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,
2009
 OR
  ̈
                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: 000-28318
  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 South, Building B, Fourth FloorAustin, 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 has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files):Yes  ̈  No  ̈
  Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act:
 
 Large
      Accelerated Filer  ̈
                  
                  Accelerated
      Filer xNon-Accelerated
      Filer  ̈
                  
                  Smaller
      Reporting Company  ̈
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈  No x
  As of
August 4, 2009, there were 27,081,846 shares of the Registrant’s
common stock, par value $0.01 per share, outstanding.
  
  FORM
10-Q
  INDEX
  PART I.  FINANCIAL
      INFORMATIONItem 1.
                                          Condensed
      Consolidated Financial Statements (Unaudited)Consolidated
      Balance Sheets(As
      of June 30, 2009and September 30,
      2008)
                                          
                                          3Consolidated
      Statements of Operations(For
      the three months ended June 30, 2009and
      2008)
                                          
                                          5Consolidated
      Statements of Operations(For
      the nine months ended June 30, 2009and
      2008)
                                          
                                          6Consolidated
      Statements of Cash Flows(For
      the nine months ended June 30, 2009and
      2008)
                                          
                                          7Notes
      to Consolidated Financial Statements
                                          
                                          8Item 2.
                                          Management’s
      Discussion and Analysisof
      Financial Condition and Results of Operations
                                          
                                          22Item 3.
                                          Quantitative
      and Qualitative Disclosures about Market Risk
                                          
                                          37Item 4.
                                          Controls
      and Procedures
                                          
                                          38PART II.  OTHER
      INFORMATIONItem 1.
                                          Legal
      Proceedings
                                          
                                          39Item 1A.
                                          Risk
      Factors
                                          
                                          39Item 2.
                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                          
                                          50Item 3.
                                          Defaults
      upon Senior Securities
                                          
                                          50Item 4.
                                          Submission
      of Matters to a Vote of Security Holders
                                          
                                          50Item 5.
                                          Other
      Information
                                          
                                          50Item 6.
                                          Exhibits
                                          
                                          50Signatures
                                          
                                          51Exhibit
      Index
  -2-
  PART
I
  FINANCIAL
INFORMATION
  Item
1. Condensed Financial Statements
  MULTIMEDIA
GAMES, INC.
 CONSOLIDATED
BALANCE SHEETS
 As of June 30, 2009 and September 30,
2008
 (In
thousands, except shares)
 (Unaudited)
 
 ASSETS
                    
                    June 30,
                      2009
                    
                    
                    September 30,
                      2008CURRENT
      ASSETS:Cash and cash
      equivalents
                    
                    $
                    9,438
                    
                    
                    $
                    6,289Accounts receivable, net of
      allowance for doubtful accounts
                      of
      $1,934 and $1,209, respectively
                    
                    
                    23,829
                    
                    
                    
                    23,566Inventory
                    
                    
                    3,000
                    
                    
                    
                    2,445Deferred contract costs,
      net
                    
                    
                    2,142
                    
                    
                    
                    998Prepaid expenses and
      other
                    
                    
                    2,493
                    
                    
                    
                    2,170Current portion of notes
      receivable, net
                    
                    
                    15,482
                    
                    
                    
                    23,072Federal and state income tax
      receivable
                    
                    
                    4,065
                    
                    
                    
                    2,198Deferred income
      taxes
                    
                    
                    6,398
                    
                    
                    
                    6,876Total current
      assets
                    
                    
                    66,847
                    
                    
                    
                    67,614Restricted
      cash and long-term investments
                    
                    
                    804
                    
                    
                    
                    868Leased
      gaming equipment, net
                    
                    
                    38,915
                    
                    
                    
                    36,024Property
      and equipment, net
                    
                    
                    57,937
                    
                    
                    
                    67,329Long-term
      portion of notes receivable, net
                    
                    
                    42,498
                    
                    
                    
                    46,690Intangible
      assets, net
                    
                    
                    35,647
                    
                    
                    
                    37,356Deferred
      income taxes
                    
                    
                    19,259
                    
                    
                    
                    16,902Other
      assets
                    
                    
                    2,432
                    
                    
                    
                    4,157Total
    assets
                    
                    $
                    264,339
                    
                    
                    $
                    276,940LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current portion of long-term
      debt
                    
                    $
                    1,675
                    
                    
                    $
                    1,544Accounts payable and accrued
      expenses
                    
                    
                    31,445
                    
                    
                    
                    29,248Federal and state income tax
      payable
                    
                    
                    —
                    
                    
                    
                    33Deferred
revenue
                    
                    
                    4,939
                    
                    
                    
                    2,640Total current
      liabilities
                    
                    
                    38,059
                    
                    
                    
                    33,465Revolving
      line of credit
                    
                    
                    16,000
                    
                    
                    
                    19,000Long-term
      debt, less current portion
                    
                    
                    65,738
                    
                    
                    
                    66,444Other
      long-term liabilities
                    
                    
                    857
                    
                    
                    
                    1,131Deferred
      revenue, less current portion
                    
                    
                    3,009
                    
                    
                    
                    6,168Total
      liabilities
                    
                    
                    123,663
                    
                    
                    
                    126,208Commitments
      and contingenciesStockholders’
      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,
                      32,763,421
      and 32,511,988 shares issued, and
                      26,860,004
      and 26,608,571 shares outstanding, respectively
                    
                    
                    328
                    
                    
                    
                    325
  -3-
  MULTIMEDIA GAMES, INC.
 CONSOLIDATED
BALANCE SHEETS –
(Continued)
 As
of June 30, 2009 and September 30, 2008
 (In
thousands, except shares)
 (Unaudited)
  June 30,
                      2009
                    
                    
                    September 30,
                      2008Additional paid-in
      capital
                    
                    
                    84,938
                    
                    
                    
                    83,076Treasury stock, 5,903,417
      common shares at cost
                    
                    
                    (50,128
                    )
                    
                    
                    (50,128
                    )Retained
    earnings
                    
                    
                    107,103
                    
                    
                    
                    117,581Accumulated other comprehensive
      loss, net
                    
                    
                    (1,565
                    )
                    
                    
                    (122
                    )Total stockholders’
      equity
                    
                    
                    140,676
                    
                    
                    
                    150,732Total liabilities and stockholders’
      equity
                    
                    $
                    264,339
                    
                    
                    $
                    276,940
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  -4-
  MULTIMEDIA
GAMES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Three Months Ended June 30, 2009 and 2008
 (In
thousands, except per share data)
 (Unaudited)
 
 Three Months Ended
                                        June 30,2009
                                      
                                      
                                      2008REVENUES:Gaming revenue:Oklahoma
      compact
                                      
                                      $
                                      15,045
                                      
                                      
                                      $
                                      14,562Class II
                                      
                                      
                                      4,720
                                      
                                      
                                      
                                      6,239Charity
                                      
                                      
                                      2,229
                                      
                                      
                                      
                                      3,332All
      other
                                      
                                      
                                      5,356
                                      
                                      
                                      
                                      5,467Gaming equipment, system sale
      and lease revenue
                                      
                                      
                                      3,786
                                      
                                      
                                      
                                      314Other
                                      
                                      
                                      993
                                      
                                      
                                      
                                      338Total revenues
                                      
                                      
                                      32,129
                                      
                                      
                                      
                                      30,252OPERATING
      COSTS AND EXPENSES:Cost of gaming equipment and
      systems sold
                                        and
      royalty fees
                                      
                                      
                                      2,137
                                      
                                      
                                      
                                      336Selling, general and
      administrative expenses
                                      
                                      
                                      15,650
                                      
                                      
                                      
                                      16,102Amortization and
      depreciation
                                      
                                      
                                      15,581
                                      
                                      
                                      
                                      13,605Total operating costs and
      expenses
                                      
                                      
                                      33,368
                                      
                                      
                                      
                                      30,043Operating income
      (loss)
                                      
                                      
                                      (1,239
                                      )
                                      
                                      
                                      209OTHER
      INCOME (EXPENSE):Interest income
                                      
                                      
                                      1,156
                                      
                                      
                                      
                                      1,342Interest
expense
                                      
                                      
                                      (1,390
                                      )
                                      
                                      
                                      (2,031
                                      )Other income
                                      
                                      
                                      —
                                      
                                      
                                      
                                      828Income
      (loss) before income taxes
                                      
                                      
                                      (1,473
                                      )
                                      
                                      
                                      348Income
      tax expense
                                      
                                      
                                      313
                                      
                                      
                                      
                                      (184
                                      )Net income (loss)
                                      
                                      $
                                      (1,160
                                      )
                                      
                                      $
                                      164Basic
      earnings (loss) per common share
                                      
                                      $
                                      (0.04
                                      )
                                      
                                      $
                                      0.01Diluted
      earnings (loss) per common share
                                      
                                      $
                                      (0.04
                                      )
                                      
                                      $
                                      0.01Shares
      used in earnings (loss) per common share:Basic
                                      
                                      
                                      26,693
                                      
                                      
                                      
                                      26,339Diluted
                                      
                                      
                                      26,693
                                      
                                      
                                      
                                      27,153
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  -5-
  MULTIMEDIA
GAMES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Nine Months Ended June 30, 2009 and 2008
 (In
thousands, except per share data)
 (Unaudited)
 
 Nine Months Ended
                                  June 30,2009
                                
                                
                                2008REVENUES:Gaming revenue:Oklahoma
      compact
                                
                                $
                                44,174
                                
                                
                                $
                                40,261Class II
                                
                                
                                14,895
                                
                                
                                
                                21,825Charity
                                
                                
                                7,646
                                
                                
                                
                                11,585All
      other
                                
                                
                                15,734
                                
                                
                                
                                15,367Gaming equipment, system sale
      and lease revenue
                                
                                
                                9,907
                                
                                
                                
                                2,463Other
                                
                                
                                2,219
                                
                                
                                
                                1,188Total revenues
                                
                                
                                94,575
                                
                                
                                
                                92,689OPERATING
      COSTS AND EXPENSES:Cost of gaming equipment and
      systems sold
                                  and
      royalty fees
                                
                                
                                6,311
                                
                                
                                
                                1,540Selling, general and
      administrative expenses
                                
                                
                                56,387
                                
                                
                                
                                48,836Amortization and
      depreciation
                                
                                
                                46,085
                                
                                
                                
                                38,561Total operating costs and
      expenses
                                
                                
                                108,783
                                
                                
                                
                                88,937Operating income
      (loss)
                                
                                
                                (14,208
                                )
                                
                                
                                3,752OTHER
      INCOME (EXPENSE):Interest income
                                
                                
                                3,692
                                
                                
                                
                                3,612Interest
expense
                                
                                
                                (5,416
                                )
                                
                                
                                (6,662
                                )Other income
                                
                                
                                74
                                
                                
                                
                                2,038Income
      (loss) before income taxes
                                
                                
                                (15,858
                                )
                                
                                
                                2,740Income
      tax (expense) benefit
                                
                                
                                5,380
                                
                                
                                
                                (919
                                )Net income (loss)
                                
                                $
                                (10,478
                                )
                                
                                $
                                1,821Basic
      earnings (loss) per common share
                                
                                $
                                (0.39
                                )
                                
                                $
                                0.07Diluted
      earnings (loss) per common share
                                
                                $
                                (0.39
                                )
                                
                                $
                                0.07Shares
      used in earnings (loss) per common share:Basic
                                
                                
                                26,653
                                
                                
                                
                                26,271Diluted
                                
                                
                                26,653
                                
                                
                                
                                27,242
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  -6-
  MULTIMEDIA
GAMES, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Nine Months Ended June 30, 2009and
2008
 (In
thousands)
 (Unaudited)
 
 Nine Months Ended
                          June 30,CASH
      FLOWS FROM OPERATING ACTIVITIES:
                        
                        2009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        (10,478
                        )
                        
                        $
                        1,821Adjustments
      to reconcile net income (loss) to cash provided
                          by
      operating activities:Amortization
                        
                        
                        3,763
                        
                        
                        
                        3,450Depreciation
                        
                        
                        42,322
                        
                        
                        
                        35,111Accretion of contract
      rights
                        
                        
                        4,500
                        
                        
                        
                        3,007Provisions for long lived asset
      impairment
                        
                        
                        1,316
                        
                        
                        
                        234Deferred income
      taxes
                        
                        
                        (1,879
                        )
                        
                        
                        (4,516
                        )Share-based
      compensation
                        
                        
                        1,487
                        
                        
                        
                        895Provision for doubtful
      accounts
                        
                        
                        920
                        
                        
                        
                        300Interest income from imputed
      interest on development agreements
                        
                        
                        (3,313
                        )
                        
                        
                        (3,064
                        )Changes in operating assets and
      liabilities:Accounts
      receivable
                        
                        
                        (2,938
                        )
                        
                        
                        (2,790
                        )Inventory
                        
                        
                        479
                        
                        
                        
                        1,157Deferred contract
      costs
                        
                        
                        (1,144
                        )
                        
                        
                        (212
                        )Prepaid expenses and
      other
                        
                        
                        1,402
                        
                        
                        
                        (1,071
                        )Federal and state income tax
      payable/receivable
                        
                        
                        (1,900
                        )
                        
                        
                        (1,229
                        )Notes
    receivable
                        
                        
                        1,176
                        
                        
                        
                        (7,518
                        )Accounts payable and accrued
      expenses
                        
                        
                        2,197
                        
                        
                        
                        (566
                        )Other long-term
      liabilities
                        
                        
                        (210
                        )
                        
                        
                        300Deferred
    revenue
                        
                        
                        (860
                        )
                        
                        
                        5,822NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                        
                        
                        36,840
                        
                        
                        
                        31,131CASH
      FLOWS USED IN INVESTING ACTIVITIES:Acquisition of property and
      equipment and leased gaming equipment
                        
                        
                        (37,306
                        )
                        
                        
                        (30,698
                        )Proceeds from disposal of
      assets
                        
                        
                        —
                        
                        
                        
                        340Acquisition of intangible
      assets
                        
                        
                        (2,266
                        )
                        
                        
                        (3,849
                        )Advances under development
      agreements
                        
                        
                        (7,000
                        )
                        
                        
                        (41,660
                        )Repayments under development
      agreements
                        
                        
                        15,766
                        
                        
                        
                        19,060NET
      CASH USED IN INVESTING ACTIVITIES
                        
                        
                        (30,806
                        )
                        
                        
                        (56,807
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock
      options, warrants,
                          and related tax
      benefit
                        
                        
                        378
                        
                        
                        
                        277Proceeds from shares
      issued
                        
                        
                        —
                        
                        
                        
                        1,168Proceeds from long-term
      debt
                        
                        
                        7,275
                        
                        
                        
                        3,196Proceeds from revolving lines
      of credit
                        
                        
                        10,000
                        
                        
                        
                        31,052Payments on long-term
      debt
                        
                        
                        (7,850
                        )
                        
                        
                        (7,722
                        )Payments on revolving lines of
      credit
                        
                        
                        (13,000
                        )
                        
                        
                        (3,881
                        )NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
                        
                        
                        (3,197
                        )
                        
                        
                        24,090EFFECT
      OF EXCHANGE RATES ON CASH
                        
                        
                        312
                        
                        
                        
                        (26
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        3,149
                        
                        
                        
                        (1,612
                        )Cash
      and cash equivalents, beginning of period
                        
                        
                        6,289
                        
                        
                        
                        5,805Cash
      and cash equivalents, end of period
                        
                        $
                        9,438
                        
                        
                        $
                        4,193SUPPLEMENTAL
      CASH FLOW DATA:Interest paid
                        
                        $
                        4,879
                        
                        
                        $
                        5,390Income tax paid(refunded),
      net
                        
                        $
                        (2,124
                        )
                        
                        $
                        6,661NON-CASH
      TRANSACTIONS:Change
      in contract rights resulting from imputed interest on development
      agreement notes receivable
                        
                        $
                        (342
                        )
                        
                        $
                        6,876Transfer
      of leased gaming equipment to inventory
                        
                        $
                        1,034
                        
                        
                        $
                        —
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  -7-
  MULTIMEDIA
GAMES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1.    SIGNIFICANT
ACCOUNTING POLICIES
  The
accompanying condensed consolidated financial statements should be read in
conjunction with Multimedia Games, Inc. (the “Company,” “we,” “us,” or “our”)
consolidated financial statements and footnotes contained within the Company’s
Annual Report on Form 10-K for the year ended September 30, 2008,
as amended by Amendments No. 1 and No. 2 on Form 10-K/A
thereto.
  The
unaudited financial statements included herein as of June 30, 2009, and for each
of the three and nine month periods ended June 30, 2009 and 2008, have been
prepared by the Company 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 month periods ended June 30, 2009 are not
necessarily indicative of the results which will be realized for the year ending
September 30, 2009. We have evaluated all subsequent events through
August 7, 2009, the date that the financial statements were issued.
  Operations –The Company is a supplier
of interactive systems, server-based gaming systems, interactive electronic
games, player terminals, stand-alone player terminals, video lottery terminals,
electronic scratch ticket systems, electronic instant lottery systems, player
tracking systems, casino cash management systems, slot accounting systems, slot
management systems, unified currencies and electronic and paper bingo systems
for Native American, racetrack casino, casino, charity and commercial bingo,
sweepstakes, lottery and video lottery markets and the Company provides support
and services and operations support for its customers and products. The Company
designs and develops networks, software and content that provide its customers
with, among other things, comprehensive gaming systems, some of which are
delivered through a telecommunications network that links its player terminals
with one another, both within and among gaming facilities. The Company’s ongoing
development and marketing efforts focus on Class II and Class III
gaming systems and products for use by Native American tribes; video lottery
terminals, video lottery systems, stand-alone player terminals, electronic
instant scratch systems and other products for domestic and international
lotteries; products for domestic and international charity and commercial bingo
markets; and promotional, sweepstakes and amusement with prize systems.
The Company’s gaming systems are typically provided to customers under
revenue-sharing arrangements, except for video lottery terminals in the
Class III market in Washington State, which are typically sold for an
up-front purchase price. The Company has undertaken a concerted effort to
generate additional revenue through the sale of Class II and Class III
gaming systems and products. The Company offers content for its gaming systems
that has been designed and developed by the Company, as well as game themes the
Company has licensed from others. The Company currently operates in one business
segment.
  Consolidation
Principles –The Company’s financial statements include the accounts of
Multimedia Games, Inc. and its wholly-owned subsidiaries: MegaBingo, Inc., MGAM
Systems, Inc., Innovative Sweepstakes Systems, Inc., MGAM Services, LLC,
MGAM Systems International, Inc., MegaBingo International, LLC,
Multimedia Games de Mexico 1, S. de R.L. de C.V., and
Servicios de Wild Basin S. de R.L. de C.V. Intercompany
balances and transactions have been eliminated.
  Accounting
Estimates–The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Examples include share-based compensation,
provisions for doubtful accounts and contract losses, estimated useful lives of
property and equipment and intangible assets, impairment of property and
equipment and intangible assets, deferred income taxes, and the provision for
and disclosure of litigation and loss contingencies. Actual results may differ
materially from these estimates in the future.
  -8-
  MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
 
 Reclassification–Reclassifications were made
to the prior-period condensed 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.
  Revenue
Recognition–In
accordance with the provision of Staff Accounting Bulletin No. 104,
“Revenue Recognition,” or SAB 104, the Company recognizes revenue when all
of the following have been satisfied:
  §
              Persuasive
      evidence of an arrangement exists;
  §
              Delivery
      has occurred;
  §
              Price
      to the buyer is fixed or determinable;
and
  §
              Collectibility
      is probable.
  Gaming
Revenue–The
Company derives gaming revenue from the following sources:
  §
                  Oklahoma
      Compact
                  –
                  Participation
      revenue generated from its games placed by the Company under the Oklahoma
      Compact§
                  Class II
                  –
                  Participation
      revenue generated from the Company’s Native American Class II
      product§
                  Charity
                  –
                  Participation
      revenue generated from its charity bingo product§
                  All
      Other
                  –
                  Participation
      revenue from Class III back-office systems, New York Lottery system,
      Mexico bingo market, and certain other participation-based
      markets
  The
majority of the Company’s gaming revenue is of a recurring nature, and is
generated under lease participation arrangements when the Company provides its
customers with player terminals, player terminal-content licenses and
back-office equipment, collectively referred to as gaming equipment. Under these
arrangements, the Company retains ownership of the gaming equipment installed at
customer facilities, and the Company receives revenue based on a percentage of
the net win per day generated by the gaming equipment. Revenue from lease
participation arrangements are considered both realizable and earned at the end
of each gaming day.
  Gaming
Revenue generated by player terminals deployed at sites under development
agreements is reduced by the accretion of contract rights from those development
agreements. Contract rights are amounts allocated to intangible assets for
dedicated floor space resulting from development agreements, described under
“Development Agreements.” The related amortization expense, or accretion of
contract rights, is netted against its respective revenue category in the
condensed consolidated statements of operations.
  The
Company also generates gaming revenues from back-office fees with certain
customers. Back-office fees cover the service and maintenance costs for
back-office servers installed in each gaming facility to run its gaming
equipment, as well as the cost of related software updates. Back-office fees are
considered both realizable and earned at the end of each gaming
day.
  Gaming Equipment
and System Sales–The Company periodically sells gaming equipment and gaming systems under
independent sales contracts through normal credit terms or may grant extended
credit terms under contracts secured by the related equipment, with interest
recognized at market rates.
  For sales
arrangements with multiple deliverables, the Company applies the guidance from
Statement of Position 97-2, or SOP 97-2, “Software Revenue Recognition,” as
amended, and Emerging Issues Task Force, or EITF 00-21, “Revenue Arrangements
with Multiple Deliverables.” Deliverables are divided into separate units of
accounting if: (i) each item has value to the customer on a stand-alone
basis; (ii) there is objective and reliable evidence of the fair value of
the undelivered items; and (iii) delivery of the undelivered item is
considered probable and substantially in the Company’s control.
  The
majority of the Company’s multiple element sales contracts are for some
combination of gaming equipment, player terminals, content, system software,
license fees and maintenance. For multiple element contracts considered a single
unit of accounting, the Company recognizes revenues based on the method
appropriate for the last delivered item.
  -9-
  MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  The
Company allocates revenue to each accounting unit based upon its fair value as
determined by Vendor Specific Objective Evidence, or VSOE. VSOE of fair value
for all elements of an arrangement is based upon the normal pricing and
discounting practices for those products and services when sold individually.
The Company recognizes revenue when the product is physically delivered to a
customer controlled location or over the period in which the service is
performed and defers revenue for any undelivered elements.
  §
              In
      those situations where each element is not essential to the function of
      the other, the “multiple deliverables” are bifurcated into accounting
      units based on their relative fair market value against the total contract
      value and revenue recognition on those deliverables is recorded when all
      requirements of revenue recognition have been
  met.
  §
              If
      any element is determined to be essential to the function of the other,
      revenues are generally recognized over the term of the services that are
      rendered.
   In those
situations where VSOE does not exist for any undelivered elements of a multiple
element arrangement, the aggregate value of the arrangement, including the value
of products and services delivered or performed, is initially deferred until all
hardware and software is delivered, and then the entire amount of the
arrangement is recognized ratably over the period of the last deliverable,
generally the service period of the contract. Depending upon the elements and
the terms of the arrangement, the Company recognizes certain revenues under the
residual method. Under the residual method, revenue is recognized when VSOE
of fair value exists for all of the undelivered elements in the arrangement, but
does not exist for one or more of the delivered elements in the arrangement.
Under the residual method, the Company defers the fair value of undelivered
elements, and the remainder of the arrangement fee is then allocated to the
delivered elements and is recognized as revenue, assuming the other revenue
recognition criteria are met.
  Costs and
Billings on Uncompleted Contract–During fiscal 2008,
the Company entered into a fixed-price contract with a customer, pursuant to
which it will deliver an electronic bingo system. Revenues from this fixed-price
contract will be recognized on the completed-contract method in accordance with
American Institute of Certified Public Accountants Statement of
Position 81-1, or SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” In the event that the
Company expected a loss on a contract accounted for under SOP 81-1, the Company
would record the entire estimated loss in the quarter in which it was determined
that a loss was expected. At June 30, 2009 no loss provision related to this
contract has been recorded.
  Contract
costs include all direct material and labor costs, and those indirect costs
related to contract performance, such as indirect labor, supplies and tools.
General and administrative costs are charged to expense as
incurred.
  Costs in
excess of amounts billed are classified as current assets under “Deferred
contract costs, net.”
  At June
30, 2009, the following amounts were recorded in the Company’s condensed
consolidated balance sheet:
  June
      30,
                          2009(in
      thousands)Costs
      incurred on uncompleted contracts
                        
                        $
                        3,024Billings
      on uncompleted contracts
                        
                        
                        (882
                        )Deferred
      contract costs
                        
                        $
                        2,142
  Cash and Cash
Equivalents –The Company considers all highly liquid investments (i.e.,
investments which, when purchased, have original maturities of three months or
less) to be cash equivalents.
  Restricted Cash
and Long-Term Investments –Restricted cash and long-term investments at
June 30, 2009, amounted to $804,000, representing the fair value of investments
held by the Company’s prize fulfillment firm related to outstanding
MegaBingo® jackpot
prizes.
  -10-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
 Allowance for
Doubtful Accounts –The Company maintains an allowance for doubtful
accounts related to its accounts receivable and notes receivable that have been
deemed to have a high risk of uncollectibility. Management reviews its accounts
receivable and notes receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. Management analyzes historical
collection trends and changes in its customer payment patterns, customer
concentration, and creditworthiness when evaluating the adequacy of its
allowance for doubtful accounts. In its overall allowance for doubtful accounts,
the Company includes any receivable balances where uncertainty exists as to
whether the account balance has become uncollectible. Based on the information
available, management believes the allowance for doubtful accounts is adequate;
however, actual write-offs might exceed the recorded allowance.
  Inventory –The Company’s inventory consists primarily of completed player terminals,
related component parts and back-office computer equipment expected to be sold
over the next 12 months. Inventories are stated at the lower of cost (first
in, first out) or market.
  Property and
Equipment and Leased Gaming Equipment –Property and equipment and leased
gaming equipment are stated at cost. The cost of property and equipment and
leased gaming equipment is depreciated over their estimated useful lives,
generally using the straight-line method for financial reporting, and regulatory
acceptable methods for income tax reporting purposes. Player terminals placed
with customers under participation arrangements are included in leased gaming
equipment. Leased gaming equipment also includes a “pool” of rental terminals,
i.e., the “rental pool.” Rental pool units are those units that have previously
been placed in the field under participation arrangements, but are currently
back with the Company, being refurbished and/or awaiting redeployment. Routine
maintenance of property and equipment and leased gaming equipment is expensed in
the period incurred, while major component upgrades are capitalized and
depreciated over the estimated remaining useful life of the component. Sales and
retirements of depreciable property are recorded by removing the related cost
and accumulated depreciation from the accounts. Gains or losses on sales and
retirements of property are reflected in the Company’s results of
operations.
  Management
reviews long-lived asset classes for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to its fair value, which considers
the future undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or the fair value less costs of disposal.
  Deferred Revenue
–Deferred revenue represents amounts from the sale of gaming equipment
and systems that have been billed, or for which notes receivable have been
executed, but which transaction has not met the Company’s revenue recognition
criteria. The cost of the related gaming equipment and systems has been offset
against deferred revenue. Amounts are classified between current and long-term
liabilities, based upon the expected period in which the revenue will be
recognized.
  Other Income –The Company had no other income for the three months ended June 30, 2009
and $74,000 for the nine months ended June 30, 2009. The Company had other
income of $828,000 and $2.0 million for the three and nine months ended June 30,
2008, respectively. Historically, other income consisted of distributions from a
limited partnership interest, accounted for on the cost basis.
  Other Long-Term
Liabilities –Other long-term liabilities at June 30, 2009 include
investments held at fair value by the Company’s prize-fulfillment firm related
to outstanding MegaBingo jackpot-prize-winner annuities.  These
annuities were $804,000 as of June 30, 2009 and $868,000 as of September 30,
2008. Also included in other liabilities were amounts due under a separation
agreement with a former Chief Executive Officer, totaling $53,000 as of June 30,
2009 and $263,000 as of September 30, 2008.
  Fair Value of
Financial Instruments –The fair value of a financial instrument, as
defined by Statement of Financial Accounting Standards, or SFAS No. 157, “Fair
Value Measurements,” is the exit price, which is the price that would be
received to sell an asset or paid to transfer a liability in a transaction
between market participants at the measurement date.  SFAS No. 157
establishes a three tier fair value hierarchy that prioritizes inputs to
valuation techniques used for fair value measurement.
  -
              Level
      1 consists of observable market data in an active market for identical
      assets or liabilities.
  -11-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  -
              Level
      2 consists of observable market data, other than that included in Level 1,
      that is either directly or indirectly
  observable.
  -
                Level
      3 consists of unobservable market data. The input may reflect the
      assumptions of the Company, not a market participant, if there is little
      available market data and the Company’s own assumptions are considered by
      management to be the best available
information.
  In the
case of multiple inputs being used in fair value measurement, the lowest level
input that is significant to the fair value measurement represents the level in
the fair value hierarchy in which the fair value measurement is
reported.  At June 30, 2009, the carrying amounts for the Company’s
financial instruments, which include accounts and notes receivable, accounts
payable, the Revolving Credit Facility, and long-term debt and capital leases,
approximated fair value.
  Segment and
Related Information–Although the Company has
a number of operating divisions, separate segment data has not been presented as
they meet the criteria for aggregation as permitted by SFAS No. 131,
“Disclosures About Segments of an Enterprise and Related
Information.”
  Costs of Computer
Software –Software development costs have been
accounted for in accordance with SFAS No. 86, “Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” UnderSFAS No. 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and prior to the availability of the product for
general release to
customers. The Company capitalized software development costs of approximately$677,000 and
$1.8 million during the three
and nine month periods endedJune 30, 2009, respectively, and $854,000 and $3.0 million
during the three and nine month periods endedJune 30, 2008,
respectively.Software development costs primarily
consist of personnel costs and rent for related office space.The Company began to amortize
capitalized costswhen a
product is available for general release to customers. Amortization expense is
determined on a product-by-product basis at a rate not less than straight-line
basis over the product’s remaining estimated economic life, not to exceed five
years. Amortization of software development costs is included in amortization
and depreciation in the accompanying consolidated statements of
operations.
  Income Taxes –The Company accounts for income taxes using the asset and liability
method and applies the provisions of SFAS, No. 109, “Accounting for
Income Taxes,” as well as the Financial Accounting Standards Board, or
FASB, Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes,” or FIN 48. Under SFAS No. 109, deferred tax liabilities or
assets arise from differences between the tax basis of liabilities or assets and
their bases for financial reporting, and are subject to tests of recoverability
in the case of deferred tax assets. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for deferred tax assets to the extent
realization is not judged to be more likely than not. 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 measurement of a tax position taken or expected to be
taken in a tax return. The new FASB standard also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted FIN 48 in the
first quarter of fiscal 2008 and recorded a liability of $295,000
related to uncertain tax positions in the first quarter of fiscal 2008.
There have been no changes to the reserves recorded related to
FIN 48.
  Treasury Stock –The Company utilizes the cost method for accounting for its treasury
stock acquisitions and dispositions.
  Share-Based
Compensation – On October 1, 2005, the Company adopted the
provisions of SFAS No. 123(revised), “Share-Based Payment.” Among
other items, SFAS No. 123(R) eliminated the use of APB No. 25,
“Accounting for Stock Issued to Employees” and the intrinsic value method of
accounting, and requires the Company to recognize in the financial statements,
the cost of employee services received in exchange for awards of equity
instruments, based on the grant date fair value of those awards. To measure the
fair value of stock options granted to employees, the Company currently utilizes
the Black-Scholes-Merton option-pricing model, consistent with the method used
for pro forma disclosures under SFAS No. 123. SFAS No. 123(R) permits
companies to adopt its requirements using either a “modified prospective”
method, or a “modified retrospective” method. The Company applied the “modified
prospective” method, under which compensation cost is recognized in the
financial statements beginning with the adoption date for all share-based
payments granted after that date, and for all unvested awards granted prior to
the adoption date of SFAS No. 123(R).
  -12-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  The
Black-Scholes-Merton model incorporates various assumptions, including expected
volatility, expected life, and risk-free interest rates. The expected volatility
is based on the historical volatility of the Company’s common stock over the
most recent period commensurate with the estimated expected life of the
Company’s stock options, adjusted for the impact of unusual fluctuations not
reasonably expected to recur. The expected life of an award is based on
historical experience and on the terms and conditions of the stock awards
granted to employees.
  There
were 21,400 option grants issued to employees during the quarter ended June
30, 2009 at an average fair value per share price of $2.25. Total pretax
share-based compensation for the three and nine month periods ended June 30,
2009 was $363,000 and $1.5 million, respectively, and $308,000 and
$896,000 for corresponding periods ended June 30, 2008. The total income tax
benefit recognized in the statement of operations for share-based compensation
arrangements was $89,000 and $384,000 for the three and nine month
periods ended June 30, 2009, respectively, and $28,000 and $131,000 for the
corresponding periods ended June 30, 2008. As of June 30, 2009,
$4.7 million of unamortized stock compensation expense will be recognized
over the vesting periods of the various option grants.
  Foreign
Currency Translation.The
Company accounts for currency translation 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 (loss) a component of
shareholder equity, in accordance with SFAS 130, “Reporting Comprehensive
Income.”Transactional
currency gains and losses arising from transactions in currencies other than the
Company’s local functional currency are included in the condensed consolidated
statement of operations in accordance with SFAS No. 52.
  Recent Accounting
Pronouncements Issued. In
March 2008, the FASB issued SFAS No 161, “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133.”
SFAS No. 161 enhances required disclosures regarding derivatives and
hedging activities, including enhanced disclosures regarding how: (a) an
entity uses derivative instruments; (b) derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities;” and (c) derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. SFAS No. 161 is effective for fiscal
years, and interim periods within those fiscal years, beginning after
November 15, 2008, though earlier application is encouraged. Accordingly,
the Company expects to adopt SFAS No. 161 beginning in fiscal 2010.
The Company expects that SFAS No. 161 will have an impact on accounting for
derivative instruments and hedging activities once adopted, but the significance
of the effect is dependent upon entering into these related transactions, if
any, at that time.
  Effective October 1, 2008,
the Company adopted SFAS No. 157, “Fair Value Measurements,” for its
financial assets and financial liabilities, but it has not yet adopted SFAS
No. 157 as it relates to nonfinancial assets and liabilities based on the
February 2008 issuance of FASB Staff Position 157-2, “Effective Date
of FASB Statement No. 157,” which permits a one-year deferral of the
application of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008. The adoption of SFAS 157 as it
pertains to financial assets and liabilities did not have a material impact on
the Company’s results of operations, financial position or liquidity. The
Company will adopt SFAS 157 for non-financial assets and non-financial
liabilities on October 1, 2009, and the Company is currently
evaluating the effect, if any, the adoption may have on its results of
operations, financial position or liquidity.
  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 “Accounting for Certain Investments in Debt and Equity
Securities,” 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 became effective for the Company beginning in
October 2008. The implementation of SFAS No. 159, effective
October 1, 2008, did not have a material effect on the consolidated
financial statements in the quarter ended June 30, 2009.
  -13-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  In
December 2007, the FASB issued SFAS No. 141 (revised), “Business
Combinations.” SFAS No. 141(R) changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption
prohibited. The Company is required to adopt SFAS No. 141(R) effective
October 1, 2009, and the Company is currently evaluating the effect,
if any, the adoption may have on its results of operations or financial
position.
  In
December 2007, the FASB issued SFAS No. 160, “Non Controlling
Interests in Consolidated Financial Statements,” an amendment of Accounting
Research Bulletin, or ARB No. 51, “Consolidated Financial Statements.” SFAS
No. 160 changes the accounting for non controlling (minority) interests in
consolidated financial statements, including the requirement to classify non
controlling interests as a component of consolidated stockholders’ equity, and
the elimination of “minority interest” accounting in results of operations with
earnings attributable to non controlling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting
for both increases and decreases in a parent’s controlling ownership interest.
SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company is
required to adopt SFAS No. 160 effective October 1, 2009, and the
Company is currently evaluating the effect, if any, the adoption may have on its
results of operations or financial position.
  In May
2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 identifies the sources of accounting principles and a
framework for selecting the principles to be used in preparation of financial
statements of nongovernmental entities that are prepared in conformity with
generally accepted accounting principles in the United States (“the GAAP
Hierarchy”). The current GAAP hierarchy is set forth in the AICPA Statement of
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.” However, the FASB believes that GAAP
hierarchy should be directed to entities rather than auditors because the entity
is responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP.  SFAS No. 162 was effective
November 15, 2008.  The adoption of SFAS No. 162 did not impact our
consolidated financial position, results of operations or cash
flows.
  In May
2009, the FASB issued SFAS No. 165, “Subsequent Events, “ which establishes the
accounting for and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued.  It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date; that is,
whether that date represents the date the financial statements were issued or
were available to be issued. Consistent with SFAS No. 165 requirements for
public entities, we evaluate subsequent events through the date the financial
statements are issued.  SFAS No. 165 should not result in significant
changes in the subsequent events that an entity reports, either through
recognition or disclosure, in its financial statements.  SFAS No. 165
is effective for reporting periods ending after June 15, 2009.  The
adoption of SFAS No. 165 did not impact our consolidated financial position,
results of operations or cash flows.
  In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and Hierarchy of Generally Accepted Accounting Principles (a replacement of SFAS
No. 162),” which will become the source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities.  Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants.  On the
effective date of this statement, the codification will supersede all
then-existing non-SEC accounting and reporting standards; and all
non-grandfathered, non-SEC accounting literature not included in the
codification will be superseded and deemed non-authoritative.  SFAS
No. 168 is effective for financial statements issued for the interim and annual
periods ending after September 30, 2009.  The adoption of SFAS No. 168
will not impact our consolidated financial position, results of operation or
cash flows
 -14-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  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’ win per unit over the term of the agreement. The agreements 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.
  In the
third quarter of fiscal 2008, the Company fulfilled a commitment to a
significant, existing Oklahoma tribal customer to provide
approximately 43.8%, or $65.6 million, of the total funding for a
facility expansion. Because of the Company’s commitment to fund the expansion,
it secured the right to place an additional 1,400 gaming units in the
expanded facility in southern Oklahoma. The Company recorded all advances as a
note receivable and imputed interest on the interest free loan. The discount
(imputed interest) was recorded as contract rights, and as of the first quarter
of fiscal 2009 is being amortized ratably over the life of the agreement.
The repayment period of the note will be based on the performance of the
facility. In the second quarter of fiscal 2009, the Company made a
commitment of $7.0 million that consists of both a loan for new unit
placements in an expanded facility and a placement fee for certain units to
remain at the current facility for an extended period of time. As of June 30,
2009, the Company had advanced $4.0 million toward this commitment. The
remaining commitment of $3.0 million is expected to be paid over the next
two fiscal quarters with $1.5 million being paid each quarter.
  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. There were no events or changes in circumstance
during the three or nine month periods ended June 30, 2009, which would require
an impairment charge to the assets’ carrying value.
  The
following net amounts related to advances made under development agreements and
were recorded in the following balance sheet captions:
  June 30,
                      2009
                    
                    
                    September 30,
                      2008Included
      in:
                    
                    (In
      thousands)Notes
      receivable, net
                    
                    $
                    51,145
                    
                    
                    $
                    61,750Intangible
      assets – contract rights,net
      of accumulated amortization
                    
                    
                    29,983
                    
                    
                    
                    29,368
  -15-
 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,
                            2009
                          
                          
                          September 30,
                            2008
                          
                          Estimated
                            Useful
                            Lives(In
      thousands)Gaming
      equipment and third-party gaming content licenses available for deployment
      (1)
                          
                          $
                          21,233
                          
                          
                          $
                          30,252Deployed
      gaming equipment
                          
                          
                          104,616
                          
                          
                          
                          96,584
                          
                          3-5 yearsDeployed
      third-party gaming content licenses
                          
                          
                          40,155
                          
                          
                          
                          34,444
                          
                          1.5-3 yearsTribal
      gaming facilities and portable buildings
                          
                          
                          4,057
                          
                          
                          
                          4,720
                          
                          5-7 yearsThird-party
      software costs
                          
                          
                          7,829
                          
                          
                          
                          7,732
                          
                          3-5 yearsVehicles
                          
                          
                          3,280
                          
                          
                          
                          3,502
                          
                          3-10 yearsOther
                          
                          
                          3,170
                          
                          
                          
                          3,191
                          
                          3-7 yearsTotal
      property and equipment
                          
                          
                          184,340
                          
                          
                          
                          180,425Less
      accumulated depreciation and amortization
                          
                          
                          (126,403
                          )
                          
                          
                          (113,096
                          )Total
      property and equipment, net
                          
                          $
                          57,937
                          
                          
                          $
                          67,329Leased
      gaming equipment
                          
                          $
                          157,682
                          
                          
                          $
                          165,903
                          
                          3 yearsLess
      accumulated depreciation
                          
                          
                          (118,767
                          )
                          
                          
                          (129,879
                          )Total
      leased gaming equipment, net
                          
                          $
                          38,915
                          
                          
                          $
                          36,024
  
 (1)
                Gaming
      equipment and third-party gaming content licenses begin depreciating when
      they are placed in service.
  In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company (i) recognizes an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows; and (ii) measures an impairment loss as the
difference between the carrying amount and fair value of the asset.
  During
the three and nine month periods ended June 30, 2009, in the ordinary course of
business activities or upon reviewing the account balances, the Company disposed
of or wrote off $55,000
and $132,000, respectively of third-party gaming content licenses, tribal
gaming facilities and portable buildings, vehicles, deployed gaming equipment,
or other equipment. In the same periods ended June 30, 2008, the Company
disposed of or wrote off $484,000 and $615,000,
respectively.
  Leased gaming equipment includes player
terminals placed under participation arrangements that are either at customer
facilities or in the rental pool.
  -16-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  4.     INTANGIBLE
ASSETS
  The
Company’s intangible assets consisted of the following:
  June 30,
                        2009
                      
                      
                      September 30,
                        2008
                      
                      Estimated
                        Useful
                        Lives(In
      thousands)Contract
      rights under development agreements
                      
                      $
                      46,377
                      
                      
                      $
                      41,325
                      
                      5-7 yearsInternally-developed
      gaming software
                      
                      
                      27,745
                      
                      
                      
                      26,473
                      
                      1-5 yearsPatents
      and trademarks
                      
                      
                      8,402
                      
                      
                      
                      8,464
                      
                      1-5 yearsOther
                      
                      
                      1,054
                      
                      
                      
                      1,054
                      
                      3-5 yearsTotal
      intangible assets
                      
                      
                      83,578
                      
                      
                      
                      77,316Less
      accumulated amortization – all other
                      
                      
                      (47,931
                      )
                      
                      
                      (39,960
                      )Total
      intangible assets, net
                      
                      $
                      35,647
                      
                      
                      $
                      37,356
  Contract rights are amounts allocated to
intangible assets for dedicated floor space resulting from development agreements.
The related amortization expense, or accretion of contract rights, is netted
against its respective revenue category in the accompanying consolidated
statements of operations.
  Internally developed gaming software is
accounted for under the provisions of SFAS No. 86 and is stated at cost,
which is amortized over the estimated useful life of the software, generally
using the straight-line method. The Company amortizes internally-developed games
over atwelvemonth period, gaming engines over
aneighteenmonth period, gaming systems over
a three-year period and its central management systems over a five-year period.
Software development costs are capitalized once technological feasibility has
been established, and are amortized when the software is placed into service.
Any subsequent software maintenance costs, such as bug fixes and subsequent
testing, are expensed as incurred. Discontinued software development costs are
expensed when the determination to discontinue is made. For the three andninemonth periodsendedJune 30, 2009, amortization expense related to
internally-developed gaming software was $813,000 and $3.0million, respectively, compared
to $891,000 and$2.4 million, respectively, for the three and nine
month periods ended June 30, 2008. During the three and nine month periods
endedJune 30, 2009, the
Company wrote off $372,000 and $827,000, respectively, related to internally-developed gaming
software and patents and trademarks, compared to write-offsof $42,000 and $350,000in the same periods ended
June 30, 2008.
  Management reviews intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
  5.     NOTES
RECEIVABLE
  The
Company’s notes receivable consisted of the following:
  June 30,
                      2009
                    
                    
                    September 30,
                      2008(In
      thousands)Notes
      receivable from development agreements
                    
                    $
                    59,440
                    
                    
                    $
                    72,706Less
      imputed interest discount reclassed to contract rights
                    
                    
                    (8,295
                    )
                    
                    
                    (10,956
                    )Notes
      receivable from equipment sales and other
                    
                    
                    6,835
                    
                    
                    
                    8,012Notes receivable,
      net
                    
                    
                    57,980
                    
                    
                    
                    69,762Less
      current portion
                    
                    
                    (15,482
                    )
                    
                    
                    (23,072
                    )Notes receivable –
      non-current
                    
                    $
                    42,498
                    
                    
                    $
                    46,690
  
 Notes receivable from development
agreements are generated from reimbursable amounts advanced under development
agreements.
  -17-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  Notes receivable from equipment sales
consisted of financial instruments issued by customers for the purchase of
player terminals and licenses, and bore interest at4.13%as of June 30, 2009. All of the Company’s notes receivable
from equipment sales are collateralized by the related equipment sold, although
the value of such equipment, if repossessed, may be less than the note
receivable outstanding.
  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,
                      2009
                    
                    
                    September 30,
                      2008(In
      thousands)Long-term
      revolving lines of credit
                    
                    $
                    16,000
                    
                    
                    $
                    19,000Term
      loan facility
                    
                    $
                    67,413
                    
                    
                    $
                    67,988Less
      current portion
                    
                    
                    (1,675
                    )
                    
                    
                    (1,544
                    )Long-term debt, less current
      portion
                    
                    $
                    65,738
                    
                    
                    $
                    66,444
  Credit
Facility.On
April 27, 2007, the Company entered into a $150 million
CreditFacility which
replaced its previouscreditfacility in its entirety. On October 26, 2007,the Company amended the
Credit Facility,andtransferreda portionof the revolving credit commitment to a
fully funded term loan due April 27, 2012. Thetermloan is amortized at an annual amount of
1% per year, payable in equal quarterly installments beginning
January 1, 2008, with the remaining amount due on the maturity date.
The Company entered into a second amendment to the Credit Facility on
December20, 2007. The second amendment
(i) extended the hedging arrangement date related to a portion of the term
loan to June 1, 2008; and (ii) modified the interest rate margin
applicable to the Credit Facility.
  On July
22, 2009, the Company entered into a third amendment to the Credit
Facility.  Under the terms of the amended credit agreement, the
calculation of Consolidated EBITDA for the purposes of evaluating compliance
with the specified covenants will now reflect the add-back of several items
including: i) legal costs and settlement fees incurred in the trailing
four-quarter period related to litigation with Diamond Game Enterprises, Inc.,
or Diamond Game, which was settled on May 1, 2009; ii) all non-cash stock-based
compensation expenses; and, iii) up to $10 million, in aggregate, of additional
non-cash asset impairment charges that the Company may incur in future periods.
In conjunction with the third amendment, the Company reduced the total borrowing
capacity of the credit facility to $125 million from the previous total
borrowing capacity of $150 million and agreed to a LIBOR floor of 2%, which
would have increased the interest rate paid as of June 30, 2009 by approximately
1.7%. On July 23, 2009, the Company paid a one-time fee of 25 basis points of
the total borrowing capacity of $125 million as well as other customary fees
associated with the amendment.
  The Credit Facility provides the Company
with the ability to finance development agreements and acquisitions and working
capital for general corporate purposes. Amounts under the $65 million revolving credit
commitment and the $60million term loan matureonApril 27, 2012, and advances under the term loan and
revolving credit commitment bear interest at the Eurodollar rate plus the
applicable spread, tied to various levels of interest pricing determined by
total debt to EBITDA (EBITDA is defined as earnings before interest, taxes,
amortization, depreciation, and accretion of contract rights). As ofJune 30, 2009, the $16.0 million drawn under the
revolving credit commitment bore interest at 4.13% and two tranches of the term loan of
$50.0 million and $17.1 million bore interest at4.82% and4.88%, respectively.Also included in theJune 30, 2009and 2008 balances areapproximately $350,000 and $567,000, respectively, of accrued
interest.
  The Credit Facility is collateralized by
substantially all of the Company’s assets, and also contains financial
covenants as defined in the agreement.These covenants 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 30, 2008, and 1.75 : 1.00 from
September 30, 2008 thereafter; and (iii) a minimum trailing
twelve-month EBITDA of not less than $60million for each quarter. As ofJune 30,
2009, the Company is in compliance
with its loan covenants. The Credit Facility requires certain mandatory
prepayments be made on the term loan from the net cash proceeds of certain asset
sales and condemnation proceedings (in each case to the extent not reinvested,
within certain specified time periods, in the replacement or acquisition of
property to be used in its businesses). In the second quarter of 2008, the
Company made a mandatory prepayment of the term loan in the amountof $4.5 million, due to an early
prepayment of a development agreement note receivable.After taking into
account the third amendment, we had availability of $45.0 million, subject
to covenant restrictions, under our Credit Facility.
  -18-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  The Credit Facility also required that the Company enter into
hedging arrangements covering at least $50 million of the term loan for a
three-year period by June 1, 2008. Therefore, on
May 29, 2008, the Company purchased, for $390,000, an interest
rate cap (5% cap rate) covering $50 million of the term loan.The Company accounts for
this hedge in accordance with SFAS No. 133 which requires entities to
recognize all derivative instruments as either assets or liabilities in the
balance sheet, at their respective fair values. The Company records changes on a
mark to market basis, changes to the fair value of the interest rate cap on a
quarterly basis. These changes in fair value are recorded in interest expense in
thecondensedconsolidated statement of
operations.
  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 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Income
      (loss) available to common stockholders(in
      thousands)
                            
                            $
                            (1,160
                            )
                            
                            $
                            164
                            
                            
                            $
                            (10,478
                            )
                            
                            $
                            1,821Weighted
      average common shares outstanding
                            
                            
                            26,693,006
                            
                            
                            
                            26,338,774
                            
                            
                            
                            26,653,093
                            
                            
                            
                            26,270,676Effect
      of dilutive securities:Options
                            
                            
                            -
                            
                            
                            
                            814,539
                            
                            
                            
                            -
                            
                            
                            
                            971,046Weighted
      average common
                              and
      potential shares outstanding
                            
                            
                            26,693,006
                            
                            
                            
                            27,153,313
                            
                            
                            
                            26,653,093
                            
                            
                            
                            27,241,722Basic
      earnings (loss) per share
                            
                            $
                            (0.04
                            )
                            
                            $
                            0.01
                            
                            
                            $
                            (0.39
                            )
                            
                            $
                            0.07Diluted
      earnings (loss) per share
                            
                            $
                            (0.04
                            )
                            
                            $
                            0.01
                            
                            
                            $
                            (0.39
                            )
                            
                            $
                            0.07
  The
Company had the following options to purchase shares of common stock that were
not included in the weighted average common and potential shares outstanding in
the computation of dilutive earnings per share, due to the antidilutive
effects:
  Three months ended June 30,
                      
                      
                      Nine months ended June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Common
      Stock Options
                      
                      
                      7,071,583
                      
                      
                      
                      2,704,241
                      
                      
                      
                      6,989,626
                      
                      
                      
                      2,483,158Range
      of exercise price
                      
                      $
                      1.00-18.71
                      
                      
                      $
                      4.68–21.53
                      
                      
                      $
                      1.00-$21.53
                      
                      
                      $
                      7.40-21.53
  In the
three and nine month periods ended June 30, 2009, options to purchase
approximately 6.0 million and 6.0 million shares of common stock, with
exercise prices ranging from $2.35 to $18.71 per share and
$1.87 to $21.53 per share, respectively, were not included in the
computation of dilutive earnings per share, due to the antidilutive effect, and
approximately 1.1 million and 964,000 equivalent shares were not
included, due to the loss generated in the current periods.
  -19-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  8.
    COMMITMENTS AND CONTINGENCIES
  Litigation
  The
Company is subject to the possibility of loss contingencies arising in its
business and such contingencies are accounted for in accordance with SFAS
No. 5, “Accounting for Contingencies.” In determining loss contingencies,
the Company considers the possibility of a loss as well as the ability to
reasonably estimate the amount of such loss or liability. An estimated loss is
recorded when it is considered probable that a liability has been incurred and
when the amount of loss can be reasonably estimated.
  Cory
Investments Ltd.On
May 7, 2008, Cory Investments, LTD., or Cory Investments, 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, Jon Yarbrough, and a former VGT
representative, John Marley; Worldwide Gaming Technologies, or WGT; AGS, LLC,
d/b/a American Gaming Systems; AGS Partners, LLC; Ronald Clapper, the owner of
WGT, AGS, LLC and AGS Partners; Sierra Design Group; and Bally Technologies,
Inc.Cory
Investmentsasserts that
the Company offered allegedly illegal Class III games on the
MegaNanza®and Reel Time Bingo®gaming systems to Native American
tribes in Oklahoma, which had a severely negative impact on Cory Investments’
market for its legal Class II games. Cory Investments also alleges that the
defendants conspired to drive it and other Class II competitors out of the
Class II market in Oklahoma and other states. In addition to the conspiracy
allegations, Cory Investments allegesninecauses of action, including: (i) deceptive trade practices;
(ii) common law unfair competition; (iii) wrongful interference with
business; (iv) malicious wrong/prima facie tort; (v) intentional
interference with contract; and (vi) unreasonable restraint of trade.
Cory Investments is seeking unspecified actual and punitive damages and
equitable relief.
  All of the defendants filed motions to
dismiss whichwere denied
by the Courton
May27, 2009.The discovery stage of the
suit is in progress.
  The Company believes that the claims of
Cory Investments are without merit and intends to defend the case vigorously.
Given the inherent uncertainties in this litigation,the Company is unable to make any prediction as to the
ultimate outcome.
  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 alleging that the Company’s central determinant
system, as operated by the New York State Lottery, infringes the
‘035 Patent. Gamco claims 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 claims to have received a license
back from IGT for the New York State Lottery. The lawsuit claims that the
Company infringed the ‘035 Patent after the date on which Gamco assigned
the ‘035 Patent to IGT.
  The
Company has made a number of challenges to Gamco’s standing to sue for
infringement of the ‘035 Patent. On October 15, 2007, pursuant to
an interlocutory appeal, the federal circuit court reversed the district court’s
order when it held that Gamco did not have sufficient rights in the
‘035 Patent to sue the Company without the involvement of the patent
owner, IGT.
  On
December 4, 2007, Gamco and IGT entered into an Amended and
Restated Exclusive License Agreement whereby IGT granted to Gamco exclusive
rights to the ‘035 Patent in the state of New York and the right to
sue for past infringement of the same. On January 9, 2008, Gamco filed
its third amended complaint for infringement of the ‘035 Patent against the
Company. On January 28, 2008, the Company filed an answer to the
complaint denying liability. The Company also filed a third amended counterclaim
against Oasis, Gamco and certain officers of Gamco, for fraud, promise without
intent to perform, negligent misrepresentation, breach of contract, specific
performance and reformation of contract with regard to the Company’s rights
under the Sublicense Agreement for the ‘035 Patent, as well as for
non-infringement and invalidity of the ‘035 Patent. These parties have
filed a motion to dismiss and a motion for summary judgment as to these claims.
The Company has filed a motion for partial summary judgment on its breach of
contract and specific performance claims seeking to enforce the terms of the
Sublicense Agreement. The Company has also moved for summary judgment on Gamco’s
complaint on the ground that it is a licensee. On February 25, 2009,
on its own motion, the court continued the hearing on these motions. All motions
to dismiss and motions for summary judgment were heard on
July 16, 2009.  Following oral arguments, the court took the
motions under submission.  No decisions on those motions have been
made.
  -20-
 MULTIMEDIA
GAMES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 (Unaudited)
  On
January 13, 2009, the court held a Markman hearing to construe the
claims of the ‘035 Patent. The Court also heard argument on the Company’s
motion for partial summary judgment to invalidate all of the means-plus-function
claims of the ‘035 Patent
under 35 U.S.C. § 112¶ 6. On
January 15, 2009, the court issued an order granting Gamco leave to
amend its proposed constructions on the means-plus function claims and setting a
schedule for supplemental briefing on amended claims construction, stating that
none of the structures proposed by Gamco in the claim chart considered by the
court referenced an algorithm that was needed to satisfy federal circuit court
standards. On April 20, 2009, the court issued its claim construction
ruling and denied the Company’s motion for partial summary judgment. A
telephonic status conference is currently scheduled to take place on August
28, 2009. A trial date has not yet been set by the court.
  The
Companycontinues to vigorously
defend this matter. Given the inherent uncertainties in this litigation,the Company is unable to
make any prediction as to the ultimate outcome.
  Other.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 or cash flows. During its ordinary course of
business, the Company enters into obligations to defend, indemnify and/or hold
harmless various customers, officers, directors, employees and other third
parties. These contractual obligations could give rise additional litigation
cost and involvement in court proceedings.
  The
Company is not aware of any pending litigation or sanctions related to
violations of government regulations at this time.  Existing federal
and state regulations may impose civil and criminal sanctions for various
activities prohibited in connection with gaming operations, including but not
limited to: (i) false statements on applications; (ii) failure or
refusal to obtain required licenses; and / or (iii) the
placement of gaming devices, terminals, player stations, and / or
units.
 
 Additionally,
the Company may become subject to litigation related to its charity bingo
business in Alabama. Conflicting public statements have been made by the Alabama
Governor’s office and the Alabama Attorney General’s office regarding the
legality of certain types of equipment commonly used to play charity bingo
within the state of Alabama.  On March 19, 2009, the
Governor’s Task Force on illegal games raided the White Hall Entertainment
Center and seized games from various gaming manufacturers, including
approximately 34 of the Company’s games, and certain of our charity bingo
equipment located in Alabama. As a result of a court order issued on March 28,
2009, the State of Alabama was ordered to return all of the equipment and
refrain from further seizures at White Hall. The charity bingo facility, located
in Lowndes County, Alabama, was able to resume its operations pending the final
outcome of the litigation. The Governor’s Task Force appealed the trial court’s
order and filed an Emergency Motion to Stay the trial court’s order. On April
17, 2009, the Supreme Court of Alabama granted the Governor’s Task Force’s
Emergency Motion to Stay pending disposition of the appeal.  The
charity that operates White Hall asked the Supreme Court of Alabama to dismiss
the appeal in order for the trial court to rule on the merits.  The
Supreme Court of Alabama has not ruled on this and other
motions.  Additionally, the Governor’s Task Force filed a forfeiture
action against all of the equipment seized at White Hall.  It is
possible that further proceedings will be initiated in the future.
  9.     SUBSEQUENT
EVENTS
  On July
22, 2009, the Company entered into a third amendment to its Credit Facility. See
discussion of the amendment in Note 6 – Credit Facility, Long-Term Debt and
Capital Leases.
  -21-
  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,” “will,” “seeking,” or similar
expressions with forward-looking connotations. 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 I – Item 1. Condensed
Consolidated Financial Statements – Note 8 – Commitments and Contingencies” and
“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 developer and distributor of
comprehensive systems, content, electronic games and gaming player
terminalsfor the casino, charity, international
bingo, and video lottery markets. Initially, our customers were located
primarily in the Native American gaming sector; however, around 2003, we
began diversifying into broader domestic and international gaming
markets.
  Although we continue to develop systems
and products for Native American tribes throughout the United States, we now
intend to further expand our efforts to include the development and marketing of
products and services for: (i) the various commercial casino markets;
(ii)thevarious domestic and international
lotteries; and (iii)thevarious charity and international bingo
and other emerging markets.
  Our products cover a broad spectrum of
the gaming industry, including: interactive systems for both server-based and
stand-alone gaming operations; interactive electronic bingo games for the Native
American Class II and charity gaming markets and for the Class III,
stand-alone and video lottery markets; proprietary gaming player terminals in
multiple configurations and formats; electronic instant lottery scratch ticket
systems; casino management systems, including player tracking, cash and cage,
slot accounting and slot management modules; unified currency systems; and other
electronic and paper bingo systems. In addition, we provide maintenance,
operations support and other services for our customers and
products.
  We design and develop networks, software
and content that provide our customers with, among other things, comprehensive
gaming systems, some of which are delivered through a telecommunications network
that links our player terminals with one another, both within a single gaming
facility or among several gaming facilities.
  We derive the majority of our gaming
revenue from participation (revenue sharing) agreements, pursuant to which we
place systems, player terminals, proprietary and licensed content operated on
player terminals, and back-office systems and equipment (collectively referred
to as gaming systems) into gaming facilities. To a lesser degree, we earn
revenue from the sale or placement of gaming systems (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) on a lease-purchase basis
and from the back-office fees generated by video lottery systems, principally in
the Washington State, Class III market. We also generate gaming revenue as
consideration for providing the central determinant system for a network of
player terminals operated by the New York State Division of the Lottery. In
addition, we earn a small portion of our revenue from the sale of lottery
systems and the placement of nontraditional gaming products, such as electronic
scratch tickets, or linked interactive paper bingo systems. In fiscal 2006,
we entered the international electronic bingo market and currently supply bingo
systems tothree
activecustomers in Mexico,
whereby we receive fees based on the net earnings of each system. During
fiscal 2009, wehave
alsogeneratedrevenue from the sale of non-linked
Class III player terminals to Class III Native American
markets.
  -22-
  As a prerequisite to conducting business
in the major commercial gaming markets, we, our directors, officers, and key
employees are required to secure various licenses. It is difficult to properly
estimate the amount of time and expense that will be necessary to complete the
required licensingprocess. We are licensed in  various tribal
 jurisdictions for Class II and/or Class III gaming in  the following
states: California, Washington, Oklahoma, Missouri, Wisconsin, Rhode Island,
Texas, Minnesota, Mississippi,  Wyoming, Alabama and Florida.  We are
also licensed in State of Louisiana and Mexico for Bingo and the State of New
York and Israel for Lottery based systems. In addition, we are in the process of
seeking licensure in Mississippi and Louisiana for manufacturing and
distributing commercial slot machines.
  Class III
Games and Systems for Oklahoma
  During2004,the Oklahoma Legislature, pursuant to a tribal state compact, or
the Oklahoma Gaming Compact,passed legislation authorizing certain
forms of gaming at racetracks, and additional types of games at tribal gaming
facilities. The Oklahoma gaming legislation allows the tribes to sign a compact
with theState 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 are allowed to operate a limited
number of instant and bonanza-style bingo games and electronic amusement games.
All vendors placing games at any of the racetracks under theOklahoma Gaming Compact are required to be licensed by
theState of Oklahoma. Pursuant to theOklahoma Gaming
Compact, vendors placing
games at tribal facilities have to be licensed by each tribe. All electronic
games placed under the compact 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. We are fully
licensed in Oklahoma and as ofJune 30, 2009, we had placed6,658 player terminals at
39 facilitiesthat are
operating under the OklahomaGamingCompact. We generally receive a 20%
revenue share for the games played under the Oklahoma Gaming
Compact.
  Class III
Games and Systems for Native American and Commercial Casino Markets
  During fiscal 2007, we began
designing and developing stand-alone Class III player terminals to be sold
or placed on a revenue share basis in the large Class III stand-alone
gaming market for Native American casinos as well as domestic and international
commercial casinos. All player terminals delivered to these markets will have to
receive specific jurisdictional approvals from the appropriate testing
laboratory and from the appropriate regulatory agency. Our first stand-alone
player terminals outside of Oklahoma have been placed in Rhode Island. We
believe that additions to our key senior management personnel will help
accelerate our entrance into new Class III markets and that we will deliver
additional player terminals to other Class III marketsin late fiscal 2009 or early fiscal
2010.
  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 win per unit generated by each gaming system. Our portion of
the win per unit 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, the amounts retained by the facilities for their share of
the hold and the accretion of contract rights.
  As the Class II market has matured,
we have seen an influx of new competitors. New tribal-state compacts, such as
the Oklahoma gaming legislation passed by referendum in 2004, have also led
to increased competition. Due to this increased competition in Oklahoma, as well
the conversion from Class II to Class III, we have experienced a reduction of
the overall number of and revenue generated from our Class II unit
base.  However, we expect to continue to introduce new and more
entertaining Class II games with technological enhancements.  These
games would allow us to maintain or increase our share of the Class II market in
Oklahoma, and potentially expand into other domestic and international
markets.
  Charity
Market
  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.
  -23-
  In
Alabama, constitutional amendments have been passed authorizing charity bingo in
certain locations. The regulation of charity bingo in Alabama is typically
vested with a local governmental authority. However, the Alabama Governor’s
office has recently commissioned a task force to review the types of games
placed in the charitable bingo halls in the state. The Alabama Governor’s office
and the Alabama Attorney General’s office have issued conflicting public
statements regarding the legality of certain types of equipment commonly used to
play charity bingo within the state of Alabama. (See “Part I – Item 1. Condensed
Consolidated Financial Statements – Note 8 – Commitments and
Contingencies.”)
  We ordinarily place player terminals
under participation arrangements in the charity market and receive a percentage
of the win per unit generated by each of the player terminals. As ofJune
30, 2009, we had 2,280 high-speed, standard bingo games
installed for the charity market in three Alabama
facilities.
  All
Other Gaming Markets
  Class III
Washington State 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” at the time of
proper revenue recognition. 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. Historically, revenue from the sale of
Class III gaming equipment is recognized when the units are delivered to
the customer, and the licensed games installed, or over the contract term when
the fair value of undelivered products has not been established. Because we sell
new products, systems and services for which fair value has not been
established, beginning in the third fiscal quarter of 2009, revenue
generated from this market is recognized over the terms of the contracts. 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. In
January 2004, we installed 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 win per unit.On June 2, 2009 we were
awarded a contract extension by the New York Lottery for the operation of the
central determinant system for video lottery terminals throughout the
state.  The seven year contract extension extends the date of the
contract to December 31, 2017.  As of June 30, 2009, there were
approximately 13,000 video lottery terminals in eight facilities in the state
linked to our central determinant system.
  International
Commercial Bingo Market. In
March 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. Apuestas currently has a permit
issued by the Mexican Ministry of the Interior (Secretaria de Gobernación) to
open and operate 65 bingo parlors. Apuestas is projecting that all
65 bingo parlors will be open by May 2014.As ofJune 30, 2009, we had installed5,357player terminals
at25bingo
parlors in Mexico under this contract with Apuestas. As ofJune 30, 2009, all player terminals placed by us in
the Apuestas bingo parlors were pursuant to a revenue share
arrangement.
  As ofJune 30, 2009, we had entered into separate contracts
withthreeother companies incorporated in Mexico
to provide traditional and electronic bingo gaming, technical assistance, and
related services for bingo parlors in Mexico. As ofJune 30, 2009, we had installed370player terminals at
three parlorsin Mexico under these
contracts.
  -24-
  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 assist in the
funding of new or expansion of 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 on a straight-line
basis.
  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 win per unit 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 may in the future, reduce the number of player terminals in
certain of our 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.
  In the
third quarter of fiscal 2008, we fulfilled a commitment to a significant,
existing Oklahoma tribal customer to provide approximately 43.8%, or
$65.6 million, of the total funding for a facility expansion. (See “Part I
– Item 1. Condensed Consolidated Financial Statements – Note 2 – Development
Agreements.”)
  As of
June 30, 2009, we have placed approximately 4,920 units
in eight facilities in Oklahoma pursuant to development
agreements.
  Third-Party
Software and Technology
  Pursuant to letter agreementswith WMSGaming Inc., or WMS, dated as of March 25, 2009 and June
26, 2009, respectively,the
Company retains certain rights under the Company’s Manufacturing and License
Agreement with WMS, datedMay 17, 2004,and amended and restated on
June 29, 2005, to license and distribute certainWMS productsincluding(i)a limited number of WMS games in
Washington until October 31, 2009; and (ii)WMS Class III Cabinets
and Games to the Chickasaw Nation in Oklahoma until June 30, 2010.  The Company also has the
right, by the payment of an annual license fee, to distribute and authorize the
use of distributed, licensed games; to transfer licensed games among the markets
in which it has deployed WMS Games; and to substitute game
themes.
  -25-
  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, 2009
and 2008.
  At June 30,2009
                        
                        
                        2008End-of-period
      installed player terminal baseOklahoma
      compact games
                        
                        
                        6,658
                        
                        
                        
                        5,325Class II
      player terminalsNew
      Generation system - Reel Time Bingo®
                        
                        
                        1,997
                        
                        
                        
                        2,132Legacy
      system
                        
                        
                        237
                        
                        
                        
                        303Mexico
                        
                        
                        5,727
                        
                        
                        
                        4,294Other
      player terminals(1)
                        
                        
                        2,582
                        
                        
                        
                        2,664
 
 Three Months Ended
                    June 30,
                  
                  
                  Nine Months Ended
                    June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Average
      installed player terminal base:Oklahoma compact
      games
                  
                  
                  6,678
                  
                  
                  
                  5,305
                  
                  
                  
                  6,345
                  
                  
                  
                  4,708Class II player
      terminalsNew
      Generation System - Reel Time Bingo
                  
                  
                  1,983
                  
                  
                  
                  2,046
                  
                  
                  
                  2,126
                  
                  
                  
                  2,943Legacy
      system
                  
                  
                  253
                  
                  
                  
                  306
                  
                  
                  
                  284
                  
                  
                  
                  330Mexico
                  
                  
                  5,408
                  
                  
                  
                  4,355
                  
                  
                  
                  5,346
                  
                  
                  
                  3,717Other player terminals(1)
                  
                  
                  2,578
                  
                  
                  
                  2,752
                  
                  
                  
                  2,640
                  
                  
                  
                  2,754
  
 (1)
              Other
      player terminals include charity, Rhode Island Lottery and
      Malta.
  Three
Months Ended June 30, 2009, Compared to Three Months Ended June
30, 2008
  Total
revenues for the three months ended June 30, 2009, were $32.1 million,
compared to $30.3 million for the three months ended June
30, 2008, a $1.8 million or 6.2% increase.
  Gaming
Revenue – Oklahoma Compact
  §
              The
      Oklahoma compact games generated revenue of $15.0 million in the
      three months ended June 30, 2009, compared to $14.6 million during
      the same period of 2008, an increase of $483,000, or 3.3%. The
      average installed base of the Oklahoma Gaming Compact games
      increased 25.9%, as the conversion of Class II player terminals
      to compact games continues, while the win per unit decreased 13.5%,
      due to general economic downturn causing a reduction in play. We expect
      the rate of conversion from Class II to compact games to decline in
      the future, as over 88% of the Oklahoma installed base at June 30,
      2009, consisted of Oklahoma Gaming Compact units. Accretion of contract
      rights related to development agreements, which is recorded as a reduction
      of revenue, increased $484,000, or 59.4%, to $1.3 million, in
      the three months ended June 30, 2009, compared to $815,000 in the
      same period of 2008.
  Gaming
Revenue – Class II
  §
              Class II
      gaming revenue was $4.7 million in the three months ended June 30,
      2009, compared to $6.2 million in the three months ended June
      30, 2008, a decrease of $1.5 million or 24.4%. We expect the
      number of Class II terminals to continue to decrease as they are
      replaced with higher-earning Oklahoma Gaming Compact player
      terminals.
 §
              Reel
      Time Bingo revenue was $4.3 million for the
      three months ended June 30, 2009, compared to $5.7 million in the
      three months ended June 30, 2008, a decrease of $1.4 million or
      24.0%. The decrease
      is primarily attributable to a decrease in the average installed base of
      player terminals of 3.0%. Accretion of contract rights related to
      development agreements, which is recorded as a reduction of revenue,
      increased $72,000, or 36.7%,
      to $267,000 in
      the three months ended June 30, 2009, compared to $195,000 in the three
      months ended
June 30, 2008.
  -26-
  §
              Legacy
      revenue decreased $159,000, or 28.0%,
      to $407,000 in the three
      months ended June 30, 2009, from $566,000 in the three
      months ended June 30, 2008. The average installed base of Legacy
      player terminals decreased 17.3%, and the win per unit decreased
      by 17.0%, due to general economic downturn causing a reduction in
      play.
  Gaming
Revenue – Charity
  §
              Charity
      gaming revenues decreased $1.1 million,
      or 33.1%, to $2.2million for the three
      months ended June 30, 2009, compared to $3.3 million for the same
      period of 2008. The average installed base of charity player
      terminals decreased 7.1%, and the win per unit decreased 30.2%.
      The decrease in the win per unit is primarily attributable to competitive
      factors and to a lesser extent, economic factors. Competitive factors
      would include, but not be limited to, a significant increase of competitor
      units added to the gaming floor of our largest charity operation, players
      reward programs not offered on our player terminals and location of our
      player terminals on the gaming
floor.
  Gaming
Revenue – All Other
  §
              Class III
      back-office fees decreased $120,000, or 12.5%, to
      $838,000in the three
      months ended June 30, 2009, from $958,000 during the same
      period of 2008.
 §
              Revenues
      from the New York Lottery system increased $156,000, or 8.4%, to $2 million in the
      three months ended June 30, 2009, from $1.9 million in the three
      months ended June 30, 2008. Currently, eight of the
      nine planned racetrack casinos are operating, with
      approximately 13,000 total terminals. 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.
 §
              Revenues from the Mexico bingo
      market decreased $68,000, or2.8% to $2.4millionin the three months endedJune 30, 2009,
      from $2.4million during the same period
      of2008.As of June 30, 2009, we had installed 5,727player terminals at
      28 bingo parlors in Mexico compared to 4,294 player terminals
      installedat
      19 bingo parlors at June 30, 2008. Our revenue share is in the
      range of the other electronic bingo markets in which we
      operate.
  Gaming
Equipment and System Sale and Lease Revenue and Cost of Sales
  §
              Gaming
      equipment and system sale and lease revenue increased $3.5 million, to
      $3.8 million for the three months ended June 30, 2009, from $314,000for the same
      period of 2008. Gaming equipment and system sale revenue of
      $3.0 million for the three months ended June 30, 2009, includes $2.7
      million for the sale of 560 player terminals and one system for which
      revenue recognition was deferred in a previous period. Gaming equipment
      and system sale revenue of $89,000for the three
      months ended June 30, 2008 was generated by the sale of gaming
      equipment. License revenues for the three months endedJune 30, 2009,
      were $762,000, of which $411,000
      was related to revenue previously deferred, compared to $225,000for the three
      months ended June 30, 2008, an increase of $537,000. Total cost of sales,
      which includes cost of royalty fees, increased $1.8 million,
      to $2.1 million, of which
      $1.5 million was related to the deferred revenue discussed above, in the
      three months ended June 30, 2009, from $336,000 in the three months
      ended June 30, 2008. The remaining increase primarily relates to an
      increase in royalty payments.
  Other
Revenue
  §
              Other
      revenues increased $655,000, to $1.0 million for the
      three months ended June 30, 2009, from $338,000during the same
      period of 2008. The increase is primarily due to a commission earned
      from allowing a vendor to sell player stations directly to one of our
      customers for which we had an exclusive arrangement to provide the vendor
      product to that customer.
  Selling,
General and Administrative Expenses
  §
              Selling,
      general and administrative expenses, or SG&A, decreased approximately
      $453,000,or 2.8%, to $15.7million for the three
      months ended June 30, 2009, from $16.1 million in the
      same period of 2008. This decrease was primarily a result of
      (i) a
      decreaseinsalaries and wages
      and the related employee benefits of $899,000 and (ii)a decrease inlegal fees of $885,000. These decreases were
      partially offset by the accrual of an annual incentive of $815,000 during
      2009 and an increase in bad debt expense of $485,000, which was primarily
      related to smaller customers in
Mexico.
  -27-
  Amortization
and Depreciation
  §
              Amortization
      expense decreased $137,000, or 11.4%, to
      $1million for
      the three months ended June 30, 2009, compared to $1.2 million for
      the same period of 2008. Depreciation expense increased $2.1million,
      or 17.0%, to $14.5 million for the three months ended June
      30, 2009, from $12.4 million for the corresponding three months
      ended June 30, 2008, primarily as a result of additional player
      terminals for the Oklahoma market.
  Other
Income and Expense
  §
              Interest
      income decreased $186,000, or 13.8%, to $1.2 million for the
      three months ended June 30, 2009, from $1.3 million in the same
      period of 2008. We entered into development agreements with a
      customer under which approximately $59.4 million has been advanced
      and is outstanding at June 30, 2009, and for which we impute interest on
      these interest-free loans. For the three months ended June 30, 2009, we
      recorded imputed interest of $1.0 million relating to development
      agreements with an imputed interest rate range of 5.5% to 9.0%,
      compared to $1.3 million for the three months ended June
      30, 2008.
 §
              Interest
      expense decreased $641,000, or 31.6%, to $1.4 million for the
      three months ended June 30, 2009, from $2.0 million in the same
      period of 2008. The decrease in interest expense for the period is a
      direct result of a decrease in the LIBOR Rate, which governs the
      calculation of the interest rate on our Credit
  Facility.
 §
              We
      had no other income for the three months ended June 30, 2009, compared to
      $828,000 in the same period of 2008. Other income primarily decreased
      due to the last distribution from a partnership
  interest.
  Income
tax decreased by $497,000 to a benefit of $313,000 for the three months
ended June 30, 2009, from an income tax expense of $184,000 in the same period
of 2008. These figures represent effective income tax rates of 21.2% and 52.9% for the
three months ended June 30, 2009 and 2008, respectively. The effective tax
rate has been impacted by the tax treatment of stock compensation expense. To
the extent that we experience volatility in tax deductibility of certain stock
compensation expense, there will remain volatility in the effective tax
rate.
  -28-
  Nine
Months Ended June 30, 2009, Compared to Nine Months Ended June
30, 2008
  Total
revenues for the nine months ended June 30, 2008 were $94.6 million, compared
to $92.7 million for the three
months ended June 30, 2008, a $1.9 million or 2.0%
increase.
  Gaming
Revenue – Oklahoma Compact
  §
              The
      Oklahoma compact games generated revenue of $44.2million in the
      nine months ended June 30, 2009, compared to $40.3 million during
      the same period of 2008, an increase of $3.9million,
      or 9.7%. The average installed base of the Oklahoma compact games
      increased 34.8%, as the conversion of Class II player terminals
      to compact games continues, while the win per unit decreased 12.2%,
      due to general economic downturn causing a reduction in play. We expect
      the rate of conversion from Class II to compact games to decline in
      the future, as over 88% of the Oklahoma installed base at June 30,
      2009, consisted of Oklahoma compact units. Accretion of contract rights
      related to development agreements, which is recorded as a reduction of
      revenue, increased$1.6 million, or 77.9%,
      to $3.6 million,
      in theninemonths
      endedJune 30, 2009,compared
      to $2.0million in the same period
      of2008.
  Gaming
Revenue – Class II
  §
              Class II
      gaming revenue was $14.9million in the nine months ended June 30, 2009, compared to $21.8million in the
      nine months endedJune 30, 2008, a decrease of $6.9million, or
      31.8%. We expect the number
      of Class II terminals tocontinue to decrease as they are
      replaced with higher-earning Oklahoma compact player
      terminals.
 §
              Reel
      Time Bingo revenue was $13.5 million for the
      nine months ended June 30, 2009, compared to $20.0 million in the
      nine months ended June 30, 2008, a decrease of $6.5 million, or
      32.6%. The decrease
      is primarily attributable to a decrease in the average installed base of
      player terminals of 27.8%. Accretion of contract rights related to
      development agreements, which is recorded as a reduction of revenue,
      decreased $51,000, or 5.7%,
      to $839,000in
      the nine months ended June 30, 2009, compared to $890,000in the nine months
      ended June 30, 2008. The reduction in accretion of
      contract rights is the result of allocating the total accretion rights
      across all product lines with the majority being allocated against
      Oklahoma compact revenue.During fiscal 2009, 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 win per unit of compact
games.
 §
              Legacy
      revenue decreased $402,000, or 22.3%,
      to $1.4 million in
      the nine months ended June 30, 2009, from $1.8 millionin the
      nine months ended June 30, 2008. The average installed base of Legacy
      player terminals decreased 13.9%, and the win per unit decreased
      by 11.5%, due to general economic downturn causing a reduction in
      play.
  Gaming
Revenue – Charity
  §
              Charity
      gaming revenues decreased $4.0million, or 34.0%, to
      $7.6million for the nine
      months ended June 30, 2009, compared to $11.6 million for the same
      period of 2008. The average installed base of charity player
      terminals decreased 6.6%, and the win per unit decreased 31.3%.
      The decrease in the win per unit is primarily attributable to competitive
      factors and to a lesser extent, economic factors. Competitive factors
      would include, but not be limited to, a significant increase of competitor
      units added to the gaming floor of our largest charity operation, players
      reward programs not offered on our player terminals and location of our
      player terminals on the gaming
floor.
  Gaming
Revenue – All Other
  §
              Class III
      back-office fees decreased $296,000, or 10.9%, to
      $2.4 million in
      the nine months ended June 30, 2009, from $2.7 million during the
      same period of 2008.
 §
              Revenues
      from the New York Lottery system increased $377,000, or 7.4%, to $5.5million in the nine
      months ended June 30, 2009, from $5.1 million in the nine months
      ended June 30, 2008. Currently, eight of the nine planned racetrack
      casinos are operating, with approximately 13,000 total terminals. 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.
  -29-
  §
              Revenues from the Mexico bingo
      marketincreased
      $427,000, or 6.1%,to $7.4millionin theninemonths endedJune 30,
      2009,
      from $7.0 million during the same period
      of2008.
      As of June 30, 2009, we had installed 5,727player terminals at
      28 bingo parlors in Mexico compared to 4,294 player terminals
      installedat
      19 bingo parlors at June 30, 2008. Our revenue share is in the
      range of the other electronic bingo markets in which we
      operate.
  Gaming
Equipment and System Sale and Lease Revenue and Cost of Sales
  §
              Gaming
      equipment and system sale and lease revenue increased $7.4 million,
      or 302.2%, to $9.9 million for the nine months ended June 30, 2009, from
      $2.5 million for the same period of 2008. Gaming equipment and
      system sale revenue of $9.0 million for the nine months ended June
      30, 2009 includes the sale of 460 player terminals sold. Also
      included is revenue of $2.7 million for the sale of 560 player terminals
      and one system for which revenue recognition was deferred in a previous
      period. Gaming equipment and system sale revenue of $1.4 million for
      the nine months ended June 30, 2008, included the sale of
      50 player terminals and one system. License revenues for the nine
      months endedJune 30, 2009,
      were $858,000, of which $411,000 was
      related to revenue previously deferred, compared to $862,000for the nine
      months ended June 30, 2008. Total cost of sales, which includes cost
      of royalty fees, increased $4.8 million,
      to $6.3 million, of which
      $1.5 million was related to the deferred revenue discussed above, in the
      nine months ended June 30, 2009, from $1.5 millionin the
      nine months ended June 30, 2008. The increase primarily relates to an
      increase in royalty payments.
  Other
Revenue
  §
              Other
      revenues increased $1.0million, or 86.8%,
      to $2.2
      million for the nine months ended June 30, 2009,
      from $1.2 millionduring the same period of 2008. The increase is primarily due
      to increased maintenance income in the nine months ended June 30, 2009 and
      a commission earned from allowing a vendor to sell player stations
      directly to one of our customers for which we had an exclusive arrangement
      to provide the vendor product to that
customer.
  Selling,
General and Administrative Expenses
  §
              Selling,
      general and administrative expenses, or SG&A, increased approximately
      $7.6 million,or 15.5%, to $56.4million for the
      nine months ended June 30, 2009, from $48.8 million in the
      same period of 2008. This increase was primarily a result of
      (i) an increase due to legal fees and settlement costs, net of
      insurance proceeds, of approximately $7.7 million; (ii) an
      increase instock compensationexpense of $567,000 and
      (iii)an accrual
      under an annual incentive planof $1.4 million. These
      increases in expenses were offset by decreases in consulting and contract
      labor of $964,000, and lobbying fees
  of $441,000.
  Amortization
and Depreciation
  §
              Amortization
      expense increased $313,000, or 9.1%, to
      $3.8million for
      the nine months ended June 30, 2009, compared to $3.5 million for the
      same period of 2008. Depreciation expense increased $7.2million, or
      20.5%, to $42.3 million for the nine months ended June 30, 2009,
      from $35.1 million for the corresponding nine months ended June
      30, 2008, primarily as a result of additional player terminals for
      the Oklahoma market.
  Other
Income and Expense
  §
              Interest
      income increased $80,000, or 2.3%, to $3.7million for the
      nine months ended June 30, 2009, from $3.6 million in the same period
      of 2008. We entered into development agreements with a customer under
      which approximately $59.4 million has been
      advanced and is outstanding at June 30, 2009, and for which we impute
      interest on these interest-free loans. For the nine months ended June 30,
      2009, we recorded imputed interest of $3.3million relating to
      development agreements with an imputed interest rate range of
      5.5% to 9.0%, compared to $3.1 million for the nine months
      ended June 30, 2008.
 §
              Interest
      expense decreased $1.3 million, or 18.7%, to $5.4 million for
      the nine months ended June 30, 2009 from $6.7 million in the same
      period of 2008. The decrease in interest expense for the period is a
      direct result of a decrease in the LIBOR Rate, which governs the
      calculation of the interest rate on our Credit
  Facility.
  -30-
  §
              Other
      income decreased $1.9 million,
      or 96.4%, to $74,000 for the nine months
      ended June 30, 2009, compared to $2.0 million in the same period
      of 2008. Other income primarily decreased due to the last
      distribution from a partnership
interest.
  Income
tax decreased by $6.3 million to a benefit of $5.4 million for
the nine months ended June 30, 2009, from an income tax expense of $919,000 in the same period
of 2008. These figures represent effective income tax rates of 33.9% and 33.5% for the nine
months ended June 30, 2009 and 2008, respectively. The effective tax rate
has been impacted by the tax treatment of stock compensation expense. To the
extent that we experience volatility in tax deductibility of certain stock
compensation expense, there will remain volatility in the effective tax
rate.
  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 condensed
consolidated financial statements.
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
  We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based on the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the periods
presented. There can be no assurance that actual results will not differ from
those estimates. We believe the following represent our most critical accounting
policies.
  Management
considers an accounting estimate to be critical if:
  §
              it
      requires assumptions to be made that were uncertain at the time the
      estimate was made, and
  §
              changes
      in the estimate or different estimates that could have been selected could
      have a material impact on our consolidated results of operation or
      financial condition.
  Revenue
Recognition.As further discussed in the discussion of our revenue
recognition policy in Note 1 of our unaudited condensed consolidated
financial statements, revenue from the sale of software is accounted for under
Statement of Position 97-2, “Software Revenue Recognition,” or SOP 97-2,
and its various interpretations. If Vendor-Specific Objective Evidence, or VSOE,
of fair value does not exist, the revenue is deferred until such time that all
elements have been delivered or services have been performed. If any element is
determined to be essential to the function of the other, revenues are generally
recognized over the term of the services that are rendered. In those limited
situations where VSOE does not exist for any undelivered elements of a multiple
element arrangement, then the aggregate value of the arrangement, including the
value of products and services delivered or performed, is initially deferred
until all hardware and software is delivered, and then is recognized ratably
over the period of the last deliverable, generally the service period of the
contract. Depending upon the elements and the terms of the arrangement, we
recognize certain revenues under the residual method. Under the residual method,
revenue is recognized when VSOE of fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one or more of
the delivered elements in the arrangement. Under the residual method, we defer
the fair value of undelivered elements, and the remainder of the arrangement fee
is then allocated to the delivered elements and is recognized as revenue,
assuming the other revenue recognition criteria are met.
  Assumptions/Approach
Used: The
determination whether all elements of sale have VSOE is a subjective measure,
where we have made determinations about our ability to price certain aspects of
transactions.
  -31-
  Effect
if Different Assumptions Used: When we have determined
that VSOE does not exist for any undelivered elements of an arrangement, then
the aggregate value of the arrangement, including the value of products and
services delivered or performed, is initially deferred until all products or
services are delivered, and then is recognized ratably over the period of the
last deliverable, generally the service period of the contract. The deferral of
revenue under arrangements where we have determined that VSOE does not exist has
resulted in $7.9million being recorded as
deferred revenue as of June 30, 2009. If we had made alternative assessments as
to the existence of VSOE in these arrangements, some or all of these amounts
could have been recognized as revenue prior to June 30, 2009.
  Share-Based
Compensation Expense. Effective October 1, 2005, we adopted the
fair value recognition provisions of SFAS 123(R), using the modified prospective
transition method, and therefore have not restated prior periods’ results. Under
this method, we recognize compensation expense for all share-based payments
granted after October 1, 2005 and prior to but not yet vested as of
October 1, 2005, in accordance with SFAS 123(R). Under the fair
value recognition provisions of SFAS 123(R), we recognize share-based
compensation net of an estimated forfeiture rate, and only recognize
compensation cost for those shares expected to vest on a straight-line basis
over the service period of the award. Prior to SFAS 123(R) adoption, we
accounted for share-based payments under Accounting Principles Board Opinion, or
APB, No. 25, “Accounting for Stock Issued to Employees,” and accordingly
generally recognized compensation expense only if options were granted to
outside consultants with a discounted exercise price.
  Assumptions/Approach
Used:
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards requires the input of highly subjective assumptions,
including the expected life of the share-based payment awards, and stock price
volatility. Management determined that volatility is based on historical
volatility trends. In addition, we are required to estimate the expected
forfeiture rate, and only recognize expense for those shares expected to vest.
If our actual forfeiture rate is materially different from our estimate, the
share-based compensation expense could be significantly different from what we
have recorded in the current period.
  Effect
if Different Assumptions Used: The assumptions used in
calculating the fair value of share-based payment awards, along with the
forfeiture rate estimation, represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of management’s
judgment. As a result, if factors change and we use different assumptions, our
stock-based compensation expense could be materially different in the
future.
  Property and
Equipment and Leased Gaming Equipment.Property and equipment and leased
gaming equipment is stated at cost. The cost of property and equipment and
leased gaming equipment is depreciated over their estimated useful lives,
generally using the straight-line method for financial reporting, and regulatory
acceptable methods for tax reporting purposes. Player terminals placed with
customers under participation arrangements are included in leased gaming
equipment. Leased gaming equipment includes a “pool” of rental terminals, i.e.,
the “rental pool.” Rental pool units are those units that have previously been
placed in the field under participation arrangements, but are currently back
with us being refurbished and/or awaiting redeployment. Routine maintenance of
property and equipment and leased gaming equipment is expensed in the period
incurred, while major component upgrades are capitalized and depreciated over
the estimated useful life (Critical Assumption #1) of the component. Sales and
retirements of depreciable property are recorded by removing the related cost
and accumulated depreciation from the accounts. Gains or losses on sales and
retirements of property are reflected in our results of operations.
  Management
reviews long-lived asset classes for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable (Critical Assumption #2).
  Assumptions/Approach
used for Critical Assumption #1: The carrying value of the asset is
determined based upon management’s assumptions as to the useful life of the
asset, where the assets are depreciated over the estimated life on a straight
line basis, and where the useful life of items in the rental pool has been
determined by management to be three years.
  Effect
if different assumptions used for Critical Assumption #1: While we believe that the
useful lives that have been determined for our fixed assets are reasonable,
different assumptions could materially affect the carrying value of the assets,
as well as the depreciation expense recorded in each respective period related
to those assets. During the three months ended June 30, 2009, a significant
portion of the $15.6million of
depreciation and amortization expense related to assets in the rental pool. If
the depreciable life of assets in our rental pool were changed from three years
to another period of time, we could incur a materially different amount of
depreciation expense during the period.
  -32-
  Assumptions/Approach
used for Critical Assumption #2: Recoverability of assets to
be held and used is measured through considerations of the future undiscounted
cash flows expected to be generated by the assets as a group, as opposed to
analysis by individual asset, or assets in place at a specific location. If such
assets are considered to be impaired, the impairment recognized is measured by
the amount by which the carrying amount of the assets exceeds their fair value.
Assets to be disposed of are reported at the lower of the carrying amount or the
fair value less costs of disposal. The carrying value of the asset is determined
based upon management’s assumptions as to the useful life of the asset, where
the assets are depreciated over the estimated life on a straight-line
basis.
  Effect
if different assumptions used for Critical Assumption #2: Impairment testing requires
judgment, including estimations of useful lives of the assets, estimated cash
flows, and determinations of fair value. While we believe our estimates of
useful lives and cash flows are reasonable, different assumptions could
materially affect the measurement of useful lives, recoverability and fair
value. If actual cash flows fall below initial forecasts, we may need to record
additional amortization and/or impairment charges. Additionally, while we
believe that analysis of the recoverability of assets in our rental pool is
accurately assessed from a homogenous level, due to the interchangeability of
player stations and parts, if these assets were to be reviewed for impairment
using another approach, there could be different outcomes to any impairment
analysis performed.
  Development
Agreements. We enter 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 exclusive placement of
our player terminals, and we receive a fixed percentage of those player
terminals’ win per unit over the term of the agreement. Certain of the
agreements contain player terminal performance standards that could allow the
facility to reduce a portion of our guaranteed 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. The agreements
typically provide for a portion of the amounts retained by the gaming facility
for their share of the hold to be used to repay some or all of the advances
recorded as notes receivable. Amounts advanced in excess of those to be
reimbursed by the customer for real property and land improvements are allocated
to intangible assets and are generally amortized over the life of the contract,
using the straight-line method of amortization (Critical Assumption #1),
which is recorded as a reduction of revenue generated from the gaming facility.
In the past and in the future, we may by mutual agreement and for consideration,
amend these contracts to reduce our floor space at the facilities. Any proceeds
received for the reduction of floor space is first applied against the
intangible asset for that particular development agreement, if any.
  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 (Critical Assumption #2). For the three
months ended June 30, 2009, there was no impairment to the assets’ carrying
values.
  Assumptions/Approach
used for Critical Assumption #1:Amounts advanced in excess
of those to be reimbursed by the customer for real property and land
improvements are allocated to intangible assets and are generally amortized over
the life of the contract, using the straight-line method of amortization, which
is recorded as a reduction of revenue generated from the gaming facility. We use
a straight-line amortization method, as a pattern of future benefits cannot be
readily determined.
  Effect
if Different Assumptions used for Critical Assumption #1:While we believe that the
use of the straight-line method of amortization is the best way to account for
the costs associated with the costs of acquiring exclusive floor space rights at
our customers facilities, the use of an alternative method could have a material
effect on the amount recorded as a reduction to revenue in the current reporting
period.
  Assumptions/Approach
used for Critical Assumption #2: We estimate cash flows directly
associated with the use of the intangible assets to test recoverability and
remaining useful lives based upon the forecasted utilization of the asset and
expected product revenues. In developing estimated cash flows, we incorporate
assumptions regarding future performance, including estimations of the win per
unit and estimated units. When the carrying amount exceeds the undiscounted cash
flows expected to result from the use and eventual disposition of the asset, we
then compare the carrying amount to its current fair value. We recognize an
impairment loss if the carrying amount is not recoverable and exceeds its fair
value.
  Effect
if Different Assumptions used for Critical Assumption #2:Impairment testing requires
judgment, including estimations of cash flows, and determinations of fair value.
While we believe our estimates of future revenues and cash flows are reasonable,
different assumptions could materially affect the measurement of useful lives,
recoverability and fair value. If actual cash flows fall below initial
forecasts, we may need to record additional amortization and/or impairment
charges.
  -33-
  Income
Taxes. In accordance with SFAS, No. 109, we have recorded a
deferred tax assets and liabilities to account for the expected future tax
benefits and consequences of events that have been recognized in our financial
statements and our tax returns. There are several items that result in deferred
tax asset and liability impact to the balance sheet. If we conclude that it is
more likely than not that some portion or all of the deferred tax assets will
not be realized under accounting standards, it is reduced by a valuation
allowance to remove the benefit of recovering those deferred tax assets from our
financial statements. Additionally, as of June 30, 2008, in accordance with
FIN 48, we recorded a liability of $295,000 associated with uncertain tax
positions. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. We are required to
determine whether it is more likely than not (a likelihood of more than 50%)
that a tax position will be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical merits of
the position in order to record any financial statement benefit. If that step is
satisfied, then we must measure the tax position to determine the amount of
benefit to recognize in the financial statements. The tax position is measured
at the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement.
  Assumptions/Approach
Used: Numerous
judgments and assumptions are inherent in the determination of future taxable
income and tax return filing positions that we take, including factors such as
future operating conditions.
  Effect
if Different Assumptions Used:Management continually
evaluates complicated tax law requirements and their effect on our current and
future tax liability and our tax filing positions. Despite our attempt to make
an accurate estimate, the ultimate utilization of our deferred tax assets
associated with the tax basis of our leased gaming equipment and property and
equipment of $18.0 million is largely dependent upon our ability to
generate taxable income in the future. Our liability for uncertain tax positions
is dependent upon our judgment on the amount of financial statement benefit that
an uncertain tax position will realize upon ultimate settlement and on the
probabilities of the outcomes that could be realized upon ultimate settlement of
an uncertain tax position using the facts, circumstances and information
available at the reporting date to establish the appropriate amount of financial
statement benefit. To the extent that a valuation allowance or uncertain tax
position is established or increased or decreased during a period, we may be
required to include an expense or benefit within income tax expense in the
income statement.
  LIQUIDITY
AND CAPITAL RESOURCES
  As of
June 30, 2009, we had $9.4 million in
unrestricted cash and cash equivalents, compared to $6.3 million as of
September 30, 2008. Our working capital as of June 30, 2009, was $28.8million, compared to a
working capital of $34.1 million at September 30, 2008. The
decrease in working capital was primarily the result of collections on notes
receivable, current, of $7.6 million, an increase in accounts payable of
$2.2 million, offset by an increase in cash of $3.1 million. During
the nine months ended June 30, 2009, we used $37.3million for capital
expenditures of property and equipment, and we collected $8.8million, net of advances,
on development agreements. After taking into account the third amendment, we had
$45.0million
available under the Credit Facility, subject to covenant
restrictions.
  As of
June 30, 2009, our total contractual cash obligations were as follows (in
thousands):
  Lessthan
                        1 year
                      
                      
                      1-3years
                      
                      
                      3-5years
                      
                      
                      TotalRevolving Credit
      Facility(1)
                      
                      $
                      —
                      
                      
                      $
                      16,000
                      
                      
                      $
                      —
                      
                      
                      $
                      16,000Credit Facility Term
      Loan(2)
                      
                      
                      1,536
                      
                      
                      
                      65,876
                      
                      
                      
                      —
                      
                      
                      
                      67,412Operating leases(3)
                      
                      
                      2,474
                      
                      
                      
                      578
                      
                      
                      
                      —
                      
                      
                      
                      3,052Purchase commitments(4)
                      
                      
                      17,701
                      
                      
                      
                      3,375
                      
                      
                      
                      —
                      
                      
                      
                      21,076Development Agreement(5)
                      
                      
                      3,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,000Total
                      
                      $
                      24,711
                      
                      
                      $
                      85,829
                      
                      
                      $
                      —
                      
                      
                      $
                      110,540
  (1)
              Relating to therevolvingcredit commitment under theCredit Facility,
      bearing interest at the Eurodollar rate plus the applicablespread (4.13% as ofJune 30, 2009).
 (2)
              Consists of amounts borrowed underthe term loan toour Credit Facility
      at the Eurodollar rate plus the applicable spread (4.82% on $50 million and4.88% on $17.1 million as ofJune 30, 2009).
 (3)
              Consists of operating leases for
      our facilities and office equipment that expire at various times
      through 2011.
 (4)
              Consists of commitments to order
      third-party gaming content licenses and for the purchase of player
      terminals.
  -34-
  (5)
              Consists of commitments tofund in accordance with a development
  agreement.
  During
the nine months ended June 30, 2009, we generated $36.8 million in cash
from our operations, compared to $31.1 million during the same period
of 2008. This $5.7million increase in
cash generated from operations over the prior period was primarily due to the
decrease in accounts payable which is offset by the increase in
inventory.
  Cash used
in investing activities decreased to $30.8million in the nine
months ended June 30, 2009, from $56.8 million in the same
period of 2008. The decrease was primarily the result of a decrease in
advances under development agreements offset by the purchase of capital
expenditures of property and equipment. During the nine months ended June 30,
2009, additions to property and equipment consisted of the
following:
  Capital Expenditures(In thousands)Gaming
      equipment
                        
                        $
                        30,539Third-party
      gaming content licenses
                        
                        
                        6,723Other
                        
                        
                        44Total
                        
                        $
                        37,306
  Cash
provided by financing activities decreased to a $3.2million usage in the
nine months ended June 30, 2009, from $24.1 million in the same period
of 2008. The decrease was primarily the result of a $26.2million decrease in
the net borrowings under the Credit Facility, as amended on July 22,
2009.
  Our
capital expenditures for the next 12 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 $17.7million.
  In the
third quarter of fiscal 2008, we fulfilled a commitment to a significant,
existing Oklahoma tribal customer to provide approximately 43.8%, or
$65.6 million, of the total funding for a facility expansion. Because of
our commitment to fund the expansion, we secured the right to place an
additional 1,400 gaming units in the expanded facility in southern
Oklahoma. We recorded all advances as a note receivable and imputed interest on
the interest free loan. The discount (imputed interest) was recorded as contract
rights, and as of the first quarter of fiscal 2009 is being amortized over
the life of the agreement. The repayment period of the note will be based on the
performance of the facility. In the second quarter of fiscal 2009, we made
a commitment of $7.0 million that consists of both a loan for new unit
placements in an expanded facility and a placement fee for certain units to
remain at the current facility for an extended period of time. As of June 30,
2009, we had advanced $4.0 million toward this commitment. The remaining
commitment of $3.0 million is expected to be paid over the next two fiscal
quarters with $1.5 million being paid each quarter.
  We are
currently in compliance with our credit agreement's covenants. However, our
ability to remain in compliance with our trailing twelve month EBITDA covenant
is dependent upon our ability to achieve our current operating plan for our
fiscal 2010. In light of (i) current prevailing economic conditions and the
inherent uncertainty of achieving and recognizing future revenue, and
(ii) the difficulty of making any necessary expense reductions sufficient
to compensate for any revenue shortfall, we cannot be certain that we will be
able to achieve our operating objectives for fiscal 2010 and thereby continue to
meet the EBITDA covenant, among others.
  While we
recently amended our credit agreement, if we fail to remain in compliance with
the covenants of our credit agreement, we will be required to seek modification
or waiver of the provisions of that agreement and potentially secure additional
sources of capital. We cannot be certain that, if required, we will be able to
successfully negotiate additional changes to or waivers of our credit agreement.
Alternatively, we may incur significant costs related to obtaining requisite
waivers or renegotiation of our credit agreement that could have a material and
adverse effect on our operating results.
  -35-
  Our
performance and financial results are, to a certain extent, subject to
(i) general conditions in or affecting the Native American gaming industry,
and (ii) general economic, political, financial, competitive and regulatory
factors beyond our control. If our business does not continue to generate cash
flow at appropriate levels or if we receive a material judgment against us in
one of the various lawsuits (See “Risk Factors – “The ultimate outcome of
pending litigation is uncertain,” and “Part I – Item 1. Condensed Consolidated
Financial Statements – Note 8 – Commitments and Contingencies”), we may need to
raise additional financing. Sources of additional financing might include
additional bank debt or the public or private sale of equity or debt securities.
However, sufficient funds may not be available, on terms acceptable to us or at
all, from these sources or any others to enable us to make necessary capital
expenditures and to make discretionary investments in the future.
  Credit
Facility
  See discussion of the Credit Facility
and the credit agreement in Note 6 – Credit Facility, Long-Term Debt and Capital
Leases.
  The Credit Facility provides us with the
ability to finance development agreements and acquisitions and working capital
for general corporate purposes. Amounts under the $65 million revolving credit
commitment and the $60million term loan matureonApril 27, 2012, and advances under the revolving
credit commitment and term loan bear interest at the Eurodollar rate plus the
applicable spread, tied to various levels of interest pricing determined by
total debt to EBITDA. As ofJune 30, 2009the $16million drawn under the revolving
credit commitment bore interest at 4.13% and two tranches of the term loan of
$50 million and $17.1 million bore interest at4.82% and4.88%, respectively.
  The
Credit Facility is collateralized by substantially all of our assets, and also
contains financial covenants as defined in the agreement. These covenants
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 30, 2008,
and 1.75 : 1.00 from September 30, 2008 thereafter; and
(iii) a minimum trailing twelve-month EBITDA of not less than
$57 million for the quarter ended September 30, 2007, and
$60 million for each quarter thereafter. In addition to the amendment
described above, clarifications have been made for purposes of calculating
EBITDA. As a result of these clarifications, interest income will no longer be
netted against interest expense and a tax benefit, if any, will not be added
back for the purpose of evaluating compliance with covenants contained in the
Credit Facility. Thus, the trailing twelve-month adjusted EBITDA, as computed
under the Credit Facility, was $79.4million as of June 30,
2009. As of June 30, 2009, we are in compliance with all loan
covenants.
  If we are
able to achieve our operating objectives in the quarter ended
September 30, 2009, we believe we will remain in compliance with the
financial covenants. Our operating objectives for the quarter include
maintaining current levels of recurring revenue as well as the successful sale
of Class III gaming equipment and recognition of related revenue from such
sales. If our performance does not meet current objectives, we may not meet the
EBITDA covenant, among others (See Risk Factors – “Our Credit Facility contains
covenants that limit our ability to finance future operations or capital needs
and to engage in other business activities”).
  The
credit agreement requires certain mandatory prepayments be made on the term loan
from the net cash proceeds of certain asset sales and condemnation proceedings
(in each case to the extent not reinvested, within certain specified time
periods, in the replacement or acquisition of property to be used in our
businesses). In the quarter ended June 30, 2008, we made a mandatory
prepayment of the term loan in the amount of $4.5 million, due to an early
prepayment of a development agreement note receivable. After taking into account
the third amendment, we had availability of $45.0 million, subject to
covenant restrictions, under our Credit Facility.
  The Credit Facility also required that
we enter into hedging arrangements covering atleast $50 million of the term loan
for a three-year period by June 1, 2008. Therefore, on
May 29, 2008, we purchased, for $390,000, an interest rate cap
(5% cap rate) covering $50 million of the term loan.We account for this hedge in accordance
with Statement of Financial Accounting StandardsNo. 133, or SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” which requires
entities to recognize all derivative instruments as either assets or liabilities
in the balance sheet, at their respective fair values. We record changes on a
mark to market basis reflecting these changes through interest expense in the
statement of operations. The fair value of this hedge wasapproximately $11,000 atJune 30, 2009.
  -36-
  Stock-Based
Compensation
  At June
30, 2009, we had approximately 6.8million options
outstanding, with exercise prices ranging from $1.00 to $18.71 per
share. At June 30, 2009, approximately 3.8million of the outstanding
options were exercisable.
  During
the three months ended June 30, 2009, options to purchase 41,400shares of common stock were
granted at a weighted average exercise price of $3.49 per share, and we issued
217,062shares of
common stock as a result of stock option exercises with a weighted average
exercise price of $1.41.
  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 “Item 1. Condensed Financial
Statements – Note 8 - 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.
  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 “Item 1. Condensed Financial
Statements - Note 6 – Credit Facility, Long-Term Debt and Capital Leases.”
Pursuant to our amended Credit Facility, we may currently borrow up to a total
of $125 million, and our availability, after taking into account the third
amendment, is $45million, subject to
covenant restrictions.
  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 “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.
  The Credit Facilityalso requiresthat we enter into hedging arrangements
covering at least $50.0million of the term loan for a
three-year period. OnMay 29, 2008, we purchased,
for $390,000, an interest rate cap (5% cap rate) covering
$50.0million of the term loan.To the extent that LIBOR rates
do not exceed the 5% cap rate, we estimate that a hypothetical increase
of 100 basis points in interest rates would increase our annual interest
expense by approximately $838,000, based on our variable debt outstanding
of $83.4million as of
June 30, 2009.
  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.
  -37-
  ITEM
      4.
              CONTROLS
      AND PROCEDURES
  Evaluation of
Disclosure Control and Procedures.In the
quarter ending June 30, 2009, an evaluation was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and our 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 senior management, including our
Chief Executive Officer and our 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 our Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective as of June 30, 2009.
  There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
  -38-


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.”).
  On May 1,
2009, we entered into a comprehensive settlement agreement with Diamond Game to
resolve all claims arising from a November 16, 2004 lawsuit filed by Diamond
Game against us and several of our former officers,  including Clifton
Lind, Robert Lannert and Gordon Graves, in the State Court in Oklahoma City,
Oklahoma, alleging five causes of action: (i) deceptive trade practices;
(ii) unfair competition; (iii) wrongful interference with business;
(iv) malicious wrong / prima facie tort; and (v) restraint of trade.
The settlement agreement was reached while the parties were engaged in federal
mediation and we did not admit any wrongdoing as a result of this settlement
agreement.
  ITEM
1A. RISK
FACTORS
  The
following risk factors should be carefully considered in connection with the
other information and financial statements contained in this Quarterly Report,
including “PART I – Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” If any of these risks actually
occur, our business, financial condition and results of operations could be
seriously and materially harmed, and the trading price of our common stock could
decline.
  Our
business operations and product offerings are subject to strict regulatory
licenses, findings of suitability, registrations, permits and/or
approvals.
  Our
ability to conduct our existing traditional business, expand operations, develop
and distribute new products, games and systems, and expand into new gaming
markets is subject to significant federal, state, local, Native American, and
foreign regulations. Specifically, our company and our officers, directors, key
employees, major shareholders, and products, games and systems are subject to
licenses, findings of suitability, registrations, permits or approvals necessary
for the operation of our gaming activities.
  We have
received licenses, findings of suitability, registrations, permits or approvals
from a number of state, local, Native American, and foreign gaming regulatory
authorities. Our tribal customers are empowered to develop their own licensing
procedures and requirements, and we currently have limited, if any, information
regarding the ultimate process or expenses involved with securing or maintaining
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.
  We
require new licenses, permits and approvals in order to meet our expectations
under our product rollout plan, and such licenses, permits or approvals may not
be timely granted to us, or granted to us at all, which could have a material
effect on our business in general and product rollout plan specifically.
Obtaining and maintaining all required licenses, findings of suitability,
registrations, permits or approvals is time consuming and expensive. The
suspension, revocation, nonrenewal or limitation of any of our licenses would
have a material adverse effect on our business operations, financial condition
and results of operations.
  -39-
  Our ability to
effectively compete in Native American gaming markets is vulnerable to legal and
regulatory uncertainties.
  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 Gambling Devices
Act, 15 U.S.C. § 1171, et seq,or theJohnson Act, the Indian
Gaming Regulatory Act of 1988 or IGRA, the National Indian Gaming Commission, or
NIGC, and the regulatory requirements of various tribal gaming commissions. 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.
  Additionally,
our development agreements could be subject to review by the NIGC at any time.
Any review of our development agreements by the NIGC, or alternative
interpretations of applicable laws and regulations, could require substantial
modifications to the agreements or result in the determination that the Company
has a proprietary interest in a tribe’s gaming activity which could materially
and adversely affect the terms on which we conduct our business.
  Other
government enforcement, regulatory action, judicial decisions, and proposed
legislative action that have in the past and will continue to affect our
business, operating results and prospects, including but not limited
to:
  §
              proposed
      legislation that would classify electronic technologic aids used by Native
      American tribes in Class II games, such as bingo, as gambling
      devices, or require certification by the NIGC of the Class II technologic
      aids;
 §
              proposed
      legislation that would authorize the NIGC to promulgate regulations
      regarding the use of technologic
aids;
 §
              proposed
      rules by the NIGC regarding classification standards which currently
      distinguish among Class II games played with technologic aids,
      Class III facsimiles of games of chance, and Class III
      games, including, but not limited to, a revision of the definition of
      “electronic or electromechanical facsimile.” Any such revision may
      have the effect of reclassifying some of our Class II games as
      noncompliant facsimiles;
 §
              proposed
      legislation or rules that would allow the NIGC authority to review
      contracts between Native American tribes and their
    suppliers;
 §
              NIGC
      rules and regulations, and their interpretations by tribal nations, may
      affect our ability to assert control over customer infrastructure networks
      and may invalidate some of our current infrastructure
      systems.  Our revenue may be affected as such systems are moved
      or replaced to comply with new regulatory and technical
      standards;
 §
              government
      enforcement, regulatory action, judicial decisions, or the prospects of
      rumors involving any of our games which have not been reviewed or approved
      as legal Class II games by the NIGC (inclusive but not limited to our
      games placed in both the Charitable Bingo and International Bingo
      markets);
 §
              contractual
      and regulatory interpretations and enforcement actions by state regulators
      or courts with regard to compacts between the state and various
      tribes;
 §
              adverse
      rulings regarding game classification by state or federal
      courts;
 §
              adverse
      regulatory decisions by federal, state and tribal gaming
      commissions;
 §
              lack
      of regulatory or judicial enforcement
action;
 §
              failure
      of our competitors to comply with published regulation restrictions. We
      believe we have lost, and could continue to lose, market share to
      competitors who offer games that do not appear to comply with published
      regulatory restrictions on Class II games and therefore offer
      features not available in our
products;
 §
              the
      use of sovereign immunity by Native American tribes to interfere with our
      ability to enforce our contractual rights, including payment under our
      agreements, with such tribes on Native American
  land;
 §
              new
      laws and regulations relating to Native American gaming that may be
      enacted, and existing laws and regulations that could be amended or
      reinterpreted in a manner adverse to our
  business;
 §
              investigations
      by the Department of the Interior and the NIGC into the practice of
      certain tribes conducting gaming on land originally acquired in trust for
      non-gaming purposes; and
 §
              a
      determination by the NIGC that our development agreements, either in
      themselves or when taken together with other agreements, demonstrate a
      proprietary interest by us in a tribe’s gaming activity and thus may
      violate the requirements of IGRA and tribal gaming
    ordinances.
  -40-
  All of
the above risk factors could result in significant and immediate adverse impacts
on our business and operating results. Additionally, each of the above described
risk factors increases our cost of doing business and could take our executives’
attention away from operations. 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 and our ability to
compete in the Native American markets. 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. 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
business relationships within Native American markets.
  The
ultimate outcome of pending litigation is uncertain.
  We are
involved in a number of commercial and intellectual property litigation matters.
Current estimates of loss regarding pending litigation may not be reflective of
any particular final outcome. The results of rulings, judgments or settlements
of pending litigation may result in financial liability that is materially
higher than what management has estimated at this time. We make no assurances
that we will not be subject to liability with respect to current or future
litigation. We maintain various forms of insurance coverage. However,
substantial rulings, judgments or settlements could exceed the amount of
insurance coverage (or any cost allocation agreement with an insurance carrier),
or could be excluded under the terms of an existing insurance policy.
Additionally, failure to secure favorable outcomes in pending litigation could
result in adverse consequences to our business, operating results and/or overall
financial condition (including without limitation, possible adverse effects on
compliance with the terms of our Credit Facility).
  We
may have difficulty enforcing contractual rights on Native American
land.
  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. The power of Native
Americans tribes to enact their own laws and to regulate gaming operations and
contracts 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.
  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. 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.
  Native
American tribes generally enjoy sovereign immunity from lawsuits 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 some 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. However, in some instances, there is no limited
waiver of sovereign immunity. Our largest customer, who accounts for
over 43% of our revenue, has not given us a limited waiver of sovereign
immunity. In the instances where tribes have not waived sovereign immunity, or
in the event that a limited waiver of sovereign immunity is held to be
ineffective, we could be precluded from judicially enforcing any rights or
remedies against a tribe, including our largest customer.  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.
  -41-
  If a
Native American tribe has effectively waived its sovereign immunity, there will
be 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 lawsuit, which is unlikely in a typical contract dispute.
Diversity of citizenship, another common basis for federal court jurisdiction,
is not generally present in a lawsuit 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.
  Our
expansion into non-Native American gaming activities will present new challenges
and risks that could adversely affect our business and results of
operations.
  As we
expand into new markets, we expect to encounter business, legal, operational and
regulatory uncertainties similar to those we face in our Native American gaming
business. 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. If we are unable to effectively develop and operate within these
new markets, then our business, operating results and financial condition would
be impaired.
  Successful
growth in new markets may require us to make changes to our gaming systems to
ensure that they comply with applicable regulatory requirements, 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:
  §
              whether
      our resources and expertise will enable us to effectively operate and grow
      in such new markets;
 §
              whether
      our internal processes and controls will continue to function effectively
      within these new segments;
 §
              whether
      we have enough experience to accurately predict revenues and expenses in
      these new markets;
 §
              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;
 §
              whether
      we will be able to successfully compete against larger companies who
      dominate the markets that we are trying to enter;
  and
 §
              whether
      we can timely perform under our agreements in these new markets because of
      other unforeseen obstacles.
  Our
charitable bingo operations in Alabama are subject to legal
uncertainty.
  On
March 19, 2009, officials with the Alabama Governor’s Task Force
seized certain of our charity bingo equipment located in Alabama. As a result of
a court order issued on March 28, 2009, the State of Alabama was ordered to
return all of our equipment, and the charity bingo facility, located in Lowndes
County, Alabama, was able to resume its operations pending the final outcome of
the litigation. The Governor’s Task Force appealed the trial court’s order and
filed an Emergency Motion to Stay the trial court’s order.  On April
17, 2009 the Supreme Court of Alabama granted the Governor’s Task Force’s
Emergency Motion to Stay pending disposition of the appeal.  The
parties have filed their briefs with the Supreme Court of Alabama. As of August
3, 2009, the Court has not issued a final ruling on the appeal. The Governor’s
Task Force also has filed a forfeiture action against all of the equipment
seized at White Hall. If the State of Alabama seizes additional equipment at
other charity bingo sites within the state, it could have a material adverse
effect on our Alabama clients’ businesses, and, ultimately, a material adverse
impact on our results of operations and financial condition.
  Our
Credit Facility contains covenants that limit our ability to finance future
operations or capital needs and to engage in other business
activities.
  The
operating and financial restrictions and covenants in our debt agreements,
including the Credit Facility, may adversely affect our ability to finance
future operations or capital needs or to engage in other business activities.
Our Credit Facility requires us to maintain a minimum EBITDA of
$60.0 million on a trailing twelve month basis, a total debt to EBITDA
leverage ratio of no more than 1.75:1.00 and a minimum fixed charge
coverage ratio of at least 1.5:1.0. The Credit Facility contains certain
covenants that, among other things, restrict our ability as well as our
restricted subsidiaries’ ability to:
  -42-
  §
              incur
      additional indebtedness, assume a guarantee or issue preferred
      stock;
 §
              pay
      dividends or make other equity distributions or payments to or affecting
      our subsidiaries;
 §
              purchase
      treasury stock;
 §
              make
      certain investments;
 §
              create
      liens;
 §
              sell
      or dispose of assets or engage in mergers or
    consolidations;
 §
              engage
      in certain transactions with subsidiaries and affiliates;
    and
 §
              enter
      into sale leaseback transactions.
  These
restrictions could limit our ability to obtain future financing, make strategic
acquisitions or needed capital expenditures, withstand economic downturns in our
business or the economy in general, conduct operations or otherwise take
advantage of business opportunities that may arise. A failure to comply with the
restrictions contained in the Credit Facility could lead to an event of default,
which could result in an acceleration of our indebtedness. Such acceleration
would constitute an event of default under the indentures governing the senior
unsecured notes. Our future operating results may not be sufficient to enable
compliance with the covenants in the Credit Facility or to remedy any such
default. In addition, in the event of acceleration, we may not have or be able
to obtain sufficient funds to refinance our indebtedness or make any accelerated
payments. Also, we may not be able to obtain new financing. Even if we were able
to obtain new financing, we cannot guarantee that the new financing will be on
commercially reasonable terms or terms that are acceptable to us. If we default
on our indebtedness, our business financial condition and results of operation
could be materially and adversely affected.
  Our
current international businesses and potential expansion into other
international gaming markets may present new challenges and risks that could
adversely affect our business or results of operations.
  In recent
years, the Company has expanded its business into several countries, including
Malta, Israel, and Mexico and has immediate plans to expand into
Canada.  The Maltese and Israeli operations are immaterial to the
Company; the Mexican business has grown significantly since
inception.  The Company now operates over 5,700 units in Mexico,
primarily across numerous facilities operated by one
customer.  Although the revenue results in Mexico have not met
original expectations, the Company plans to continue to operate in the country
but there can be no assurances that either revenues will grow or that we will
continue supplying product to that market.  In addition, international
business is subject to various risks, including but not limited to:
  §
              currency
      fluctuations;
 §
              higher
      operating costs due to local laws or
  regulations;
 §
              unexpected
      changes in regulatory requirements;
 §
              tariffs,
      taxes and other trade barriers;
 §
              general
      government instability;
 §
              costs
      and risks of localizing products for foreign
  countries;
 §
              difficulties
      in staffing and managing geographically disparate
    operations;
 §
              greater
      difficulty in safeguarding intellectual property, licensing and other
      trade restrictions;
 §
              challenges
      negotiating and enforcing contractual
  provisions;
 §
              repatriation
      of earnings; and
 §
              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.
  Interpretations
of federal regulations by governmental agencies may affect our
business.
  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.
Specifically, the IRS is conducting a Bank Secrecy Act audit at one of the
tribal casinos, and 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.
  -43-
  We
may be unable to develop, enhance or introduce successful gaming systems and
games.
  We may be
unable to successfully and cost effectively develop and introduce new and
enhanced gaming systems, games and content that will be widely accepted both by
our customers and their end users. Additionally, we may be unable to enhance
existing products in a timely manner in response to changing regulatory, legal
or market conditions or customer requirements, or new products or new versions
of our existing products may not achieve market acceptance. A decrease in demand
for our games could also result in an increase in our inventory obsolescence
charges.
  We
have limited control over our customers’ casino operations.
  We seek
to provide assistance to our key customers in the form of project management,
with a focus on facility layout and planning, gaming floor configuration and
customized marketing and promotional initiatives. Our key customers, however,
are solely responsible for the operations of their facilities and are not
required to consult us or take our advice on their operations, marketing,
facility layout, gaming floor configuration, or promotional initiatives.Our customers
have in the past, and will in the future, remodel and expand their facilities.
To the extent that our machines are not a part of an optimized facility layout
or gaming floor configuration, or to the extent that our machines are not
supported by effective marketing or promotional initiatives or are scheduled to
be out of service during a facility remodeling, our operating results could
suffer.
  We
are largely dependent upon one customer and most of our customers are based in
Oklahoma.
  For the
nine months ended June 30, 2009 and 2008, approximately 65%
and 60%, respectively, of our total revenues were from Native American
tribes located in Oklahoma, and approximately 43% and 41%,
respectively, of our gaming revenues were from one tribe in that state. The
significant concentration of our customers in Oklahoma means that local
economic, regulatory and licensing changes may adversely affect our customers,
and therefore our development agreements and 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 legislation
allowing tribal-state compacts in Oklahoma has resulted in increased competition
from other vendors, who we believe previously avoided entry into the
Oklahoma market due to its uncertain and ambiguous legal environment.
Oklahoma permits other types of gaming, both at tribal gaming facilities
and at Oklahoma racetracks, and many of our competitors may seek entry into
this market. The loss of significant market share to these new gaming
opportunities or the increased presence of our competitors’ products in Oklahoma
could also have a material adverse effect upon our financial condition and
results of operations.
  We
believe that the introduction of our competitor’s 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.
  State
compacts with our existing Native American customers to allow Class III
gaming could reduce demand for our Class II games and our entry into
the Class III market may be difficult as we compete against larger companies in
the Class III market.
  Certain
of Class II tribal customers have entered into compacts with the states in
which they operate to permit the operation of Class III games. We believe
the number of our Class II game machine placements in those customers’
facilities could decline significantly, and our operating results could be
materially and 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.
  As a
result, we anticipate that the introduction of Class III games will create
further pressure on our market and revenue share percentages in Oklahoma or a
shift in the market from revenue share arrangements to a “for sale” model.
Additionally, we may be forced to compete with larger companies that specialize
in Class III gaming as they move into these new Class III markets.  We
believe the establishment of state compacts depends on a number of political,
social, and economic factors that 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 if or when a compact could be entered into by one or more of our tribal
customers.
  -44-
  We
may not realize satisfactory returns on money lent to new and existing customers
to develop or expand gaming facilities.
  We enter
into development agreements to provide financing for construction 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. However, we may not realize the anticipated benefits of
any of these strategic relationships or financing. Certain of our development
agreements allow the facility operator to buy out our floor space and purchase
player terminals directly from the Company. If the operator elects to buy our
machines outright, in certain circumstances, the Company may also be required to
reimburse previously earned revenue. In connection with one or more of these
transactions, and to obtain the necessary development funds, we may need to
issue additional equity securities which would dilute existing shareholders;
extend secured and unsecured credit to potential or existing tribal customers
that may not be repaid; incur debt on terms unfavorable to us or that we are
unable to repay; or incur other contingent liabilities.
  Our
development efforts and 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. 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.
  The NIGC
has previously expressed its view that some of our development agreements could
be in violation of 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 risk for our business
(See “Risk Factors – Our ability to effectively compete in Native American
gaming markets is vulnerable to legal and regulatory
uncertainties.”)
  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.
  We
may not be able to successfully compete in new and existing markets due to
research and development, intellectual property and regulatory
challenges.
  We
operate in an intensely competitive industry against larger companies with
significant financial, research design and development, and marketing resources.
These larger companies are aggressively competing against us in our core
business operations, including but not limited to, charity bingo, lottery, Class
II, Class III, and international bingo markets. Additionally, new smaller
competitors may enter our traditional markets. The increased competition will
intensify pressure on our pricing model. We expect to face increased competition
as we attempt to enter new markets and new geographical locations. In the
future, gaming providers will compete on the basis of price as well as the
entertainment value and technological superiority of their
products.
  Other
members of our industry 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.
  Additionally,
our customers compete with other providers of entertainment for their end user’s
entertainment budget. Consequently, our customers might not be able to spend new
capital on acquiring gaming equipment. Moreover, our customers might reduce
their utilization of revenue share agreements.
  The
carrying value of our assets is dependent upon our ability to successfully
deploy games into new or existing markets.
  We have
player stations not deployed as of June 30, 2009, which are considered part
of our rental pool. If the opening of new facilities or the expansion of
existing facilities is altered negatively; either by significant delay, or by
cancellation, the realizable value of these assets could be adversely impacted.
In such instances we may be required to recognize impairment charges on these
assets.
  -45-
  We
may not be able to successfully implement new sales strategies.
  As we
attempt to generate new streams of revenue by selling units to new customers we
may have difficulty implementing an effective sales strategy. Our failure to
successfully implement an effective sales strategy could result in our future
operating results to vary materially from what management has
forecast.
  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 we enter into
new markets by leveraging our existing technology, and by developing new
technology and new products, it becomes more and more likely that we will become
subject to infringement claims from other parties. We are currently involved in
a patent dispute with a competitor. See “Part I – Item I. Condensed
Financial Statements – Note 8 – Commitments and Contingencies.” 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 cannot guarantee that
our intellectual property will provide us with a competitive advantage or that
it will not be circumvented by our competitors.
  Some of
our products may incorporate open source software.  Open source
licenses typically mandate that software developed based on source code that is
subject to the open source license, or combined in specific ways with such open
source software, become subject to the open source license.  Open
source licenses typically require that source code subject to the license be
released or made available to the public.  We take steps to ensure
that proprietary software we do not wish to disclose is not combined with, or
does not incorporate, open source software in ways that would require such
proprietary software to be subject to an open source
license.  However, few courts have interpreted the open source
licenses, and the manner in which these licenses may be interpreted and enforced
is therefore subject to some uncertainty.
  We
rely on software licensed from third parties, and on technology provided by
third-party vendors, the loss of which could increase our costs and delay
deployment or suspend development of our gaming systems and 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 to
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.
  Pursuant
to letter agreements with WMS, dated as of March 25, 2009 and June 26,
2009, respectively, the Company retains certain rights under the Company’s
Manufacturing and License Agreement with WMS, dated May 17, 2004, and
amended and restated on June 29, 2005, to license
and distribute certain WMS products including (i) a limited
number of WMS games in Washington until October 31, 2009; and (ii) WMS
Class III Cabinets and Games to the Chickasaw Nation in Oklahoma until June 30,
2010.  The Company also has the right, by the payment of an annual
license fee, to distribute and authorize the use of distributed, licensed games;
to transfer licensed games among the markets in which it has deployed WMS Games;
and to substitute game themes.
  -46-
  We rely
on the content of certain software that we license from third-party vendors and
often distribute and sell such software to our customers. The software could
contain “open source” code, require a resale license or 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 reduce over-all 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, which may materially and adversely affect our
earnings, financial condition and cash flows.
  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 to assist in the Company’s new strategic direction. 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.
  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
arrangement can result in our paying our customers amounts greater than our
customers’ percentage share of the actual win per unit. 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, which could materially and adversely affect our earnings and financial
condition.
  If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report financial results or prevent fraud.
  Effective
internal controls are necessary to provide reliable financial reports and to
assist in the effective prevention of fraud. Any inability to provide reliable
financial reports or prevent fraud could harm our business. We must annually
evaluate our internal procedures to satisfy the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which requires management and auditors
to assess the effectiveness of internal controls. If we fail to remedy or
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we could be subject to regulatory
scrutiny, civil or criminal penalties or shareholder litigation.
  In
addition, failure to maintain adequate internal controls could result in
financial statements that do not accurately reflect our financial condition.
There can be no assurance that we will be able to complete the work necessary to
fully comply with the requirements of the Sarbanes-Oxley Act or that our
management and our independent registered public accounting firm will continue
to conclude that our internal controls are effective.
  -47-
  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 are critical to our 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 as
well as state licensing boards. 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.
  In
the event gaming authorities determine that any of our officers, directors, key
employees, shareholders or any other person of the Company is unsuitable to act
in such a capacity, we will either be required to terminate our relationship
with such person, which termination could have a material adverse effect on our
business, or may not be able to terminate such relationship, which could impact
our ability to obtain such license or approval.
  We do not
currently have the right to redeem shares of an unsuitable shareholder, and a
finding of unsuitability could have a material adverse effect on our
business.  There can be no assurance that we will obtain all the
necessary licenses and approvals or that its officers, directors, key employees,
their affiliates and certain other shareholders will satisfy the suitability
requirements in each jurisdiction in which we seek to operate. The failure to
obtain such licenses and approvals in one jurisdiction may affect our licensure
and/or approvals in other jurisdictions. In addition, a significant delay in
obtaining such licenses and approvals could have a material adverse effect on
our business prospects.
  Our
games and systems may experience loss based on malfunctions, anomalies or
fraudulent activities.
  Our games
and systems, and games and systems we license or distribute from third parties,
could produce false payouts as the result of malfunctions, anomalies or
fraudulent activities, which we may be required to pay. We depend on our
security precautions to prevent fraud. We depend on regulatory safeguards, which
may not be available in all jurisdictions or markets, to protect us against
jackpots awarded as a result of malfunctions, anomalies or fraudulent
activities. There can be no guarantee that regulatory safeguards, in
jurisdictions or markets were they do exist, will be sufficient to protect us
from liabilities associated with malfunctions, anomalies or fraudulent
activities.
  The
occurrence of malfunctions, anomalies or fraudulent activities could result in
litigation against us by our customers based on lost revenue or other claims
based in tort or breach of contract. Moreover, these occurrences could result in
investigations or disciplinary actions by applicable gaming
regulators.
  Any
disruption in our network or telecommunications services, adverse weather
conditions or other catastrophic events 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 experienced prolonged adverse weather conditions, or if the sites
in Oklahoma, where a significant number of our games are installed,
simultaneously experienced adverse weather conditions, our results of operations
and financial condition would be materially and adversely affected.
  -48-
  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. Failure to perform under this contract 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.
  We
could be adversely affected by an outbreak of a communicable disease that
negatively affects our customers.
  In
mid-April of 2009, there was an outbreak of the influenza H1N1 virus, or “swine
flu,” in Mexico, which caused the temporary closing of several of our client’s
bingo parlors in that country. Additionally, there have been sporadic outbreaks
of swine flu, including in the southwestern United States and Mexico, where our
most significant clients are located. If the swine flu outbreak, or the outbreak
of another communicable disease (such as SARS or avian flu), discourages people
from traveling or causes people to avoid public places (including casinos and
bingo parlors), it could have a material adverse effect on our clients’ gaming
businesses and, ultimately, a material adverse impact on our results of
operations and financial condition.
  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 situation could cause a reduction
in our revenues and have a material adverse effect on our operating results. The
gaming industry is currently experiencing a period of reduced demand. If, as a
result of deteriorating economic conditions, fewer people frequent our
customers’ facilities, or if amounts spent per person in our customers’
facilities are reduced from historical levels, our business could be materially
and adversely affected.
  Additionally,
a decline in general economic conditions might negatively impact our customers’
abilities to pay us in a timely fashion. Our customers’ failures to make timely
payments could result in an increase in our provision for bad debt.
  Our
ability to recognize revenue at the time of sale and delivery is dependent upon
obtaining VSOE for products yet to be delivered or services yet to be
performed.
  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.
  -49-
  ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  None.
  ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
  None.
  ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  The
Annual Meeting of Shareholders of the Company (the “Annual Meeting”) for the
2008 fiscal year was held on April 6, 2009.  The Company had
23,488,221 shares of common stock (of 26,649,251 total shares outstanding on the
record date) present at the meeting or represented by proxies.  The
following sets forth a brief description of the matters voted upon at the Annual
Meeting and the results of the voting on each such matter:
 
 (i)
              The
      following individuals were elected as directors of the Company for a term
      expiring at the 2009 Annual Meeting (there were no broker
      non-votes):
 
 Nominee
                      
                      Votes in Favor
                      
                      Votes Against
                      
                      Votes AbstainedMichael
      J. Maples, Sr.
                      
                      22,725,236
                      
                      761,407
                      
                      1,575Robert
      D. Repass
                      
                      22,978,151
                      
                      508,494
                      
                      1,575Neil
      E. Jenkins
                      
                      18,086,637
                      
                      5,400,005
                      
                      1,575Emanuel
      R. Pearlman
                      
                      12,931,496
                      
                      10,555,146
                      
                      1,575Anthony
      M. Sanfilippo
                      
                      22,784,433
                      
                      702,210
                      
                      1,575Stephen
      J. Greathouse
                      
                      22,783,691
                      
                      702,952
                      
                      1,575Justin
      A. Orlando
                      
                      17,503,528
                      
                      5,139,457
                      
                      845,235
 
 (ii)
              BDO
      Siedman, LLP was ratified as our independent registered public accountants
      for the 2009 fiscal year:
 
 Votes in Favor
                    
                    Votes Against
                    
                    Votes Abstained23,054,358
                    
                    433,665
                    
                    196
  ITEM
      5.
              OTHER
      INFORMATION
  None.
  ITEM
      6.
              EXHIBITS
  (a)
              Exhibits
  See
      Exhibit Index.
  -50-
  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.
  Date:
      August 7, 2009
              Multimedia
      Games, Inc.By:
              /s/ Adam D. Chibib†Adam D. ChibibChief Financial Officer
  †Mr.
Chibib is signing as an authorized officer and as our Principal Financial
Officer and Principal Accounting Officer.
  -51-
  EXHIBIT
INDEX
 
 EXHIBIT NO.
                  
                  TITLE
                  
                  LOCATION3.1
                  
                  Amended
      and Restated Articles of Incorporation
                  
                  (1)3.2
                  
                  Amendment
      to Articles of Incorporation
                  
                  (2)3.3
                  
                  Second
      Amended and Restated Bylaws, as Amended
                  
                  (3)10.1***
                  
                  Settlement
      Agreement, effective as of May 1, 2009, by and among the Company, Diamond
      Game Enterprises, Inc., and those parties listed
    therein
                  
                  (*)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 ofthe 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 June 30,
  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 on
      December 15, 2008.
  (*)
              Filed
      herewith
  ***
              Confidential
      treatment has been requested for portions of this
      exhibit.  These portions have been omitted from this quarterly
      report and submitted separately to the Securities and Exchange
      Commission.
  -52-