result of the Inspector General’s inquiry, the NIGC was conducting its own investigation into the practice of certain tribes conducting gaming on land originally acquired in trust for non-gaming purposes. Unless the land qualifies under one of the exceptions contained in the IGRA, thereby authorizing gaming to be conducted on such land, it could lose its “Indian lands” status under IGRA.

We currently face risks related to regulation of our magnetic stripe gaming card system.

The NIGC has recently determined that the magnetic stripe card system, employed by Native American gaming operations using the gaming system developed by us, is an “account access card” system as defined in the NIGC’s Minimum Internal Control Standards regulation, thereby triggering certain recordkeeping requirements. An “account access card” is defined as “an instrument to access customer accounts for wagering at a gaming machine. Account access cards are used in connection with a computerized database. Account access cards are not smart cards.”

On July 8, 2005, the NIGC issued a Warning Notice to certain tribes for, among other things, noncompliance with the recordkeeping requirements applicable to account access cards. According to the Warning Notice, the cashiers were not obtaining signatures from the customers on our receipts when cashing out. The NIGC is also of the opinion that the Bank Secrecy Act recordkeeping requirements apply to account access cards. The Minimum Internal Control Standards (25 C.F.R. § 542.3(c)(2)) require compliance

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with the Bank Secrecy Act. Because the IRS is conducting a Bank Secrecy Act audit at one of the tribal casinos, the NIGC has deferred a determination of whether the tribal gaming operations are in compliance with (25 C.F.R. § 542.3(c)(2) until the IRS audit is completed.

In addition to the issues raised by the NIGC, we may face regulatory risks as a result of interpretations of other federal regulations, such as banking regulations, as applied to our gaming systems. We may be required to make changes to our games to comply with such regulations, with attendant costs and delays that could adversely affect our business.

We continue to work with our legal counsel and tribal customers, exploring ways to modify the magnetic stripe card system to eliminate the “account” aspect of the system so that it operates like script or a bearer instrument.

We believe diversification from Native American gaming activities is critical to our growth strategy. Our expansion into non-Native American gaming activities will present new challenges and risks that could adversely affect our business or results of operations. Our new markets are also subject to extensive legal and regulatory uncertainties.

We face intensified competition in the Class II market that has historically provided the substantial majority of our revenue and earnings. Moreover, the apparent trend in regulatory developments suggests that Class II gaming may diminish as a percentage of overall gaming activity in the United States. As a result of these pressures, we have experienced declining market share in the Class II market. We believe it is imperative that we successfully diversify our operations to include gaming opportunities in markets other than our historical Class II jurisdictions. If we are unable to effectively develop and operate within these new markets, then our business, operating results and financial condition would be impaired.

Our growth strategy includes selling and/or licensing our systems, games and technology into segments of the gaming industry other than Native American gaming, principally the charity and commercial bingo markets, but also into new jurisdictions authorizing video lottery systems. These and other non-Native-American gaming opportunities are not currently subject to a nationwide regulatory system such as the one created by IGRA to regulate Native American gaming, so regulation is on a state-by-state, and sometimes a county-by-county basis. In addition, federal laws relating to gaming, such as the Johnson Act, which regulates slot machines and similar gambling devices, apply to new video lottery jurisdictions, absent authorized state law exemptions.

As we expand into new markets, we expect to encounter business, legal and regulatory uncertainties similar to those we face in our Native American gaming business. Our strategy is to attempt to be an early entrant into new and evolving markets where the legal and regulatory environment may not be well settled or well understood. As a result, we may encounter legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. Regulatory action against our customers or equipment in these or in other markets could result in machine seizures and significant revenue disruptions, among other adverse consequences.

Successful growth in accordance with our strategy may require us to make changes to our gaming systems to ensure that they comply with applicable regulatory regimes, and may require us to obtain additional licenses. In certain jurisdictions and for certain venues, our ability to enter these markets will depend on effecting changes to existing laws and regulatory regimes. The ability to effect these changes is subject to a great degree of uncertainty and may never be achieved. We may not be successful in entering into other segments of the gaming industry.

Generally, our placement of systems, games and technology into new market segments involves a number of business uncertainties, including:

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Whether our resources and expertise will enable us to effectively operate and grow in such new markets;

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Whether our internal processes and controls will continue to function effectively within these new segments;

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Whether we have enough experience to accurately predict revenues and expenses in these new segments;

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Whether the diversion of management attention and resources from our traditional business, caused by entering into new market segments, will have harmful effects on our traditional business;

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Whether we will be able to successfully compete against larger companies who dominate the markets that we are trying to enter; and

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Whether we can timely perform under our agreements in these new markets.

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We have only recently begun to develop international business, and we have realized revenue from the sale of an Electronic Instant Lottery System to the Israel National Lottery during fiscal 2006 and from contracts to supply Electronic Bingo Terminals to casinos in Mexico during fiscal 2006. Neither our transaction in Israel nor in Mexico has been profitable to date or is currently profitable, and may not lead to future profitable business. To date, there are not as many permanent facilities opened in Mexico as we originally projected, and the hold per day in certain of the open facilities in Mexico has not met our original expectations. There can be no assurances that our games will gain market acceptance in Mexico, additional facilities will open in Mexico, or that the hold per day will increase in those facilities in Mexico currently not meeting our expectations. International transactions are subject to various risks, including:

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Currency fluctuations;

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Higher operating costs due to local laws or regulations;

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Unexpected changes in regulatory requirements;

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Costs and risks of localizing products for foreign countries;

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Difficulties in staffing and managing geographically disparate operations;

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Greater difficulty in safeguarding intellectual property, licensing and other trade restrictions;

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Challenges negotiating and enforcing contractual provisions;

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Repatriation of earnings; and

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Anti-American sentiment due to the war in Iraq and other American policies that may be unpopular in certain regions, particularly in the Middle East.

Beginning in January 2004, we began the first operation of our central determinant system for the video lottery terminal network that the New York Lottery operates at licensed New York State racetrack casinos. As payment for providing and maintaining the central determinant system, we receive a small portion of the network-wide hold per day. To date, we have realized substantially less revenue than anticipated from our New York Lottery operations, in significant part due to delays in the opening of planned operations at several racetrack casinos. We are nevertheless required to incur ongoing expenses associated with the development and maintenance of the New York video lottery system, and we do not currently expect to have profitable operations there until one or more of the larger racetrack casinos are opened. Delays in the anticipated development of the New York video lottery system and other emerging market opportunities may continue to adversely affect our revenue and operating results.

We believe future transactions with existing and future customers may be more complex than transactions entered into currently. As a result, we may enter into more complicated business and contractual relationships with customers which, in turn, can engender increased complexity in the related financial accounting. Legal and regulatory uncertainty may also affect our ability to recognize revenue associated with a particular project, and therefore the timing and possibility of actual revenue recognition may differ from our forecast.

We provide linked interactive electronic bingo systems and player terminals to charitable bingo operations in Alabama. During January 2004, we began placing player terminals in Alabama, and as of June 30, 2007, we had 2,399 player terminals at three facilities. The Attorney General of Alabama has recently completed a review of the gaming within the state. He concluded that the games that we were operating in Alabama were a legal form of bingo. He also concluded that two of the facilities are operating under a valid constitutional amendment authorizing the facilities the ability to play electronic bingo. The municipal and county authorities who regulate gaming in Alabama look to the NIGC and Class II regulations for guidance in adopting, interpreting and enforcing the municipal and county regulations permitting the operation of our machines in such counties and municipalities. To the extent these authorities rely on the NIGC’s standards, any determinations by the NIGC or developments in Class II regulations which negatively impact our games and systems may, therefore, be adopted by the counties and municipalities and negatively impact the operation of our business in Alabama.

We have excess player stations not deployed at June 30, 2007, which were intended to be deployed at facilities in Mexico. If the opening of facilities is altered negatively, either by significant delay, or by cancellation, the realizable value of these assets could be reduced. In such instances we may be required to recognize increased expense on our income statement related to the impairment of these assets.

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Our future performance will depend on our ability to develop and introduce new gaming systems and to enhance existing games that are widely accepted and played.

Our future performance will depend primarily on our ability to successfully and cost-effectively enter new gaming markets, and develop and introduce new and enhanced gaming systems and content that will be widely accepted both by our customers and their end users. We believe our business requires us to continually offer games and technology that play quickly and provide more entertainment value than those our competitors offer. However, consumer preferences can be difficult to predict, and we may offer new games or technologies that do not achieve market acceptance. In addition, we may experience future delays in game development, or we may not be successful in developing, introducing, and marketing new games or game enhancements on a timely and cost-effective basis.

If we are unable, for technological, regulatory, political, financial, marketing or other reasons, to develop and introduce new gaming systems and to enhance existing products in a timely manner in response to changing regulatory, legal or market conditions or customer requirements, or if new products or new versions of existing products do not achieve market acceptance, or if uneven enforcement policies cause us to continue facing competition from noncompliant games offered by some competitors, our business could be materially and adversely affected.

We are dependent upon a few customers who are based in Oklahoma.

For the nine months ended June 30, 2007 and 2006, approximately 60% and 50%, respectively, of our gaming revenues were from Native American tribes located in Oklahoma, and approximately 42% and 35%, respectively, of our gaming revenues were from one tribe in that state. The significant concentration of our customers in Oklahoma means that local economic changes may adversely affect our customers, and therefore our business, disproportionately to changes in national economic conditions, including more sudden adverse economic declines or slower economic recovery from prior declines. The loss of any of our Oklahoma tribes as customers would have a material and adverse effect upon our financial condition and results of operations. In addition, the recent legislation allowing tribal-state compacts in Oklahoma has resulted in increased competition from other vendors, who we believe have avoided entry into the Oklahoma market due to its uncertain and ambiguous legal environment. The new legislation allows for other types of gaming, both at tribal gaming facilities and at Oklahoma racetracks. The loss of significant market share to these new gaming opportunities or our competitors’ products in Oklahoma could also have a material adverse effect upon our financial condition and results of operations.

As states enter into compacts with our existing Native American customers to allow Class III gaming, our results of operations could be materially harmed.

As our Class II tribal customers enter into such compacts with the states in which they operate, allowing the tribes to offer Class III games, we believe the number of our game machine placements in those customers’ facilities could decline significantly, and our operating results could be materially adversely affected. As our tribal customers make the transition to gaming under compacts with the state, we believe there will be significant uncertainty in the market for our games that will make our business more difficult to manage or predict.

In May 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming at racetracks, and additional types of games at tribal gaming facilities, pursuant to a tribal-state compact. The Oklahoma gaming legislation allows the tribes to sign a compact with the State of Oklahoma to operate an unlimited number of electronic instant bingo games, electronic bonanza-style bingo games, electronic amusement games, and non-house-banked tournament card games. In addition, certain horse tracks in Oklahoma will be allowed to operate a limited number of instant and bonanza-style bingo games and electronic amusement games. As of June 30, 2007, we had placed 3,973 player terminals at 31 facilities that are operating under the Oklahoma compact. All vendors placing games at any of the racetracks under the compact will ultimately be required to be licensed by the State of Oklahoma. Pursuant to the compacts, vendors placing games at tribal facilities will have to be licensed by each tribe. All electronic games placed under the compact will have to be certified by independent testing laboratories to meet technical specifications. These technical specifications were published by the Oklahoma Horse Racing Commission and the individual tribal gaming authorities in the first calendar quarter of 2005. To date, independent testing labs have given wide latitude as to what constitutes a compliant game.

We believe the Oklahoma legislation significantly clarifies and expands the types of gaming permitted by Native American tribes in Oklahoma. We currently expect continued intensified competition from vendors currently operating in Oklahoma as well as from new market entrants. As a result, we anticipate further pressure on our market and revenue share percentages in Oklahoma or the market

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could shift from revenue share arrangements to a “for sale” model. We believe the introduction of more aggressive instant bingo machines, with characteristics of traditional slot machines, into the Oklahoma market, has adversely affected our operating results and market position in that state and may continue to do so in the future.

The 2004 legislation requires Oklahoma tribes to develop their own vendor licensing procedures. Some of our Oklahoma tribal customers have developed these procedures, and others are in the process of defining the procedures. For that reason, deployment of games to be operated under a compact in Oklahoma is proceeding at an erratic pace and will continue to do so for many months. Moreover, tribal policies and procedures, as well as tribal selection of gaming vendors, are subject to the political and governance environment within the tribe. Changes in tribal leadership or tribal political pressure can affect our relationships with our customers. As a result of these and other considerations, it remains difficult to forecast the short-term impact on our business from the recent Oklahoma gaming legislation.

We believe the establishment of state compacts depends on a number of political, social, and economic factors which are inherently difficult to ascertain. Accordingly, although we attempt to closely monitor state legislative developments that could affect our business, we may not be able to timely predict when or if a compact could be entered into by one or more of our tribal customers.

Although we believe our agreements with WMS Industries, Inc., or WMS, and Aristocrat Technologies, Inc., or Aristocrat, position us to compete effectively as resellers of Class III gaming equipment in the Oklahoma market and we also have plans to compete in the Oklahoma market by offering our own proprietary Class III gaming systems, there can be no assurance that our Class III offerings in Oklahoma will be successful or achieve market acceptance. If we are unsuccessful at converting our networked Class II player terminals into stand-alone Class III player terminals in Oklahoma, our future operating results would be adversely affected.

We are seeking to expand our business by lending money to new and existing customers to develop or expand gaming facilities, primarily in the state of Oklahoma. We may not realize a satisfactory return, if any, on our investment, and we could lose some or all of our investment.

We enter into development agreements to provide financing for construction and/or remodeling of gaming facilities, primarily in the state of Oklahoma. Under our development agreements, we secure a long-term revenue share percentage and a fixed number of player terminal placements in the facility, in exchange for development and construction funding.

We may continue to seek to enter into strategic relationships to provide financing for new or expanded gaming and related facilities for our customers. However, we may not realize the anticipated benefits of any of these strategic relationships or financing. In connection with one or more of these transactions, and to obtain the necessary development funds, we may: issue additional equity securities which would dilute existing stockholders; extend secured and unsecured credit to potential or existing tribal customers which may not be repaid; incur debt on terms unfavorable to us or that we are unable to repay; and incur contingent liabilities.

Our development efforts or financing activities may result in unforeseen operating difficulties, financial risks, or required expenditures that could adversely affect our liquidity. It may also divert the time and attention of our management that would otherwise be available for ongoing development of our business. As a result of providing financing to our customers, we may incur liquidity pressure and we may not realize a satisfactory return, if any, on our investment, and we could lose some or all of our investment.

The NIGC has expressed its view that our development agreements violate the requirements of IGRA and tribal gaming regulations, which state that the Native American tribes must hold “sole proprietary interest” in the tribes’ gaming operations, which presents additional risks for our business. See “Certain Risk Factors – Changes in regulation or regulatory interpretations could require us to modify the terms of our contracts with customers.”

In addition, certain of the agreements contain performance standards for our player terminals that could allow the facility to reduce a portion of our player terminals. We are aware that certain of our games may not currently meet these performance standards and that, accordingly, certain of our customers may have contractual rights to reduce the percentage of our machines in their facilities.

In the past we have, and in the future we expect to, reduce our floor space in certain of our Class II facilities as a result of ongoing competitive pressures faced by our customers from alternative gaming facilities and faced by our machines from competitors’ products. In addition, future NIGC decisions could affect our ability to place our games with these tribes. See “Certain Risk Factors – Enforcement of remedies or contracts against Native American tribes could be difficult.”

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We compete for customers and end users with other vendors of gaming systems and player terminals. We also compete for end users with other forms of entertainment.

We compete with other vendors for customers, primarily on the basis of the amount of profit our gaming products generate for our customers in relation to other vendors’ gaming products. We believe that the most important factor influencing our customers’ product selection is the appeal of those products to end users. This appeal has a direct effect on the volume of play by end users, and drives the amount of revenues generated for and by our customers. Our ability to remain competitive depends primarily on our ability to continuously develop new game themes and systems that appeal to end users, and to introduce those game themes and systems in a timely manner. See “Certain Risk Factors – Our future performance will depend on our ability to develop and introduce new gaming systems and to enhance existing games that are widely accepted and played.” We may not be able to continue to develop and introduce appealing new game themes and systems that meet the emerging requirements in a timely manner, or at all. In addition, others may independently develop games similar to our games, and competitors may introduce noncompliant games that unfairly compete in certain markets due to uneven regulatory enforcement policies.

We believe continued developments in the Class II market that alleviate or clarify the legal and regulatory uncertainties of that market will result in increased competition in the interactive electronic Class II gaming market, including the entrance of new competitors with significant gaming experience and financial resources. We also expect to face increased competition as we attempt to enter new markets and new geographical locations. Specifically, three of the largest manufacturers of gaming equipment have entered or expressed an interest in the Class II market, and we are also increasingly competing against these vendors in our charity, lottery, and international bingo markets. In at least one instance, we have competed with a joint proposal of two of these significant vendors. We believe the increased competition will intensify pressure on our pricing model. In the future, gaming providers will compete on the basis of price as well as the entertainment value and technological superiority of their products. While we will continue to compete by regularly introducing new and faster games with technological enhancements that we believe will appeal to end users, we believe that the net revenue our customers retain from their installed base of player terminals will become a more significant factor, one that may require us to change the terms of our participation arrangements with customers to remain competitive. Consequently, we believe that a simple business model based upon a relationship between the average hold per player terminal per day and the installed base of player terminals will become less relevant in predicting our performance, as the totality and the mix of our participation arrangements with customers become less standardized and more complex.

Given the limitations placed on Class II gaming, we may not be able to successfully compete in gaming jurisdictions and facilities where slot machines, table games and other forms of Class III gaming are permitted. Furthermore, increases in the popularity of and competition from an expansion of Class III gaming, or Internet and other account wagering gaming services, which allow end users to wager on a wide variety of sporting events and to play traditional casino games from home, could have a material adverse effect on our business, financial condition and operating results.

Our business requires us to obtain and maintain various licenses, permits and approvals from state governments and other entities that regulate our business.

We have obtained all state licenses, lottery board licenses, Native American gaming commission licenses, findings of suitability, registrations, permits and approvals necessary for the operation of our gaming activities. These include a license from Washington State to sell Class III video lottery systems, and licenses from the lottery boards of Texas, Iowa and New York. The Louisiana Department of Revenue and the Mississippi Gaming Commission have also issued licenses to us, and we have received licenses from all applicable Native American gaming commissions. We may require new licenses, permits and approvals in the future, and such licenses, permits or approvals may not be granted to us. The suspension, revocation, nonrenewal or limitation of any of our licenses would have a material adverse effect on our business, financial condition and results of operations.

Our Oklahoma tribal customers are in the early stages of developing their own licensing procedures under the new legislation, and we currently have limited, if any, information regarding the ultimate process or expenses involved with securing licensure by the tribes. Moreover, tribal policies and procedures, as well as tribal selection of gaming vendors, are subject to the political and governance environment within the tribe.

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We may not be successful in protecting our intellectual property rights, or avoiding claims that we are infringing upon the intellectual property rights of others.

We rely upon patent, copyright, trademark and trade secret laws, license agreements and employee nondisclosure agreements to protect our proprietary rights and technology, but these laws and contractual provisions provide only limited protection. We rely to a greater extent upon proprietary know-how and continuing technological innovation to maintain our competitive position. Insofar as we rely on trade secrets, unpatented know-how and innovation, others may be able to independently develop similar technology, or our secrecy could be breached. The issuance of a patent to us does not necessarily mean that our technology does not infringe upon the intellectual property rights of others. As the Class II market grows and we enter into new markets by leveraging our existing technology, it becomes more and more likely that we will become subject to infringement claims from other parties. Problems with patents or other rights could increase the cost of our products, or delay or preclude new product development and commercialization. If infringement claims against us are valid, we may seek licenses that might not be available to us on acceptable terms or at all. Litigation would be costly and time consuming, but may become necessary to protect our proprietary rights or to defend against infringement claims. We could incur substantial costs and diversion of management resources in the defense of any claims relating to the proprietary rights of others or in asserting claims against others.

We rely on software licensed from third parties, and technology provided by third-party vendors, the loss of which could increase our costs and delay deployment of our gaming systems and player terminals. We also rely on technology provided by third-party vendors which, if disrupted, could suspend play on some of our player terminals.

We integrate various third-party software products as components of our software. Our business would be disrupted if this software, or functional equivalents of this software, were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to either redesign our software to function with alternate third-party software, or develop these components ourselves, which would result in increased costs and could result in delays in our deployment of our gaming systems and player terminals. Furthermore, we might be forced to limit the features available in our current or future software offerings.

We rely on the content of certain software that we license from third-party vendors. The software could contain bugs that could have an impact on our business.

We also rely on the technology of third-party vendors, such as telecommunication providers, to operate our nationwide broadband telecommunications network. A serious or sustained disruption of the provision of these services could result in some of our player terminals being non-operational for the duration of the disruption, which would adversely affect our ability to generate revenue from those player terminals.

We do not rely upon the term of our customer contracts to retain the business of our customers.

Our contracts with our customers are on a year-to-year or multi-year basis. Except for customers with whom we have entered into development agreements, we do not rely upon the stated term of our customer contracts to retain the business of our customers, as often noncontractual considerations unique to doing business in the Native American market override strict adherence to contractual provisions. We rely instead upon providing competitively superior player terminals, games and systems to give our customers the incentive to continue doing business with us. At any point in time, a significant portion of our business is subject to nonrenewal, and, if not renewed, would materially and adversely affect our earnings and financial condition.

Changes in regulation or regulatory interpretations could require us to modify the terms of our contracts with customers.

The NIGC has recently determined that the magnetic stripe card system, employed by Native American gaming operations using the gaming system developed by us, is an “account access card” system as defined in the NIGC’s Minimum Internal Control Standards regulation, thereby triggering certain recordkeeping requirements. An “account access card” is defined as “an instrument to access customer accounts for wagering at a gaming machine.” Account access cards are used in connection with a computerized database. Account access cards are not “smart cards.”

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with the Bank Secrecy Act. Because the IRS is conducting a Bank Secrecy Act audit at one of the tribal casinos, the NIGC has deferred a determination of whether the tribal gaming operations are in compliance with 25 C.F.R. § 542.3(c)(2) until the IRS audit is completed.

We continue to work with our legal counsel and tribal customers, exploring ways to modify the magnetic stripe card system to eliminate the “account” aspect of the system so that the card system operates like script or a bearer instrument.

Except as described below, the NIGC has considered the provisions of the agreements under which we provide our Class II games, equipment and services to our Native American customers, and has determined that these agreements are “service agreements” and not “management contracts.” Management contracts are subject to additional regulatory requirements and oversight, including preapproval by the NIGC that could delay our providing products and services to customers, as well as divert customers to our competitors.

In April 2004, we received a letter from the NIGC advising us that our agreements with a certain customer may constitute a management contract requiring the approval of the Chairman of the NIGC. We have maintained that the agreement relied on by the NIGC was an old, outdated agreement that was not applicable to the customer’s gaming facility. The NIGC has taken no further action in this matter.

On November 30, 2004, we received letters from the Acting General Counsel of the NIGC advising us that our development agreements with certain other tribes may evince a proprietary interest by us in the tribes’ gaming activities, in violation of IGRA and the tribes’ gaming ordinances, based on the fee we receive under the agreements. The NIGC invited us and the tribes to submit any explanation or information that would establish that the agreement terms do not violate the requirement that tribes maintain sole proprietary interest in their gaming operations. The NIGC letters also advised that some of the agreements may constitute management contracts, thereby requiring the approval of the Chairman of the NIGC.

We have responded to the NIGC, explaining why the agreements do not violate the sole proprietary interest prohibition of IGRA or constitute management agreements. Furthermore, we will vigorously contest any NIGC action that would adversely affect our agreements with the tribes. To date, the NIGC has take no further action in this matter.

If certain of our development agreements are finally determined to be management contracts or to create a proprietary interest of ours in tribal gaming operations, there could be material adverse consequences to us. In that event, we may be required, among other things, to modify the terms of such agreements. Such modification may adversely affect the terms on which we conduct business, and have a significant impact on our financial condition and results of operations from such agreements and from other development agreements that may be similarly interpreted by the NIGC.

If our key personnel leave us, our business could be materially adversely affected.

We depend on the continued performance of the members of our senior management team and our technology team. If we were to lose the services of any of our senior officers, directors, or any key member of our technology team, and could not find suitable replacements for such persons in a timely manner, it could have a material adverse effect on our business.

Our business is dependent on contract rights.

Governing and Native American Law. Federally recognized Native American tribes are independent governments, subordinate to the United States, with sovereign powers, except as those powers may have been limited by treaty or by the United States Congress. Native Americans’ power to enact their own laws to regulate gaming is an exercise of Native American sovereignty, as recognized by IGRA. Native American tribes maintain their own governmental systems and often their own judicial systems. Native American tribes have the right to tax persons and enterprises conducting business on Native American lands, and also have the right to require licenses and to impose other forms of regulation and regulatory fees on persons and businesses operating on their lands.

Native American tribes, as sovereign nations, are generally subject only to federal regulation. Although Congress may regulate Native American tribes, states do not have the authority to regulate Native American tribes unless such authority has been specifically granted by Congress. In the absence of a specific grant of authority by Congress, states may regulate activities taking place on Native American lands only if the tribe has a specific agreement or compact with the state. In the absence of a conflicting federal or properly authorized state law, Native American law governs.

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Our contracts with Native American customers normally provide that only certain provisions will be subject to the governing law of the state in which a tribe is located. However, these choice-of-law clauses may not be enforceable.

Sovereign Immunity; Applicable Courts. Native American tribes generally enjoy sovereign immunity from suits similar to that of the individual states and the United States. In order to sue a Native American tribe (or an agency or instrumentality of a Native American tribe), the tribe must have effectively waived its sovereign immunity with respect to the matter in dispute.

Our contracts with Native American customers include a limited waiver of each tribe’s sovereign immunity, and generally provide that any dispute regarding interpretation, performance or enforcement shall be submitted to, and resolved by, arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and that any award, determination, order or relief resulting from such arbitration is binding and may be entered in any court having jurisdiction. In the event that such waiver of sovereign immunity is held to be ineffective, we could be precluded from judicially enforcing any rights or remedies against a tribe. These rights and remedies include, but are not limited to, our right to enter Native American lands to retrieve our property in the event of a breach of contract by the tribe party to that contract.

If a Native American tribe has effectively waived its sovereign immunity, there exists an issue as to the forum in which a lawsuit can be brought against the tribe. Federal courts are courts of limited jurisdiction and generally do not have jurisdiction to hear civil cases relating to Native Americans. In addition, contractual provisions that purport to grant jurisdiction to a federal court are not effective. Federal courts may have jurisdiction if a federal question is raised by the suit, which is unlikely in a typical contract dispute. Diversity of citizenship, another common basis for federal court jurisdiction, is not generally present in a suit against a tribe, because a Native American tribe is not considered a citizen of any state. Accordingly, in most commercial disputes with tribes, the jurisdiction of the federal courts may be difficult or impossible to obtain. We may be unable to enforce any arbitration decision effectively.

Contracts with Suppliers and Customers. In the ordinary course of our business, we enter into contracts with our suppliers and customers. Certain of these contracts relate to our operations in important markets. We currently have a disagreement with WMS Industries, Inc., regarding the interpretation of our contracts, and we may from time to time have other such disagreements with this supplier or others, or with our customers. In the event any such disagreement escalates to a dispute that is ultimately resolved against us, our earnings and financial condition could be adversely affected. See PART I – Item 1. Condensed Financial Statements – Note 8 – Commitments and Contingencies.

We may incur prize payouts in excess of game revenues.

Certain of our contracts with our Native American customers relating to our Legacy and Reel Time Bingo system games provide that our customers receive, on a daily basis, an agreed percentage of gross gaming revenues based upon an assumed level of prize payouts, rather than the actual level of prize payouts. This can result in our paying our customers amounts greater than our customers’ percentage share of the actual hold per day. In addition, because the prizes awarded in our games are based upon assumptions as to the number of players in each game and statistical assumptions as to the frequency of winners, we may experience on any day, or over short periods of time, a “game deficit,” where the aggregate amount of prizes paid exceeds aggregate game revenues. If we have to make any excess payments to customers, or experience a game deficit over any statistically relevant period of time, we are contractually entitled to adjust the rates of prize payout to end users in order to recover any deficit. In the future, we may miscalculate our statistical assumptions, or for other reasons, we may experience abnormally high rates of jackpot prize wins, which could materially and adversely affect our cash flow on a temporary or long-term basis, and which could materially and adversely affect our earnings and financial condition.

Our business prospects and future success rely heavily upon the integrity of our employees and executives and the security of our gaming systems.

The integrity and security of our gaming systems is critical to its ability to attract customers and players. We strive to set exacting standards of personal integrity for our employees and for system security involving the gaming systems that we provide to our customers. Our reputation in this regard is an important factor in our business dealings with our current and potential customers. For this reason, an allegation or a finding of improper conduct on our part or on the part of one or more of our employees that is attributable to us, or of an actual or alleged system security defect or failure attributable to us could have a material adverse effect upon our business, financial condition, results, and prospects, including our ability to retain existing contracts or obtain new or renewed contracts.

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Any disruption in our network or telecommunications services, or adverse weather conditions in the areas in which we operate could affect our ability to operate our games, which would result in reduced revenues and customer down time.

Our network is susceptible to outages due to fire, floods, power loss, break-ins, cyberattacks and similar events. We have multiple site back-up for our services in the event of any such occurrence. Despite our implementation of network security measures, our servers are vulnerable to computer viruses and break-ins; similar disruptions from unauthorized tampering with our computer systems in any such event could have a material adverse effect on our business, operating results and financial condition.

Adverse weather conditions, particularly flooding, tornadoes, heavy snowfall and other extreme weather conditions often deter our end users from traveling or make it difficult for them to frequent the sites where our games are installed. If any of those sites were to experience prolonged adverse weather conditions, or if the sites in Oklahoma, where a significant number of our games are installed, were to simultaneously experience adverse weather conditions, our results of operations and financial condition would be materially adversely affected.

In addition, our agreement with the New York State Division of the Lottery permits termination of the contract at any time for failure by us or our system to perform properly. We were also required to post a performance bond to secure our performance under such contract. Failure to perform under this or similar contracts could result in substantial monetary damages, as well as contract termination.

In addition, we enter into certain agreements that could require us to pay damages resulting from loss of revenues if our systems are not properly functioning, or as a result of a system malfunction or an inaccurate pay table.

Worsening economic conditions may adversely affect our business.

The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes, and thus a decline in general economic conditions or an increase in gasoline prices may lead to our end users’ having less discretionary income with which to wager. This could cause a reduction in our revenues and have a material adverse effect on our operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

None

(b)

None

(c)

We did not repurchase shares of our common stock during the most recently completed quarter. During July 2007, we completed a modified “Dutch Auction” Tender Offer to purchase $25.0 million of our common stock and the associated preferred share purchase rights. We accepted, for purchase, an aggregate of 1,992,032 shares of our common stock at a purchase price of $12.55 per share, for an aggregate share repurchase of approximately $25.0 million. As of June 30, 2007, the maximum number of common shares that may be repurchased under the plans or programs, excluding the Tender Offer, was approximately 887,000. For a description of our authorized stock repurchase plans, see “PART I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 30, 2007, we held our 2006 Annual Stockholder Meeting. The meeting involved the election of six nominees to be Directors, and the following persons were elected, constituting all of the members of our Board of Directors: Michael J. Maples, Sr., Clifton E. Lind, , Robert D. Repass, John M. Winkelman, Emanuel R. Pearlman and Neil E. Jenkins.

A separate tabulation with respect to each nominee is as follows:


	FOR	WITHHELD
Michael J. Maples, Sr.	24,661,592	305,312
Clifton E. Lind	24,649,747	317,157
Robert D. Repass	24,643,292	323,612
John M. Winkelman	23,559,905	1,406,999
Emanuel R. Pearlman	23,709,248	1,257,656
Neil E. Jenkins	23,575,740	1,391,164

A proposal to ratify the appointment of BDO Seidman, LLP as our independent auditors was voted upon at the meeting and received the requisite number of votes necessary to pass, as follows:


FOR	AGAINST	ABSTAIN
24,571,809	337,656	57,439

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

(a)

Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

^†Mr. Cieslewicz is signing as an authorized officer and as our Principal Financial Officer and Chief Accounting Officer.

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EXHIBIT NO.	TITLE	LOCATION
3.1	Amended and Restated Articles of Incorporation	(1)
3.2	Amendment to Articles of Incorporation	(2)
3.3	Amended and Restated Bylaws	(3)
10.1	Revolving Credit Facility Agreement entered into as of April 27, 2007 by and among the financial institutions from time to time signatory thereto, Comerica Bank, as agent for such financial institutions, and MegaBingo, Inc. and MGAM Systems, Inc.	(4)
10.2	Guaranty entered into as of April 27, 2007 by and among Comerica Bank and Multimedia Games, Inc., Innovative Sweepstakes Systems, Inc., MGAM Services, L.L.C., MGAM Systems International, Inc. and MegaBingo International, LLC	(4)
10.3	Security Agreement entered into as of April 27, 2007 by and among MegaBingo, Inc., MGAM Systems, Inc., such other entities which from time to time become parties thereto and Comerica Bank, as Agent	(4)
10.4	Letter Agreement by and among MGAM Systems, Inc., MegaBingo, Inc., Comerica Bank and CIT Lending Services Corporation dated as of June 6, 2007	(5)
31.1	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002	(*)
31.2	Certification of Principal Accounting Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002	(*)
32.1	Certification as required by Section 906 of the Sarbanes Oxley Act of 2002	(*)

(1)	Incorporated by reference to our Form 10-QSB filed with the Securities and Exchange Commission, or SEC, for the quarter ended March 31, 1997.

(2)	Incorporated by reference to our Form 10-Q filed with the SEC for the quarter ended December 31, 2003.

(3)	Incorporated by reference to our Form 10-K filed with the SEC for the fiscal year ended September 30, 2003.

(4)	Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on May 3, 2007.

(5)	Incorporated by reference to our Form 8-K filed with the SEC on June 8, 2007.

(*)	Filed herewith.

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