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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended: June 30, 2005



| ̈ | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | -----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 001-14551



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Multimedia Games, Inc.

(Exact Name of Registrant as Specified in its Charter)



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|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Texas                                          |  | 74-2611034                          
|(State or Other Jurisdiction of Incorporation) |  | (IRS Employer Identification Number)



|                                                            |  |           
|----------------------------------------------------------- |  | ----------
|206 Wild Basin Road, Building B, Fourth Floor Austin, Texas |  | 78746     
|(Address of Principal Executive Offices)                    |  | (Zip Code)



Registrants
telephone number, including area code: (512) 334-7500



Registrants website: www.multimediagames.com



---



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange

Act):    Yes  x    No ̈



As of August 3, 2005, there were 27,133,740 shares of the Registrants common stock, par value $0.01 per share, outstanding.



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##### Table of Contents

FORM 10-Q



INDEX



|                              |  |                                                                                         |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                        
|                              |  |                                                                                        
|Item 1.                       |  | Financial Statements (Unaudited)                                                        |  |   
|                              |  |                                                                                        
|                              |  | Consolidated Balance Sheets(As of June 30, 2005 and September 30, 2004)                 |  | 3 
|                              |  |                                                                                        
|                              |  | Consolidated Statements of Income(For the three months ended June 30, 2005 and 2004)    |  | 4 
|                              |  |                                                                                        
|                              |  | Consolidated Statements of Income(For the nine months ended June 30, 2005 and 2004)     |  | 5 
|                              |  |                                                                                        
|                              |  | Consolidated Statements of Cash Flows(For the nine months ended June 30, 2005 and 2004) |  | 6 
|                              |  |                                                                                        
|                              |  | Notes to Consolidated Financial Statements                                              |  | 8 
|                              |  |                                                                                        
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 17
|                              |  |                                                                                        
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                              |  | 39
|                              |  |                                                                                        
|Item 4.                       |  | Controls and Procedures                                                                 |  | 39
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                        
|                              |  |                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                       |  | 41
|                              |  |                                                                                        
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                             |  | 41
|                              |  |                                                                                        
|Item 6.                       |  | Exhibits                                                                                |  | 41



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##### Table of Contents

MULTIMEDIA GAMES, INC.



CONSOLIDATED BALANCE SHEETS

As of June 30, 2005 and September 30, 2004

(In thousands, except shares and per-share amounts)

(Unaudited)



|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                     |  | June 30,2005 |         |   | September 30,2004 |  
|ASSETS                                                                                                                                                               |  |              |         |   |                   |   |         |  
|CURRENT ASSETS:                                                                                                                                                      |  |              |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                            |  | $            | 5,894   |   |                   | $ | 4,768   |  
|Accounts receivable, net of allowance for doubtful accounts of $204 and $533, respectively                                                                           |  |              | 10,652  |   |                   |   | 10,397  |  
|Inventory                                                                                                                                                            |  |              | 812     |   |                   |   | 930     |  
|Deferred contract costs                                                                                                                                              |  |              | 6,029   |   |                   |   |        |  
|Prepaid expenses and other                                                                                                                                           |  |              | 1,944   |   |                   |   | 2,242   |  
|Notes receivable, net                                                                                                                                                |  |              | 5,506   |   |                   |   | 12,299  |  
|Federal and state income tax receivable                                                                                                                              |  |              | 35      |   |                   |   | 5,044   |  
|Deferred income taxes                                                                                                                                                |  |              | 1,899   |   |                   |   | 1,909   |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total current assets                                                                                                                                                 |  |              | 32,771  |   |                   |   | 37,589  |  
|Restricted cash and long-term investments                                                                                                                            |  |              | 1,068   |   |                   |   | 1,216   |  
|Leased gaming equipment, net                                                                                                                                         |  |              | 41,954  |   |                   |   | 40,652  |  
|Property and equipment, net                                                                                                                                          |  |              | 90,706  |   |                   |   | 93,090  |  
|Notes receivable  noncurrent                                                                                                                                        |  |              | 29,287  |   |                   |   | 20,588  |  
|Intangible assets, net                                                                                                                                               |  |              | 45,348  |   |                   |   | 21,941  |  
|Other assets                                                                                                                                                         |  |              | 3,317   |   |                   |   | 2,331   |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total assets                                                                                                                                                         |  | $            | 244,451 |   |                   | $ | 217,407 |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                 |  |              |         |   |                   |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                 |  |              |         |   |                   |   |         |  
|Current portion of long-term debt and capital leases                                                                                                                 |  | $            | 14,335  |   |                   | $ | 9,713   |  
|Accounts payable and accrued expenses                                                                                                                                |  |              | 26,929  |   |                   |   | 25,780  |  
|Federal income tax payable                                                                                                                                           |  |              | 1,439   |   |                   |   |        |  
|Deferred revenue                                                                                                                                                     |  |              | 2,276   |   |                   |   | 1,847   |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                            |  |              | 44,979  |   |                   |   | 37,340  |  
|Revolving line of credit                                                                                                                                             |  |              | 20,970  |   |                   |   |        |  
|Long-term debt and capital leases, less current portion                                                                                                              |  |              | 9,253   |   |                   |   | 10,753  |  
|Other long-term liabilities                                                                                                                                          |  |              | 3,030   |   |                   |   | 3,932   |  
|Deferred revenue  noncurrent                                                                                                                                        |  |              | 1,128   |   |                   |   | 2,050   |  
|Deferred income taxes                                                                                                                                                |  |              | 7,816   |   |                   |   | 13,185  |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                    |  |              | 87,176  |   |                   |   | 67,260  |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                        |  |              |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                |  |              |         |   |                   |   |         |  
|Preferred stock:                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Series A, $0.01 par value, 1,800,000 shares authorized, no shares issued and outstanding                                                                             |  |              |        |   |                   |   |        |  
|Series B, $0.01 par value, 200,000 shares authorized, no shares issued and outstanding                                                                               |  |              |        |   |                   |   |        |  
|Common stock, $0.01 par value, 75,000,000 shares authorized, 30,780,329 and 30,453,245 shares issued, and 27,154,690 and 27,917,597 shares
outstanding, respectively |  |              | 308     |   |                   |   | 305     |  
|Additional paid-in capital                                                                                                                                           |  |              | 67,143  |   |                   |   | 65,157  |  
|Treasury stock, 3,625,639 and 2,535,648 shares at cost                                                                                                               |  |              | (22,028 | ) |                   |   | (12,382 | )
|Retained earnings                                                                                                                                                    |  |              | 111,852 |   |                   |   | 97,067  |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                           |  |              | 157,275 |   |                   |   | 150,147 |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                           |  | $            | 244,451 |   |                   | $ | 217,407 |  
|                                                                                                                                                                     |  |              |         |   |                   |   |         |  



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



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##### Table of Contents

MULTIMEDIA GAMES, INC.



CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended June 30, 2005 and 2004

(In thousands, except per-share amounts)

(Unaudited)



|                                                   |  |      |        |   |      |   |        |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                   |  | 2005 |        |   | 2004 |  
|Revenues:                                          |  |      |        |   |      |   |        |  
|Gaming revenue:                                    |  |      |        |   |      |   |        |  
|Class II                                           |  | $    | 28,191 |   |      | $ | 29,043 |  
|Charity                                            |  |      | 4,622  |   |      |   | 3,009  |  
|All other                                          |  |      | 2,814  |   |      |   | 3,323  |  
|Player terminal and license sale and lease revenue |  |      | 957    |   |      |   | 805    |  
|Other                                              |  |      | 565    |   |      |   | 740    |  
|                                                   |  |      |        |   |      |   |        |  
|Total revenues                                     |  |      | 37,149 |   |      |   | 36,920 |  
|                                                   |  |      |        |   |      |   |        |  
|OPERATING COSTS AND EXPENSES:                      |  |      |        |   |      |   |        |  
|Cost of player terminals and licenses sold         |  |      | 787    |   |      |   | 666    |  
|Selling, general and administrative expenses       |  |      | 14,104 |   |      |   | 12,951 |  
|Amortization and depreciation                      |  |      | 14,576 |   |      |   | 9,765  |  
|                                                   |  |      |        |   |      |   |        |  
|Total operating costs and expenses                 |  |      | 29,467 |   |      |   | 23,382 |  
|                                                   |  |      |        |   |      |   |        |  
|Operating income                                   |  |      | 7,682  |   |      |   | 13,538 |  
|OTHER INCOME (EXPENSE):                            |  |      |        |   |      |   |        |  
|Interest income                                    |  |      | 608    |   |      |   | 178    |  
|Interest expense                                   |  |      | (675   | ) |      |   | (429   | )
|                                                   |  |      |        |   |      |   |        |  
|Income before income taxes                         |  |      | 7,615  |   |      |   | 13,287 |  
|Income tax expense                                 |  |      | 3,065  |   |      |   | 3,451  |  
|                                                   |  |      |        |   |      |   |        |  
|Net income                                         |  | $    | 4,550  |   |      | $ | 9,836  |  
|                                                   |  |      |        |   |      |   |        |  
|Basic earnings per share                           |  | $    | 0.17   |   |      | $ | 0.35   |  
|                                                   |  |      |        |   |      |   |        |  
|Diluted earnings per share                         |  | $    | 0.16   |   |      | $ | 0.32   |  
|                                                   |  |      |        |   |      |   |        |  



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



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##### Table of Contents

MULTIMEDIA GAMES, INC.



CONSOLIDATED STATEMENTS OF INCOME

For the Nine Months Ended June 30, 2005 and 2004

(In thousands, except per-share amounts)

(Unaudited)



|                                                   |  |      |         |   |      |   |         |  
|-------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                   |  | 2005 |         |   | 2004 |  
|Revenues:                                          |  |      |         |   |      |   |         |  
|Gaming revenue:                                    |  |      |         |   |      |   |         |  
|Class II                                           |  | $    | 87,082  |   |      | $ | 89,477  |  
|Charity                                            |  |      | 14,676  |   |      |   | 5,453   |  
|All other                                          |  |      | 10,235  |   |      |   | 7,269   |  
|Player terminal and license sale and lease revenue |  |      | 2,762   |   |      |   | 7,193   |  
|Other                                              |  |      | 1,607   |   |      |   | 1,583   |  
|                                                   |  |      |         |   |      |   |         |  
|Total revenues                                     |  |      | 116,362 |   |      |   | 110,975 |  
|                                                   |  |      |         |   |      |   |         |  
|OPERATING COSTS AND EXPENSES:                      |  |      |         |   |      |   |         |  
|Cost of player terminals and licenses sold         |  |      | 2,588   |   |      |   | 4,240   |  
|Selling, general and administrative expenses       |  |      | 46,535  |   |      |   | 41,795  |  
|Amortization and depreciation                      |  |      | 42,620  |   |      |   | 26,170  |  
|                                                   |  |      |         |   |      |   |         |  
|Total operating costs and expenses                 |  |      | 91,743  |   |      |   | 72,205  |  
|                                                   |  |      |         |   |      |   |         |  
|Operating income                                   |  |      | 24,619  |   |      |   | 38,770  |  
|OTHER INCOME (EXPENSE):                            |  |      |         |   |      |   |         |  
|Interest income                                    |  |      | 1,390   |   |      |   | 906     |  
|Interest expense                                   |  |      | (1,892  | ) |      |   | (1,067  | )
|                                                   |  |      |         |   |      |   |         |  
|Income before income taxes                         |  |      | 24,117  |   |      |   | 38,609  |  
|Income tax expense                                 |  |      | 9,332   |   |      |   | 13,003  |  
|                                                   |  |      |         |   |      |   |         |  
|Net income                                         |  | $    | 14,785  |   |      | $ | 25,606  |  
|                                                   |  |      |         |   |      |   |         |  
|Basic earnings per share                           |  | $    | 0.53    |   |      | $ | 0.94    |  
|                                                   |  |      |         |   |      |   |         |  
|Diluted earnings per share                         |  | $    | 0.50    |   |      | $ | 0.83    |  
|                                                   |  |      |         |   |      |   |         |  



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



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##### Table of Contents

MULTIMEDIA GAMES, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended June 30, 2005 and 2004

Increase (Decrease) in Cash and Cash Equivalents

(In thousands)

(Unaudited)



|                                                                                                   |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                   |  | 2005 |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |      |         |   |      |   |         |  
|Net income                                                                                         |  | $    | 14,785  |   |      | $ | 25,606  |  
|Adjustments to reconcile net income to cash and cash equivalents provided by operating activities: |  |      |         |   |      |   |         |  
|Amortization                                                                                       |  |      | 3,139   |   |      |   | 1,700   |  
|Depreciation                                                                                       |  |      | 39,481  |   |      |   | 24,470  |  
|Accretion of contract rights                                                                       |  |      | 1,541   |   |      |   | 36      |  
|Write off of long-lived assets                                                                     |  |      | 217     |   |      |   |        |  
|Provision for inventory and long-lived assets                                                      |  |      | 35      |   |      |   |        |  
|Deferred income taxes                                                                              |  |      | (5,359  | ) |      |   | 2,968   |  
|Options issued to consultants                                                                      |  |      | 144     |   |      |   | 383     |  
|Recovery of doubtful accounts                                                                      |  |      | (225    | ) |      |   | (17     | )
|(Increase) decrease in:                                                                            |  |      |         |   |      |   |         |  
|Accounts receivable                                                                                |  |      | (269    | ) |      |   | (3,583  | )
|Inventory                                                                                          |  |      | 118     |   |      |   | (1,793  | )
|Deferred contract costs                                                                            |  |      | (6,029  | ) |      |   |        |  
|Prepaid expenses and other                                                                         |  |      | (1,690  | ) |      |   | (1,289  | )
|Federal and state income tax payable/receivable                                                    |  |      | 6,448   |   |      |   | (1,179  | )
|Notes receivable                                                                                   |  |      | 5,798   |   |      |   | 728     |  
|Increase (decrease) in:                                                                            |  |      |         |   |      |   |         |  
|Accounts payable and accrued expenses                                                              |  |      | 1,138   |   |      |   | 5,632   |  
|Deferred revenue                                                                                   |  |      | (493    | ) |      |   | 220     |  
|Other long-term liabilities                                                                        |  |      | (504    | ) |      |   | 977     |  
|                                                                                                   |  |      |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                          |  |      | 58,275  |   |      |   | 54,859  |  
|                                                                                                   |  |      |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |      |         |   |      |   |         |  
|Acquisition of property and equipment and leased gaming equipment                                  |  |      | (36,509 | ) |      |   | (59,288 | )
|Acquisition of intangible assets                                                                   |  |      | (7,990  | ) |      |   | (3,600  | )
|Advances under development agreements                                                              |  |      | (38,906 | ) |      |   | (10,182 | )
|Repayments under development agreements                                                            |  |      | 10,985  |   |      |   | 760     |  
|Advances on notes receivable                                                                       |  |      |        |   |      |   | (20,574 | )
|Stockholders notes receivable, net                                                                |  |      |        |   |      |   | (37     | )
|Repayments of notes receivable                                                                     |  |      |        |   |      |   | 21,107  |  
|                                                                                                   |  |      |         |   |      |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                              |  |      | (72,420 | ) |      |   | (71,814 | )
|                                                                                                   |  |      |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |      |         |   |      |   |         |  
|Proceeds from exercise of stock options, warrants, and related tax benefit                         |  |      | 1,845   |   |      |   | 18,080  |  
|Proceeds from long-term debt                                                                       |  |      | 10,000  |   |      |   | 7,708   |  
|Principal payments of long-term debt and capital leases                                            |  |      | (7,898  | ) |      |   | (5,504  | )
|Proceeds from revolving line of credit                                                             |  |      | 36,606  |   |      |   |        |  
|Payments on revolving line of credit                                                               |  |      | (15,636 | ) |      |   |        |  
|Purchase of treasury stock                                                                         |  |      | (9,646  | ) |      |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          |  |      | 15,271  |   |      |   | 20,284  |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                          |  |      | 1,126   |   |      |   | 3,329   |  
|Cash and cash equivalents, beginning of period                                                     |  |      | 4,768   |   |      |   | 26,319  |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $    | 5,894   |   |      | $ | 29,648  |  
|                                                                                                   |  |      |         |   |      |   |         |  



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##### Table of Contents

MULTIMEDIA GAMES, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)

For the Nine Months Ended June 30, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                      |  |      |       |      |   |      
|------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                                      |  | 2005 |       | 2004
|SUPPLEMENTAL CASH FLOW DATA:                                                          |  |      |       |      |   |      
|Interest paid                                                                         |  | $    | 1,782 |      | $ | 1,066
|                                                                                      |  |      |       |      |   |      
|Income tax paid                                                                       |  | $    | 8,183 |      | $ | 418  
|                                                                                      |  |      |       |      |   |      
|NON-CASH TRANSACTIONS:                                                                |  |      |       |      |   |      
|Property and equipment and other assets acquired through:                             |  |      |       |      |   |      
|Capital lease                                                                         |  |      | 575   |      |   | 5,280
|Long-term debt                                                                        |  |      | 445   |      |   | 1,303
|Receipt of Companys common stock for repayment of stockholders note receivable      |  |      |      |      |   | 1,599
|Receipt of Companys common stock as consideration for employee stock option exercise |  |      |      |      |   | 472  



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



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##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. SIGNIFICANT ACCOUNTING POLICIES



The
accompanying consolidated financial statements should be read in conjunction with the Companys consolidated financial statements and footnotes contained within the Companys Annual Report on Form 10-K/A for the year ended September 30,
2004.



The financial statements included herein as of June 30, 2005, and for
each of the three and nine months ended June 30, 2005 and 2004 have been prepared by the Company without an audit, pursuant to accounting principles generally accepted in the United States of America, or U.S., and the rules and regulations of the
Securities and Exchange Commission. They do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The information presented reflects all adjustments
consisting solely of normal adjustments which are, in the opinion of management, considered necessary to present fairly the financial position, results of operations, and cash flows for the periods. Operating results for the three and nine months
ended June 30, 2005 are not necessarily indicative of the results which will be realized for the year ending September 30, 2005.



Operations. The Company is a technology supplier to the gaming industry; it designs and develops interactive electronic gaming systems that are marketed
primarily to Native American, charity and commercial bingo gaming facilities, and to state lottery commissions located throughout the U.S. 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 provides Class II gaming to its tribal customers through a nationwide, broadband telecommunications
network. Player terminals in the Class II gaming market are typically interconnected within a gaming facility and across multiple facilities, thereby enabling players to simultaneously participate in the same game and to compete against one another
to win common pooled prizes. In the charity bingo market, player terminals are typically only interconnected within the gaming facility where the player terminals are located. The Company provides a central determinant system for use by state
lottery commissions. The Company offers Point-of-Sale Terminals, or POSTs, in conjunction with its Tribal Instant Lottery Game, or TILG, in the Class III market; these are supported by central determinant system technology similar to that used in
the state lottery market. The Company offers content for its gaming systems that has been designed and developed by the Company, as well as game themes it has licensed from others.



Consolidation Principles. The Companys financial statements include the activities of Multimedia Games, Inc. and its
wholly-owned subsidiaries: MegaBingo, Inc., MGAM Systems, Inc. and MGAM Services, LLC. Intercompany balances and transactions have been eliminated.



Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 provisions for bad debts and inventory obsolescence, asset lives of equipment, deferred taxes, and the provision for and disclosure of litigation and loss contingencies. Actual results may differ significantly from
these estimates in the future.



Reclassifications. Certain
reclassifications were made to the prior periods financial statements to conform to the current period financial statement presentation. These reclassifications did not have an impact on the Companys previously reported net income.



Historically, the Company entered into certain agreements with its tribal
customers that, among other things, guaranteed certain prize payouts. These were based upon attaining an assumed level of gross game receipts and upon statistical assumptions as to the frequency of winners; the agreements required customers to
deposit a fixed percentage of gross gaming receipts in a depository account controlled by us. The depository account was used by the Company to reimburse prizes, prize fulfillment fees, insurance payments and bank fees. In these instances, the
Company was essentially acting as a bank by managing prizes across multiple facilities on its network of electronic player terminals. Based on the its role as a bank, the Company historically considered its role more as a
principal than an agent, and reported the hold per day from its player terminals as revenue and deducted amounts paid to or retained by facilities as Allotments to facility operators.



The vast majority of these arrangements have gone away over the past few years, prompting the
Company to evaluate its revenue presentation.



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



The Companys current gaming arrangements typically do not guarantee prize payout levels and require that only
its share of the hold per day be remitted to the Company. Management has determined that the net amounts remitted by customers should be reported as revenue and not presented on a gross basis, as previously reported. As a result, the Company has
presented its current period revenues in accordance with this policy and reclassified Allotments to facility operators for the three and nine months ended June 30, 2004 to conform to the current period presentation.



Revenue Recognition. The Company derives its gaming revenues primarily from
participation arrangements with its Native American and charity bingo customers. Participation revenue generated from the Companys Class II gaming systems is reported in its results of operations as Gaming revenue  Class II,
while revenue generated from charity customers is included in Gaming revenue  Charity, and revenue from the Companys TILG product and games played under the Oklahoma and Washington compacts is included in Gaming revenue
 All other. Under these arrangements, the Company retains ownership of the player terminals, POSTs and back-office equipment (which are collectively referred to as gaming systems) installed at customer gaming facilities, and receives
revenue based on a percentage of the hold per day generated by each gaming system. The hold is generally considered both realizable and earned at the end of each gaming day. Certain of the Companys arrangements require it to set aside a
portion of a facilitys hold per day to be used to fund facility-specific marketing, advertising, promotions and service. These amounts are offset against revenue, and deferred in a liability account until expended.



The Company generates gaming revenues from the state video lottery market by providing the
central determinant system for video lottery terminal networks. In return for providing the system, the Company receives a small portion of the network-wide hold, which is reported in its financial results of operations as a part of Gaming
revenue  All other.



The Company also generates gaming revenues
from back-office fees based on a share of the hold per day from both leased and sold Class III POSTs in Washington State. Back-office fees cover the service and maintenance costs for back-office servers installed in each gaming facility to run its
Class III games, as well as the cost of related software updates. These back-office fees are reported in the Companys results of operations as a part of Gaming revenue  All other. For those POSTs sold to customers, the
back-office fees are based on a considerably smaller percentage of the hold per day than the revenue share received from terminals being rented under participation agreements. Accordingly, the Company derives its Class III revenues to a greater
extent from POST sales than from participation-based back-office fees. Sales of Class III POSTs are usually clustered around the expansion of existing casinos, the opening of new casinos, or changes in applicable law that permit customers to operate
a greater number of POSTs than previously allowed.



The majority of the
Companys Class III POSTs in Washington State have been sold to customers outright for a one-time purchase price, and are reported by the Company under Player terminal and license sale and lease revenue. Certain game themes used by
the Company in the Class III market have been licensed from third parties and are generally licensed to customers along with the Class III POSTs. For the remainder of its Class III POSTs, the Company enters into participation arrangements similar to
those in the Class II market.



Revenues from the sale of player terminals,
player terminal licenses and license of our gaming systems are accounted for under Staff Accounting Bulletin 104, Revenue Recognition, or SAB 104, Statement of Position 97-2 Software Revenue Recognition, or SOP 97-2, and
Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. In accordance with the provisions of SAB 104, SOP 97-2 and EITF 00-21, sales that are considered to contain multiple
deliverables are bifurcated into accounting units based on their relative fair market value, provided each component is not essential to the function of the other. Revenue from these separate accounting units is then recognized when: a)
persuasive evidence of an arrangement exists and the sales price is fixed and determinable; b) delivery has occurred and services have been rendered; and c) collectibility is reasonably assured. If vendor-specific objective evidence 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 utilizing the
subscription method of accounting over the term of the services rendered.



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.



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 collectibility. Management reviews its accounts receivable and notes receivable on a monthly basis to determine if any receivables
will



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



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 that are determined to be uncollectible. Based on the information
available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs might exceed the recorded allowance.



Deferred Contract Costs. During Fiscal 2005, the Company entered into a contract with a customer, pursuant to which it will deliver a video lottery system
and player terminals at a number of retail sites. Costs directly attributable to this contract, consisting principally of engineering, development, installation and hardware costs, are being deferred until the revenue is recognized.



Billings under the contract are tied to certain defined objectives. As of June 30, 2005, the
Company had not billed any amounts under this contract.



Inventory. The Companys inventory consists primarily of completed player terminals, related component parts and back-office computer equipment expected to be sold within the Companys next fiscal year. Inventories
are stated at the lower of cost (first in, first out) or market.



Development Agreements. The Company enters into development agreements to provide financing for new tribal gaming facilities, or for the expansion of existing facilities. In return, the customer commits to a fixed number of
player terminal placements in the facility, and the Company receives a fixed percentage of those player terminals hold per day over the term of the agreement. Certain of the agreements contain performance standards for its player terminals
that could allow the facility to reduce a portion of the Companys player terminals. The agreements typically provide for a portion of the amounts retained by the gaming facility for their share of the hold to be used for repayment of some or
all of the advances. Amounts advanced in excess of those reimbursed by the customer for real property and land improvements are allocated to an other asset and amortized over the life of the contract. Amounts related to personal property owned by
the Company and located at the tribal gaming facility are carried in the Companys property and equipment, and depreciated over the estimated useful life of the related asset.



At June 30, 2005 and September 30, 2004, the following net amounts related to advances made under development agreements were recorded in
the following balance sheet captions:



|                                                                     |  |                |        |                    |   |       
|-------------------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------
|                                                                     |  | June 30, 2005  |        | September 30, 2004
|                                                                     |  | (In thousands)
|Included in:                                                         |  |                |        |                    |   |       
|Notes receivable                                                     |  | $              | 31,369 |                    | $ | 22,836
|Property and equipment, net of accumulated depreciation              |  |                | 12,761 |                    |   | 10,343
|Intangible assets  contract rights, net of accumulated amortization |  |                | 30,936 |                    |   | 11,812



Notes Receivable.At
June 30, 2005 and September 30, 2004, the Companys notes receivable consisted of the following:



|                                             |  |                |        |                    |   |        |  
|-------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------ | -
|                                             |  | June 30, 2005  |        | September 30, 2004 |  
|                                             |  | (In thousands) |       
|Notes receivable from development agreements |  | $              | 31,369 |                    | $ | 22,836 |  
|Notes receivable from equipment sales        |  |                | 2,502  |                    |   | 9,040  |  
|Other notes receivable                       |  |                | 922    |                    |   | 1,086  |  
|Allowance for notes receivable               |  |                |       |                    |   | (75    | )
|                                             |  |                |        |                    |   |        |  
|Notes receivable, net                        |  |                | 34,793 |                    |   | 32,887 |  
|Less current portion                         |  |                | 5,506  |                    |   | 12,299 |  
|                                             |  |                |        |                    |   |        |  
|Notes receivable  non-current               |  | $              | 29,287 |                    | $ | 20,588 |  
|                                             |  |                |        |                    |   |        |  



Notes receivable from development
agreements are generated from reimbursable amounts advanced under development agreements, and generally bear interest at prevailing interest rates. These notes are typically collateralized by all the personal property not owned by the Company and
contained within the respective tribal gaming facility, although the value of such property, if repossessed, may be less than the note receivable



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



outstanding. As of June 30, 2005, the average interest rate on notes receivable from development agreements was 5.33%, and the expected term of such notes
ranged from one to three years; however, the timing of required payments may vary, as certain of the note repayment terms are based on the hold per day per player terminal retained by the facilities.



Notes receivable from equipment sales consist of financial instruments issued by customers
for the purchase of player terminals and licenses, and generally bear interest at prevailing interest rates. 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. As of June 30, 2005, the average interest rate on notes receivable from equipment sales was 7.03%, and the term of such notes ranged from one to two years.



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 accelerated 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 at 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 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 assets 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 are reported at the lower of the carrying amount or the fair
value less costs of disposal. An analysis of the long-lived assets at June 30, 2005 indicated there was no impairment to these assets carrying values.



Equipment under Capital Lease. Equipment under capital leases is recorded at the lower of the present value of the minimum lease payments or the fair value
of the assets. The cost of leased property and equipment is amortized using the Companys normal depreciation policy, described under Property and Equipment and Leased Gaming Equipment.



Credit Facility,Long-Term Debt and Capital Leases. At June 30,
2005 and September 30, 2004, the Companys Credit Facility, long-term debt and capital leases consisted of the following:



|                                                        |  |                |        |                    |   |       
|------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------
|                                                        |  | June 30, 2005  |        | September 30, 2004
|                                                        |  | (In thousands)
|Revolving line of credit                                |  | $              | 20,970 |                    | $ |      
|                                                        |  |                |        |                    |   |       
|Term Loan facility                                      |  | $              | 14,243 |                    | $ | 7,181 
|Other long-term debt                                    |  |                | 3,805  |                    |   | 4,998 
|Capital lease obligations                               |  |                | 5,540  |                    |   | 8,287 
|                                                        |  |                |        |                    |   |       
|Long-term debt and capital leases                       |  |                | 23,588 |                    |   | 20,466
|Less current portion                                    |  |                | 14,335 |                    |   | 9,713 
|                                                        |  |                |        |                    |   |       
|Long-term debt and capital leases, less current portion |  | $              | 9,253  |                    | $ | 10,753
|                                                        |  |                |        |                    |   |       



The Companys debt structure
consists of a Credit Facility, which provides the Company with a $20.0 million term loan facility, or the Term Loan, a $15.0 million revolving line of credit, or the Revolver, and a $35.0 million reducing line of credit, or the Reducing Revolver.
Two of the three tranches of the Term Loan mature in June 2006 and bear interest at a rate of Prime plus 1.25% (or 7.50% as of June 30, 2005). The third tranche of the Term Loan matures in June 2007 and bears interest at a rate of Prime plus 1.25%.
As of June 30, 2005, the Company had drawn $20.2 million under the available tranches of the Term Loan. Equal installments of principal and interest are payable over the term of the first two tranches, which are 36 and 30 months, respectively. On
the third tranche, installments based on a 24-month term are due beginning in July 2005, with a balloon payment due in June 2007.



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



The Revolver provides the Company with up to $15.0 million for working capital needs. The Revolver bears interest at
a rate of Prime plus 1.25%, and has a commitment fee based on the daily average unborrowed commitment. The Revolver matures in November 2006. As of June 30, 2005, $12.0 million was outstanding under the Revolver, leaving $3.0 million available,
which was reduced by $1.0 million, reflecting outstanding letters of credit.



The Reducing Revolver provides the company with up to $35.0 million, which is advanceable based on the Companys unfinanced capital expenditures. After the first 12 months, the availability under the Reducing Revolver is reduced
quarterly, based on a 36-month straight-line amortization. The Reducing Revolver bears interest at a rate of Prime plus 1.25% and has a commitment fee based on the daily average unborrowed commitment. Interest payments are due monthly, and principal
plus unpaid interest is due when the Reducing Revolver matures in June 2009. As of June 30, 2005, $9.0 million was outstanding under the Reducing Revolver, leaving $26.0 million available.



The Credit Facility contains certain customary financial and operational covenants, and is
collateralized by substantially all the Companys assets. The Company is in compliance with these covenants as of June 30, 2005.



Other long-term debt at June 30, 2005 consists of a five-year loan related to financing the Companys corporate aircraft, and various three-to five-year loans for
the purchase of automobiles and property and equipment.



Capital lease
obligations consist of various three-year noncancelable capital leases for certain equipment used in the Companys operations.



Fair Value of Financial Instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation. At June 30, 2005 and September 30, 2004, the carrying amounts for the Companys financial instruments, which include accounts and notes receivable, accounts
payable, and long-term debt and capital leases, approximate fair value.



Income Taxes. The Company applies the provisions of SFAS No. 109 Accounting for Income Taxes. Under SFAS No. 109, deferred tax liabilities or assets arise from differences between the tax basis of liabilities or
assets and their basis 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. A valuation allowance is provided for deferred tax assets to the extent realization is not judged to be more likely than not.



Treasury Stock. The Company utilizes the cost method for accounting for its
treasury stock acquisitions and dispositions.



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



|                                                            |  |                                                     |            |      |   |           
|----------------------------------------------------------- |  | --------------------------------------------------- | ---------- | ---- | - | ----------
|                                                            |  | Three Months Ended June 30,                        
|                                                            |  | 2005                                                |            | 2004
|                                                            |  | (In thousands, except shares and per-share amounts)
|Income available to common stockholders  basic and diluted |  | $                                                   | 4,550      |      | $ | 9,836     
|                                                            |  |                                                     |            |      |   |           
|Weighted average common shares outstanding                  |  |                                                     | 27,331,945 |      |   | 27,872,523
|Effect of dilutive securities:                              |  |                                                     |            |      |   |           
|Options                                                     |  |                                                     | 1,811,533  |      |   | 3,063,153 
|                                                            |  |                                                     |            |      |   |           
|Weighted average common and potential shares outstanding    |  |                                                     | 29,143,478 |      |   | 30,935,676
|                                                            |  |                                                     |            |      |   |           
|Basic earnings per share                                    |  | $                                                   | 0.17       |      | $ | 0.35      
|                                                            |  |                                                     |            |      |   |           
|Diluted earnings per share                                  |  | $                                                   | 0.16       |      | $ | 0.32      
|                                                            |  |                                                     |            |      |   |           



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)





|                                                            |  |                                                     |            |      |   |           
|----------------------------------------------------------- |  | --------------------------------------------------- | ---------- | ---- | - | ----------
|                                                            |  | Nine Months Ended June 30,                         
|                                                            |  | 2005                                                |            | 2004
|                                                            |  | (In thousands, except shares and per-share amounts)
|Income available to common stockholders  basic and diluted |  | $                                                   | 14,785     |      | $ | 25,606    
|                                                            |  |                                                     |            |      |   |           
|Weighted average common shares outstanding                  |  |                                                     | 27,734,915 |      |   | 27,286,216
|Effect of dilutive securities:                              |  |                                                     |            |      |   |           
|Options                                                     |  |                                                     | 1,988,042  |      |   | 3,465,999 
|                                                            |  |                                                     |            |      |   |           
|Weighted average common and potential shares outstanding    |  |                                                     | 29,722,957 |      |   | 30,752,215
|                                                            |  |                                                     |            |      |   |           
|Basic earnings per share                                    |  | $                                                   | 0.53       |      | $ | 0.94      
|                                                            |  |                                                     |            |      |   |           
|Diluted earnings per share                                  |  | $                                                   | 0.50       |      | $ | 0.83      
|                                                            |  |                                                     |            |      |   |           



At June 30, 2005 and 2004, options to
purchase 1,152,500 and 225,000 shares, respectively, of Common Stock at exercise prices ranging from $10.11 to $21.53 per share, and $11.79 to $15.47 per share, respectively, were outstanding, but were not included in the computation of diluted
earnings per share due to their antidilutive effect.



Stock-Based
Compensation. The Company applies Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, or APB 25, in accounting for its stock option plans, rather than the alternative fair value accounting
provided under SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, no compensation expense is recognized for grants of options to common-law employees and directors at an exercise price equal to or greater than the
market price of the stock on the date of grant. Accordingly, based on the Companys grants in the three and nine months ended June 30, 2005 and 2004, no compensation expense has been recognized.



Pro forma information regarding net income and earnings per share under the alternative fair
value accounting is required by SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. For purposes of pro forma disclosures, the estimated fair value of the options granted is
amortized to expense over the options vesting period. Had the Company determined compensation expense for stock option grants based on their estimated fair value on their grant date, the Companys net income and earnings per share would
have been as follows:



|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | - | -------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                  |  | Three Months Ended June 30,              |       |   | Nine Months Ended June 30, |  
|                                                                                                                                  |  | 2005                                     |       |   | 2004                       |   |       | 2005 |  |   | 2004   |  
|                                                                                                                                  |  | (In thousands, except per-share amounts) |      
|Net income:                                                                                                                       |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                       |  | $                                        | 4,550 |   |                            | $ | 9,836 |      |  | $ | 14,785 |   |  | $ | 25,606 |  
|Deduct: Estimated stock-based employee compensation determined under fair value method for all awards, net of related tax
benefit |  |                                          | (718  | ) |                            |   | (815  | )    |  |   | (2,337 | ) |  |   | (3,993 | )
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                         |  | $                                        | 3,832 |   |                            | $ | 9,021 |      |  | $ | 12,448 |   |  | $ | 21,613 |  
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Basic earnings per common share:                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                       |  | $                                        | 0.17  |   |                            | $ | 0.35  |      |  | $ | 0.53   |   |  | $ | 0.94   |  
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                         |  | $                                        | 0.14  |   |                            | $ | 0.32  |      |  | $ | 0.45   |   |  | $ | 0.79   |  
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Diluted earnings per common share:                                                                                                |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                       |  | $                                        | 0.16  |   |                            | $ | 0.32  |      |  | $ | 0.50   |   |  | $ | 0.83   |  
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                         |  | $                                        | 0.13  |   |                            | $ | 0.29  |      |  | $ | 0.42   |   |  | $ | 0.70   |  
|                                                                                                                                  |  |                                          |       |   |                            |   |       |      |  |   |        |   |  |   |        |  



2. COMMITMENTS AND CONTINGENCIES



Litigation



General.The Company is subject to federal, state and Native American laws and
regulations that affect both its general commercial relationships with its Native American tribal customers as well as the products and services provided to them. The following is only a summary of the more material aspects of these laws and
regulations, and is not a complete recitation of all applicable law.



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



Development Agreements. On April 23, 2004, the Company reported that the Acting General Counsel of the
National Indian Gaming Commission, or NIGC, had issued a letter to the Company and one of its tribal customers opining that its development agreement regarding the WinStar Casino in Thackerville, Oklahoma constitutes a management
contract. The authority of the NIGC to review and approve gaming related contracts is limited to management contracts and related collateral agreements. According to the Acting General Counsel, the performance of any planning, organizing,
directing, coordinating or controlling with respect to any part of a gaming operation constitutes management for purposes of determining whether an agreement for any of these activities is a management contract. The Company has expressed
its disagreement with the Acting General Counsels interpretation, and its belief that her view of management is broader than was intended by Congress. The Company also believes that the Acting General Counsels opinion may be
based in part on collateral agreements that were provided to the NIGC in error and that are not presently in effect.



On December 1, 2004 the Company received a series of letters from the NIGC expressing the Commissions concern that certain of its agreements violate the
requirements of the Indian Gaming Regulatory Act of 1988, or IGRA, and tribal gaming regulations which state that the Native American tribes hold the sole proprietary interest in the tribes gaming operations. In particular, the
NIGC is concerned that the Companys development agreements, whereby it advances development funds to its tribal customers in exchange for allocated floor space and a share of gaming revenue, create a proprietary interest of the
Companys in the tribes gaming operations. As a result of its concern, the NIGC has requested that the Company and its tribal customers provide a written justification for the percentage of shared revenue specified in the subject
agreements, which, in the view of the NIGC, exceeds the level permissible under a management agreement. The NIGC has also asked that the Company and its tribal customers provide an explanation why these arrangements do not result in the Company
holding a proprietary interest in its tribal customers gaming operations. In addition, on December 1, 2004, the Company received a letter from the NIGC expressing the Commissions concern that an Integrated Electronic Gaming Services
Agreement with one of the Companys customers, dated January 2000 and covering one of its Legacy games, constituted a management agreement. According to the Acting General Counsel, the performance of any planning, organizing, directing,
coordinating or controlling, with respect to any part of a gaming operation, constitutes management for purposes of determining whether an agreement is a management contract, which requires NIGC approval.



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



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



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



Diamond Games.The Company
is a defendant in a lawsuit filed on November 16, 2004, in the State Court in Oklahoma City, Oklahoma alleging four causes of action: 1) Deceptive Trade Practices, 2) Unfair Competition; 3) Wrongful Interference with Diamond Games, Inc.s
Business; and 4) Restraint of Trade. All of the theories of recovery arise out of Oklahoma State law. The Company removed the case from the state court to the United States District Court for the Western District of Oklahoma. Diamond Games filed a
motion and the case was remanded back to state court. The Company filed a motion to dismiss the case. The motion is still pending. The essence of the case alleges that the Company offered MegaNanza® and Reel Time Bingo® to tribes in Oklahoma, even though they were both allegedly illegal Class III games
which had a severe negative impact on Diamond Games market for their legal pull-tab game, Lucky Tab II. Also, the case alleges that the Companys development agreements unfairly interfere with their ability to successfully conduct their
business. Diamond Games is seeking unspecified damages and injunctive relief; however, the Company believes the claims of Diamond Games are without merit and intends to defend the case vigorously.



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



International Gamco, Inc.International Gamco, Inc., or Gamco, claiming certain rights in United States
Patent No. 5,324,035, or the 035 Patent, brought suit on May 25, 2004 against the Company in the United States District Court for the Southern District of California, claiming that the Companys central determinant system, as operated in
the New York State Lottery, infringes the 035 Patent. The Company currently sublicenses the right to practice the technology stated in the 035 Patent in Native American gaming jurisdictions in the United States, pursuant to an agreement
between it and Bally Gaming, Inc. Bally obtained the right to sublicense those rights to the Company from Oasis Technologies, Inc., or Oasis, a previous owner of the 035 Patent.



In the event that the Company desires to expand its rights beyond Native American gaming, the agreement provides the Company the option: 1)
to pursue legal remedies to establish its rights independent of the 035 Patent; or 2) to negotiate directly and enter into a separate agreement with Oasis for such rights, paying either a one-time license fee per jurisdiction or a unit fee per
gaming machine. Gamco claims to have acquired ownership of Oasis rights to the 035 Patent.



Prior to deployment of its central determinant system in New York, the Company undertook an analysis of the patent issues to determine whether or not its central determinant system infringed the claims of the
035 Patent. The Company determined that it did not infringe. Although continuing to assert that it did not infringe, the Company offered to enter into a license agreement with Gamco, who refused the offer and filed its complaint seeking
injunctive relief, unspecified damages, and attorneys fees. The Company intends to vigorously defend this matter. The Court has announced that it will issue a show cause order requiring Gamco to show cause why the suit should not be dismissed
due to Gamcos lack of standing. Given the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.



Aristocrat Technologies, Inc. Aristocrat Technologies, Inc has sued the Company in Cause No. CV05-0679 FMC, in the United States District Court, Central
District of California, alleging that the Companys deployment of its networked central-determinant instant lottery game infringes U.S. Letters Patent No. 4,817,951, entitled Player Operable Lottery Machine Having Display Means Displaying
Combination of Game Result Indicia (the 951 Patent). Aristocrat seeks an injunction, damages for infringement, and a trebling of damages for willful infringement. Preliminary research indicates that the Company does not infringe
the 951 Patent. Aristocrat filed this suit on January 27, 2005, and served the Company on May 27, 2005. The Company has answered and intends to vigorously defend this matter. Given the inherent uncertainties in any litigation, the Company is unable
to make any prediction as to the outcome.



HomeBingo Network,
Inc. HomeBingo Network, Inc. has sued the Company and the gaming entity of the Miami Tribe of Oklahoma in Cause No. 05-CV-0608, in the United States District Court, Northern District of New York, alleging that the Companys deployment
of Reel Time Bingo and other bingo games infringes U.S. Letters Patent No. 6,186,892, entitled Bingo Game for use on the Interactive Communication Network which Relies upon Probabilities for Winning. HomeBingo seeks an injunction,
damages in the amount of a reasonable royalty, and a trebling of damages for willful infringement. The Company received no demand or prior indication that this suit was going to be filed. The Company intends to vigorously defend this matter. Given
the inherent uncertainties in any litigation, the Company is unable to make any prediction as to the outcome.



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



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MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



Development Agreements



As of June 30, 2005, the Company had entered into development agreements to provide up to $138.2 million towards the construction and/or
remodeling of tribal gaming facilities, and had advanced $92.0 million under these agreements. In exchange for a certain amount of the funds advanced under the development agreement, the Company receives a fixed number of player terminal placements
in the facility. A portion of the hold per day generated by these player terminals is used to repay the construction advance. Consequently, the payback period is dependent on the hold per day generated by the Companys player terminals. The
Company is in various stages of discussion with new and existing customers to provide funding for similar opportunities under joint development agreements.



Off Balance Sheet Arrangements



As of June 30, 2005, the Company had $1.0 million in outstanding letters of credit issued under the Revolver to guarantee its performance under certain contracts.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



We are a supplier of complex, mission-critical systems to the gaming segment of the entertainment industry. We design and develop linked, interactive, electronic gaming systems and related products that provide our
customers with a comprehensive gaming system. Our products are marketed primarily to operators of Native American, charity and commercial gaming facilities, and to operators and/or regulators of domestic and international lotteries. Historically, we
have focused our development and marketing efforts on Class II gaming systems and Class III video lottery systems used primarily by Native American tribes. We have recently focused our marketing efforts on the emerging charity markets in the U.S.,
and on domestic and international lottery jurisdictions.



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



Class II
Market



We derive our Class II gaming revenues primarily from
participation arrangements with our Native American customers. Under participation arrangements, we retain ownership of the player terminals and gaming equipment installed at our customers tribal gaming facilities, and receive revenue based on
a percentage of the hold per day generated by each gaming system. Our portion of the hold per day is reported by us as Gaming revenue  Class II, and represents the total amount that end users wager, less the total amount paid to
end users for prizes, and the amounts retained by the facilities for their share of the hold. Our historical revenue growth is a reflection of the increase in our installed base of player terminals in the Class II market, and the technological
advances we have developed and implemented.



Our New Generation gaming system
operates at a speed considerably faster than our Legacy system, generally resulting in end users playing a greater number of games on our New Generation system in the same amount of time. As a result of the faster speed of play and higher payout
ratios, we believe that end users derive a higher level of satisfaction from playing our New Generation games. We believe that this enhanced satisfaction results in end users playing more games and for longer periods of time than on our Legacy
system, resulting in higher play on our New Generation system. In November 2003, we introduced and began deploying our Gen4 back-office system, which enables us to produce games with bonus rounds and wide-area progressives, provides more end-user
enjoyment and also provides better networking capabilities among gaming systems. Furthermore, our Gen4 gaming system allows us to operate multiple gaming engines within a single facility. This will be especially beneficial in certain Oklahoma
facilities where the operators have decided to continue offering Class II games after they begin offering the new Class III games that are permitted under the tribal-state compact.



As the market grows, and the rules and regulations governing Class II gaming are clarified by court decisions and by improved rule-making
procedures, we believe new competitors with significant gaming experience and financial resources will enter the Class II market. New tribal-state compacts, such as the Oklahoma gaming legislation, may also lead to increased competition from such
competitors. In addition, we are experiencing an extended period of uncertainty relative to enforcement of existing restrictions on non-Class II devices, which is forcing us to continue competing against games that do not appear to comply with the
published regulatory restrictions on Class II games. As a result of this increased competition in Oklahoma, we have and may continue to experience pressure on our pricing model, with the result that gaming providers are competing on the basis of
price as well as the entertainment value and technological superiority of their products. While we will continue to compete by regularly introducing new and more entertaining games with technological enhancements that we believe will appeal to end
users, we believe that the level of revenue retained by our customers from their installed base of player terminals will become a more significant competitive factor, one that may require us to change the terms of our participation arrangements with
customers. Consequently, we believe that a simple business model based upon the average hold per player terminal per day will become less relevant in predicting our performance, as our participation arrangements with customers become less
standardized and more complex.



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Class III Market



The majority of our Class III POSTs in Washington State have been sold to customers outright, for a one-time purchase price, and are
reported in our results of operations as Player terminal and license sale and lease revenue. Certain game themes we use in the Class III market have been licensed from third parties and are resold to customers along with our Class III
POSTs. Revenues from the sale of Class III POSTs and the sale of terminal licenses are recognized when the units are delivered to the customer, and the licensed games installed. To a considerably lesser extent, we also enter into either
participation arrangements or lease-purchase arrangements for our Class III POSTs, on terms similar to those used for our gaming systems in the Class II market.



We also receive back-office fees based on a share of the hold per day from both leased and sold POSTs 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.



In December 2003, we installed POSTs for our new Tribal Instant Lottery Game, or TILG, in California. TILG is a one-touch game based on a simulated scratch-off lottery
ticket, and employs our central determinant system technology. In January 2005, we removed all of the deployed TILG POSTs and redeployed a significant number of these original placements as Reel Time Bingo.



In May 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming
at racetracks, and additional types of games at tribal gaming facilities, pursuant to a tribal-state compact. This legislation was subject to approval in a statewide referendum, which was subsequently obtained in the November 2004 elections. The
Oklahoma gaming legislation allows the tribes to sign a compact with the State of Oklahoma to operate an unlimited number of electronic instant bingo games, electronic bonanza-style bingo games, electronic amusement games and
non-house-banked tournament card games. In addition, certain horse tracks in Oklahoma will be allowed to operate a limited number of instant and bonanza-style bingo games and electronic amusement games. On March 30, 2005, our
bonanza-style bingo games became the first such games played in the state. As of June 30, we had placed more than 900 player terminals, to be operated under the compact, at ten facilities; approximately 750 were bonanza-style
games, and the remainder were amusement games, including re-spin and poker titles.



Charity and Commercial Bingo Market



In December 2003, we began installing our first electronic bingo player terminals for the charity market in Alabama. In addition, during July 2004, we began installing player terminals in the Louisiana charity market.



State Video Lottery Market



In January 2004, we began the first operation of our central determinant system for the
video lottery terminal network that the New York Lottery operates at licensed New York State racino racetracks. As payment for providing and maintaining the central determinant system, we receive a small portion of the network-wide hold
per day.



Development Agreements



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



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



In return for the amounts advanced by us, we received a commitment for a fixed number of player terminal placements in the facility, and a fixed percentage of the hold
per day from those units over the term of the agreement. Certain of the agreements contain performance standards for our player terminals that could allow the facility to reduce a portion of our player terminals. To date, we have entered into
development agreements for an



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##### Table of Contents

aggregate commitment to advance approximately $138.2 million. As of June 30, 2005, we had advanced a total of $92.0 million under such agreements and expect
to advance the remaining $46.2 million over the next twelve months.



We are in
various stages of discussion with new and existing tribal customers to provide funding for similar opportunities under additional development agreements.



Research and Development



Research and development activities primarily relate to the development of new gaming systems, gaming engines, player tracking systems, casino data management systems,
central video lottery systems, gaming platforms and content, and enhancements to our existing product lines. Research and development costs consist primarily of salaries and benefits, consulting fees, and an allocation of corporate facilities costs
related to these activities. Once the technological feasibility of a project has been established, the project is transferred from research to development, and capitalization begins.



Research and development expenses increased by 38.1% to $4.4 million for the three months ended June 30, 2005, from $3.2 million for the
comparable period in the prior fiscal year. For the nine months ended June 30, 2005, research and development expenses increased by 42.8% to $12.7 million from $8.9 million for the same period of 2004. This increase primarily resulted from an
increased headcount in our development group as we have focused our internal efforts on developing new gaming systems and game themes. We expect our research and development expenses to grow over the upcoming periods as we continue focusing on
product development and adding development staff.



Recent Developments



Oklahoma Tribal-State Compact.In May 2004, the Oklahoma
Legislature passed legislation authorizing certain forms of gaming at racetracks, and additional types of games at tribal gaming facilities, pursuant to a tribal-state compact. This legislation was subject to approval in a statewide referendum,
which was subsequently obtained in the November 2004 elections. The Oklahoma gaming legislation allows the tribes to sign a compact with the State of Oklahoma to operate an unlimited number of electronic instant bingo games, electronic
bonanza-style bingo games, electronic amusement games and non-house-banked tournament card games. In addition, certain horse tracks in Oklahoma will be allowed to operate a limited number of instant and
bonanza-style bingo games and electronic amusement games. All vendors placing games at any of the racetracks under the compact will ultimately be required to be licensed by the State of Oklahoma. Pursuant to the compacts,
vendors placing games at tribal facilities will have to be licensed by each tribe. All electronic games placed under the compact will have to be certified by independent testing laboratories to meet technical specifications. These were published by
the Oklahoma Horse Racing Commission and the individual tribal gaming authorities in the first calendar quarter of 2005.



We believe the recently adopted Oklahoma legislation significantly clarifies and expands the types of gaming permitted by Native America tribes in that state. We expect
continued intensified competition from vendors currently operating in Oklahoma, as well as new market entrants. As a result, we anticipate further pressure on our market and revenue share percentages in Oklahoma. In addition, in the immediate
future, we expect continued regulatory uncertainty in Oklahoma. In particular, although we and other vendors have begun to offer games enabled by the new legislation, the compacted tribes regulatory processes and specifications timetable
varies from tribe to tribe. Certain other vendors and tribes may begin to offer new games prior to the time that the state or individual tribes have the regulatory and licensing in place. It is unclear what, if any, regulatory enforcement action
could or would be taken against tribes and vendors offering games not authorized by existing law but permitted under the newly adopted, but not yet effective, legislation.



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



NIGC. On April 23, 2004, we reported that the Acting General Counsel of the
National Indian Gaming Commission, or NIGC, had issued a letter to us and one of our tribal customers opining that our development agreement regarding the WinStar Casino in Thackerville, Oklahoma constitutes a management contract. The
authority of the NIGC to review and approve gaming-related contracts is limited to management contracts and related collateral agreements.



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According to the Acting General Counsel, the performance of any planning, organizing, directing, coordinating or
controlling with respect to any part of a gaming operation constitutes management for purposes of determining whether an agreement for any of these activities is a management contract. We have expressed our disagreement with the Acting
General Counsels interpretation, and our belief that her view of management is broader than was intended by Congress. We also believe that the Acting General Counsels opinion may be based, in part, on collateral agreements that we
provided to the NIGC in error and that are not presently in effect. We, along with certain tribal customers, have submitted additional information and documents related to our development agreements for review by the NIGC. If certain of our
development agreements are finally determined to be management contracts, there could be material adverse consequences for us. In that event, we may be required to modify the terms of such agreements. Such modification may adversely affect the terms
on which we conduct business, and significantly impact our financial condition and results of operations from such agreements and from other development agreements that may be similarly interpreted by the NIGC.



On December 1, 2004, we received a series of letters from the NIGC expressing the
Commissions concern that certain of our agreements violate the requirements of the Indian Gaming Regulatory Act of 1988, or IGRA, and tribal gaming regulations that the Native American tribe hold the sole proprietary interest in
the tribes gaming operations. In particular, the NIGC is concerned that our development agreements, whereby we advance development funds to our tribal customers in exchange for allocated floor space and a share of gaming revenue, give us a
proprietary interest in the tribes gaming operations. As a result of its concern, the NIGC has requested that we and our tribal customers provide a written justification for the percentage of shared revenue specified in the subject
agreements, which in the view of the NIGC exceeds the level permissible under a management agreement, and is evidence of our proprietary interest. The NIGC has also asked that we and our tribal customers provide an explanation why our arrangements
do not result in our holding a proprietary interest in our tribal customers gaming operations.



Also, on December 1, 2004, we received a letter from the NIGC expressing the Commissions concern that our January 2000 Integrated Electronic Gaming Services Agreement with one of our customers, covering one of
our Legacy games, constituted a management agreement. According to the Acting General Counsel, the performance of any planning, organizing, directing, coordinating or controlling, with respect to any part of a gaming operation, constitutes
management for purposes of determining whether an agreement is a management contract, which requires NIGC approval.



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



Our contracts could be subject to further review at any time. Any further review of these agreements by the NIGC, or alternative
interpretations of applicable laws and regulations could require substantial modifications to those agreements or result in their redesignation as management contracts, which could materially and adversely affect the terms on which we
conduct business.



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RESULTS OF OPERATIONS



The following tables outline our end-of-period and average installed base of gaming terminals for the three and nine months ended June 30, 2005 and 2004:



|                                              |  |                |  |      
|--------------------------------------------- |  | -------------- |  | -----
|                                              |  | As of June 30,
|                                              |  | 2005           |  | 2004 
|End-of-period installed gaming terminal base: |  |                |  |      
|Class II player terminals                     |  |                |  |      
|Reel Time Bingo                               |  | 9,157          |  | 8,686
|MegaNanza                                     |  |               |  |     
|                                              |  |                |  |      
|New Generation system                         |  | 9,157          |  | 8,686
|Legacy system                                 |  | 558            |  | 1,009
|Oklahoma compacted games                      |  | 938            |  |     
|Other player terminals and POSTs              |  | 2,628          |  | 1,996



|                                        |  |                            |  |                           |  |       |  |      
|--------------------------------------- |  | -------------------------- |  | ------------------------- |  | ----- |  | -----
|                                        |  | Three Months EndedJune 30, |  | Nine Months EndedJune 30,
|                                        |  | 2005                       |  | 2004                      |  | 2005  |  | 2004 
|Average installed gaming terminal base: |  |                            |  |                           |  |       |  |      
|Class II player terminals               |  |                            |  |                           |  |       |  |      
|Reel Time Bingo                         |  | 9,905                      |  | 8,793                     |  | 9,730 |  | 8,752
|MegaNanza                               |  |                           |  |                          |  |      |  | 27   
|                                        |  |                            |  |                           |  |       |  |      
|New Generation system                   |  | 9,905                      |  | 8,793                     |  | 9,730 |  | 8,779
|Legacy system                           |  | 587                        |  | 1,124                     |  | 691   |  | 1,255
|Oklahoma compacted games                |  | 531                        |  |                          |  | 222   |  |     
|Other player terminals and POSTs        |  | 2,518                      |  | 1,639                     |  | 3,760 |  | 923  



Reclassifications



Certain reclassifications were made to the prior periods financial statements to
conform to the current period financial statement presentation. These reclassifications did not have an impact on our previously reported net income.



Historically, we entered into certain agreements with our tribal customers that, among other things, guaranteed certain prize payouts. These were based upon attaining an
assumed level of gross game receipts and upon statistical assumptions as to the frequency of winners; the agreements required customers to deposit a fixed percentage of gross gaming receipts in a depository account we controlled. We used the
depository account to reimburse prizes, prize fulfillment fees, insurance payments and bank fees. In these instances, we were essentially acting as a bank by managing prizes across multiple facilities on our network of electronic player
terminals. Based on our role as a bank, we historically considered our role more as a principal than an agent, and reported the hold per day generated from our player terminals as revenue, and deducted amounts paid to or retained by
facilities as Allotments to facility operators. The vast majority of these arrangements have gone away over the past few years, prompting us to evaluate our revenue presentation.



Our current gaming arrangements typically do not guarantee prize payout levels, and require
that only our share of the hold per day be remitted to us. Management has determined the net amounts remitted by customers should be reported as revenue, and not presented on a gross basis. As a result, we have presented our current period revenues
in accordance with this policy, and reclassified Allotments to facility operators for the three and nine months ended June 30, 2004 to conform to the current period presentation.



Three Months Ended June 30, 2005, Compared to Three Months Ended June 30, 2004



Total revenues for the three months ended June 30, 2005 were $37.1
million compared to $36.9 million for the same period of 2004. The increase in revenues was primarily driven by an increase in the installed base of player terminals in the charity market, offset by a decrease in Class II and other gaming revenues.



Gaming Revenue  Class II



| |  |  | Class II gaming revenues decreased by $852,000, or 3%, from $29.0 million in the three months ended June 30, 2004, to $28.2 million in the three months ended June 30, 2005, due
primarily to a decrease in the installed base of Legacy player terminals.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Reel Time Bingo revenues were $27.3 million for the quarter ended June 30, 2005, compared to $27.2 million in the quarter ended June 30, 2004. This slight increase in revenues
resulted from a greater average installed base of player terminals, a portion of which were attributable to conversions from TILG, and was partially offset by the lower average hold per day experienced on the Reel Time Bingo network.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gaming Revenue  Charity



| |  |  | Charity gaming revenues increased 54%, to $4.6 million for the June 2005 quarter, compared to $3.0 million for the same quarter of 2004. The increase relates to the greater number
of player terminals installed in the three months ended June 30, 2005, compared to the same period in 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of June 30, 2005, we had an installed player terminal base of 2,628 units in the charity market, compared to 1,479 units in the prior year. The increase primarily relates to
placements in Alabama.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gaming Revenue  All
Other



| |  |  | Class III rental and back-office fees increased 27%, to $1.5 million in the three months ended June 30, 2005, from $1.2 million during the same period of 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other recurring gaming revenue generated from TILG, and to a lesser degree, from the central determinant system for the New York Lottery, decreased to $565,000 for the quarter ended
June 30, 2005, compared to $2.2 million in same quarter of 2004. The decrease relates to the fiscal 2005 second-quarter conversion of TILG POSTs to Reel Time Bingo.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We began generating revenues from the central determinant system for the New York Lottery in January 2004. Currently, five of the eight planned racinos are operating,
with approximately 5,600 total POSTs. To date, we have realized substantially less revenue than anticipated from our New York Lottery operations, in significant part due to delays in the opening of planned racino operations at several
racetracks. We are nevertheless required to incur ongoing expenses associated with development and maintenance of the New York video lottery system, and we do not currently expect to have profitable operations there at least through 2005. Delays in
the anticipated development of the New York video lottery system and other emerging market opportunities may continue to adversely impact our revenue and operating results.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Player Terminal and License Sale and Lease Revenue



| |  |  | Player terminal and license sale and lease revenue increased to $957,000, from $805,000 in the same period of 2004. During the quarter ended June 30, 2005, eight video lottery
terminals were sold, compared to 30 sold in the same quarter of fiscal 2004, resulting in $124,000 in player terminal revenue. In the third quarter of fiscal 2005, player terminal revenue of $281,000 was recognized ratably, based on the contract
term. The release of a new type of game theme in the current quarter resulted in an increase in license sales, from $488,000 in the quarter ended June 30, 2004, to $552,000 in the quarter ended June 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other revenue, which consisted primarily of service and maintenance fees, decreased 23%, to
$565,000 for the three months ended June 30, 2005, from $740,000 in the same period of 2004. The decrease is due to the rental of temporary facilities during fiscal 2004, which have since been discontinued.



Cost of player terminal and licenses sold increased to $787,000 for the three months ended
June 30, 2005, from $666,000 in the same period of 2004. The increase relates to increased sales of player terminals and ancillary equipment and licenses during the third quarter of 2005, compared to the same period in 2004.



Selling, general and administrative expenses increased to $14.1 million for the three months
ended June 30, 2005, from $13.0 million in the same period of 2004. The increase continues to reflect higher salaries and wages and the related employee benefits and taxes, which increased approximately $2.3 million, due to the additional personnel
hired to develop our gaming systems and content, and to monitor and develop proposals to address opportunities in both domestic and international markets. At June 30, 2005, we employed 451 full-time and part-time employees, compared to 414 at June
30, 2004. Consulting and contract labor decreased $368,000, due to decreased commissions in the California TILG market. Legal, professional and lobbying fees increased approximately $563,000, primarily as a result of increased legal and professional
services related to our research of new products, entry into new markets and Sarbanes-Oxley consulting costs. Advertising and promotion expense decreased $408,000, due to the entrance into new markets early in fiscal 2004. Repairs and maintenance,
transportation, and related cost decreased by $619,000, because installation costs related to large charity installations were included in the three months ended June 30, 2004. Bad debt expense decreased $394,000, as certain accounts receivable,
previously reserved for, were recovered.



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Depreciation expense increased 48%, to $13.4 million for the three months ended June 30, 2005, from $9.1 million in 2004,
primarily as a result of a 10.7% increase in the installed base of terminals under participation arrangements. Amortization expense increased to $1.2 million for the quarter ended June 2005, compared to $706,000 for the same quarter of 2004. The
majority of the increase was related to amortization of license agreements for gaming content and internally developed software.



Interest income increased to $608,000 for the three months ended June 30, 2005, from $178,000 in the same period of 2004, due to the higher balance of notes receivable
bearing variable interest rates.



Interest expense increased 57%, to $675,000
for the third fiscal quarter of 2005, from $429,000 for the same quarter of fiscal 2004, due primarily to an increase in amounts outstanding under our Credit Facility. As we continue to fund our capital commitments pursuant to our development
agreements and otherwise, we will likely be required to borrow more money under our Credit Facility. As a result, our interest expense will likely continue to increase in the future.



Income tax expense decreased to $3.0 million for the three months ended June 30, 2005, from $3.5 million in the same period of 2004. These
figures represent effective tax rates of 40.2% and 26.0% for the three months ended June 30, 2005 and 2004, respectively. Income tax expense for the June 30, 2004 quarter includes a benefit of approximately $1.7 million, relating to an over-accrual
from prior years state and federal income tax provision, which resulted in a lower-than-expected effective rate. The higher-than-expected effective rate in the June 30, 2005 quarter was the result of higher-than-normal non-deductible lobbying
expenses.



Nine Months Ended June 30, 2005, Compared to Nine Months Ended
June 30, 2004



Total revenues for the nine months ended June 30, 2005 were
$116.4 million, compared to $111.0 million for the same period in fiscal 2004, a 5% increase. The increase in revenues primarily resulted from an increase in the installed base of player terminals in the charity market. This increase was offset by a
decrease in player terminal and license sale and lease revenue, as the nine months ended June 30, 2004 results benefited from the sale of 487 player terminals, compared to the sale of 51 player terminals in the same period of 2005.



Gaming Revenue  Class II



| |  |  | Class II gaming revenues decreased by $2.4 million, or 3%, from $89.5 million in the nine months ended June 30, 2004, to $87.1 million in the nine months ended June 30, 2005, due
primarily to a decrease in the average installed base of Legacy player terminals.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New Generation system revenues, which include Reel Time Bingo and MegaNanza games, were $83.7 million for the nine months ended June 30, 2005, compared to $83.3 million in the same
period of fiscal 2004. This increase was related to the greater average installed base of player terminals and was partially offset by the lower average hold per day.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gaming Revenue  Charity



| |  |  | Charity gaming revenues increased $9.2 million to $14.7 million for the nine months ended June 30, 2005, compared to $5.5 million for the same period of 2004. The increase relates
to the greater number of player terminals installed in the nine months ended June 30, 2005 when compared to the same period of 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gaming Revenue  All Other



| |  |  | Class III rental and back-office fees increased 11% to $4.2 million, in the nine months ended June 30, 2005, from $3.8 million during the same period of 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other recurring gaming revenue generated from TILG, and to a lesser degree, from the central determinant system for the New York Lottery, increased to $5.2 million for the nine
months ended June 30, 2005, compared to $3.5 million in same period of 2004. The increase relates to our launch of TILG and the New York lottery system late in the first quarter of fiscal 2004. During the second quarter of 2005, TILG POSTs were
converted to Reel Time Bingo.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We began generating revenues from the central determinant system for the New York Lottery in January 2004. Currently, five of the eight planned racinos
are operating, with approximately 5,600 total
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | POSTs. To date, we have realized substantially less revenue than anticipated from our New York Lottery operations, in significant part due to delays in the
opening of planned racino operations at several racetracks. We are nevertheless required to incur ongoing expenses associated with development and maintenance of the New York video lottery system, and we do not currently expect to have
profitable operations there at least through 2005. Delays in the anticipated development of the New York video lottery system and other emerging market opportunities may continue to adversely impact our revenue and operating results.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Player Terminal and License Sale and Lease
Revenue



| |  |  | Player terminal and license sale and lease revenue decreased to $2.8 million, from $7.2 million in the same period of 2004. During the nine months ended June 30, 2005, 51 video
lottery terminals were sold, compared to 487 in the same period of fiscal 2004, resulting in $494,000 and $4.8 million, respectively, in player terminal revenue. Player terminal revenue of $844,000 was recognized ratably in the nine months ended
June 30, 2005, based on the contract term. The fewer number of video lottery terminals sold in the current period resulted in a decrease in license sales from $1.9 million to $1.4 million in the nine months ended June 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other revenue, which consisted primarily of service and
maintenance fees, remained relatively constant at $1.6 million. The slight increase was due to the greater number of player terminals in service, and service contract income related to video lottery terminals in the Sate of Washington.



Cost of player terminal and licenses sold decreased to $2.6 million for the nine months
ended June 30, 2005, from $4.2 million in the same period of 2004. The decrease relates to reduced sales of player terminals and ancillary equipment and licenses during the third quarter of 2005, compared to the same period in 2004.



Selling, general and administrative expenses increased 11%, to $46.5 million for the nine
months ended June 30, 2005, from $41.8 million in the same period of 2004. The increase continues to reflect higher salaries and wages and the related employee benefits and taxes, which increased approximately $3.1 million, due to the additional
personnel hired to develop our gaming systems and content, and to monitor and develop proposals to address opportunities in both domestic and international markets. At June 30, 2005, we employed 451 full-time and part-time employees, compared to 414
at June 30, 2004. The decreased number of player terminal installations decreased repairs and maintenance, and transportation and related costs by $372,000. Consulting and contract labor increased $1.1 million, due to commissions and the large
first-quarter deployment of player terminals in the California TILG market. Legal, professional and lobbying fees increased approximately $1.7 million, primarily as a result of increased legal and professional services related to our research of new
products, entry into new markets and Sarbanes-Oxley consulting costs. Advertising and promotion decreased $1.5 million, due to the entrance into new markets in early fiscal 2004. Bad debt expense decreased $209,000, as certain accounts receivable,
previously reserved for, were recovered.



Depreciation expense increased 61%,
to $39.5 million for the nine months ended June 30, 2005, from $24.5 million in 2004, primarily as a result of a 10.7% increase in the installed base of terminals under participation arrangements. Amortization expense increased to $3.1 million for
the quarter ended June 2005, compared to $1.7 million for the same quarter of 2004. The majority of the increase was related to amortization of license agreements for gaming content and internally developed software.



Interest income increased 54%, to $1.4 million for the nine months ended June 30, 2005, from
$906,000 in the same period of 2004, due to the higher balance of notes receivable bearing variable interest rates.



Interest expense increased 77%, to $1.9 million for the nine months ended June 30, 2005, from $1.1 million for the same quarter of fiscal 2004, due primarily to an
increase in amounts outstanding under our Credit Facility. As we continue to fund our capital commitments pursuant to our development agreements and otherwise, we will likely be required to borrow more money under our Credit Facility. As a result,
our interest expense will likely continue to increase in the future.



Income
tax expense decreased to $9.3 million for the nine months ended June 30, 2005, from $13.0 million in the same period of 2004. These figures represent effective tax rates of 38.7% and 33.7% for the nine months ended June 30, 2005 and 2004,
respectively. Income tax expense for the nine months ended June 30, 2004, includes a benefit of approximately $1.7 million relating to an over-accrual from prior years state and federal income tax provision.



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RECENT ACCOUNTING PRONOUNCEMENTS ISSUE



In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123
(revised 2004), Share-Based Payment. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements, including
share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees.



Statement 123, as originally
issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long
as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R)
as of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule that amended the required application date of 123(R) from interim or annual reporting periods
beginning after June 15, 2005, to the beginning of the entities next fiscal year. We are currently evaluating the effect adoption of SFAS 123 (R) will have on our overall results of operations and financial position.



In March 2005, the FASB issued FASB Interpretation, or FIN, No. 47, Accounting for
Conditional Asset Retirement Obligations. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation of
an entity to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Such an obligation to perform the asset retirement activity
is unconditional, even though uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application for interim financial information is permitted but is not required. We are currently
assessing the effect adoption of FIN No. 47 will have on our overall results of operations and financial position.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3, which
changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principles and also to changes required by an accounting pronouncement that does not
contain specific transition provisions. SFAS NO. 154 carries forward without change the guidance contained in APB Opinion No. 20, Accounting Changes, for reporting the correction of an error in previously issued financial statements and a change in
accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We will be adopting SFAS No. 154, effective January 1, 2006. SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements.



CRITICAL
ACCOUNTING POLICIES



We prepare our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America. 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:



Revenue Recognition.Revenues from the sale of player terminals, player terminal licenses and license of gaming systems are generally accounted for under
Staff Accounting Bulletin 104, Revenue Recognition, or SAB 104, Statement of Position 97-2 Software Revenue Recognition, or SOP 97-2, or Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with
Multiple Deliverables, or EITF 00-21. In accordance with the provisions of SAB 104, SOP 97-2 and EITF 00-21, sales that are considered to contain multiple deliverables are bifurcated into accounting units based on their relative
fair market value, provided each component is not essential to the function of the other. Revenue from these separate accounting units is then recognized when: a) persuasive evidence of an arrangement exists and the sales price is fixed and
determinable; b) delivery has occurred and services have been rendered; and



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c) collectibility is reasonably assured. If vendor-specific objective evidence 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 utilizing the subscription method of accounting over the term of the services
that are rendered.



Revenue recognition for our gaming systems is complex and
involves judgment in: a) identifying multiple deliverables, since each system contract is generally unique; b) determining the interoperability of certain elements of our hardware and software; and c) assessing the creditworthiness of
our customers. While we believe our assumptions are reasonable, these factors significantly influence our decision to recognize or defer revenue from each gaming system, and if different, could materially affect the timing of our revenues.



Property and Equipment and Leased Gaming Equipment. 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 accelerated methods for tax reporting purposes. A majority of our assets are
susceptible to changes in technology and changes in the competitive marketplace influencing customer preferences, such as cabinet style or game titles. These factors could cause us to evaluate and change the estimated lives used to depreciate
assets.



Furthermore, we review our property and equipment and leased gaming
equipment for impairment whenever events or changes in circumstances, such as technological obsolescence or customer preferences, indicate we may not recover the carrying amount of an asset. We measure recoverability of assets to be held and used by
comparing the carrying amount of an asset to future cash flows expected to be generated by the asset. While we believe that our estimates and assumptions used in evaluating the carrying amount of these assets are reasonable, different assumptions
could materially affect either the carrying amount or the estimated useful lives of the assets.



Development Agreements. We enter into development agreements to provide financing for new tribal gaming facilities, or for the expansion of existing facilities. In return, the customer commits to a fixed
number of player terminal placements in the facility, and we receive a fixed percentage of those player terminals hold per day over the term of the agreement. 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 agreements typically provide for a portion of the amounts retained by the gaming facility for their share of the hold to be used for repayment of some or all of the
advances. Amounts advanced in excess of those reimbursed by the customer for real property and land improvements are allocated to intangible assets and amortized over the life of the contract. Amounts related to personal property owned by us and
located at the tribal gaming facility are carried in our property and equipment, and depreciated over the estimated useful life of the related asset or the contract life, whichever is shorter.



We utilize the life of a contract to amortize the intangible assets associated with
development agreements. We review the carrying value of these contract rights at least annually or whenever changes in circumstances indicate the carrying value of these assets may not be recoverable. While we believe that our estimates and
assumptions used in evaluating the carrying value of these assets are reasonable, different assumptions could materially affect either the carrying value or the estimated useful lives of the contract rights.



Allowance for Doubtful Accounts.We maintain an allowance for doubtful accounts
related to our accounts receivable and notes receivable that have been deemed to have a high risk of collectibility. We review our accounts receivable and notes receivable on a monthly basis to determine if any receivables will potentially be
uncollectible. We analyze historical collection trends and changes in our customers payment patterns, customer concentration and creditworthiness when evaluating the adequacy of our allowance for doubtful accounts. A large percentage of
receivables are with Native American tribes that have their reservations and gaming operations in the state of Oklahoma, and we have concentrations of credit risk with several tribes. Despite the industry, geographic and customer concentrations
related to our receivables, due to our historical experience on receivable collections, management considers credit risk is minimal with respect to accounts receivable. We include any receivable balances that are determined to be uncollectible in
our overall allowance for doubtful accounts. Changes in our assumptions or estimates reflecting the collectibility of certain accounts could materially affect our allowance for both trade and notes receivable.



At June 30, 2005 and September 30, 2004, our allowance for doubtful trade accounts and notes
receivable was $204,000 and $608,000 respectively.



Income taxes.We apply the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax liabilities or assets arise from differences between the tax basis of liabilities or assets and their basis for financial
reporting, and are subject to tests of recoverability in the case of deferred tax assets. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying
amounts of assets and liabilities, and their respective tax basis. Deferred tax assets and



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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 the period that includes the enactment date.



The accounting for income taxes involves significant judgments and estimates, and deals with complex tax regulations. The recoverability of certain deferred tax assets
is based in part on estimates of future income and the timing of temporary differences, so the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods.



At June 30, 2005 and September 30, 2004, our net deferred tax liability totaled $5.9 million
and $11.3 million, respectively.



LIQUIDITY AND CAPITAL RESOURCES



At June 30, 2005, we had unrestricted cash and cash equivalents of $5.9
million, compared to $4.8 million at September 30, 2004. At June 30, 2005, we had a working capital deficit of $12.2 million, compared to working capital of $249,000 at September 30, 2004. The working deficit as of June 30, 2005, was the result of
our repurchases of treasury stock and our continued investment in development agreements. During the nine months ended June 30, 2005, we used $9.7 million to purchase treasury stock and advanced $27.9 million, net of amounts reimbursed, under
development agreements.



As of June 30, 2005, our total contractual cash
obligations were as follows (in thousands):



|                                                |  |                  |        |           |   |           |  |                   |       |       |   |       |  |   |        
|----------------------------------------------- |  | ---------------- | ------ | --------- | - | --------- |  | ----------------- | ----- | ----- | - | ----- |  | - | -------
|                                                |  | Less than 1 year |        | 1-3 years |   | 3-5 years |  | More than 5 years |       | Total
|Revolving line of credit                        |  | $                |       |           | $ | 20,970    |  | $                 |      |       | $ |      |  | $ | 20,970 
|Long-term debt, excluding interest(1)           |  |                  | 10,619 |           |   | 6,360     |  |                   | 1,069 |       |   |      |  |   | 18,048 
|Capital leases(2)                               |  |                  | 4,364  |           |   | 1,908     |  |                   |      |       |   |      |  |   | 6,272  
|Operating leases(3)                             |  |                  | 1,527  |           |   | 2,787     |  |                   | 2,914 |       |   | 123   |  |   | 7,351  
|Purchase commitments(4)                         |  |                  | 7,292  |           |   |          |  |                   |      |       |   |      |  |   | 7,292  
|Payments due under employment agreement(5)      |  |                  | 250    |           |   | 500       |  |                   | 500   |       |   | 2,146 |  |   | 3,396  
|Gaming facility joint development agreements(6) |  |                  | 46,172 |           |   |          |  |                   |      |       |   |      |  |   | 46,172 
|                                                |  |                  |        |           |   |           |  |                   |       |       |   |       |  |   |        
|Total                                           |  | $                | 70,224 |           | $ | 32,525    |  | $                 | 4,483 |       | $ | 2,269 |  | $ | 109,501
|                                                |  |                  |        |           |   |           |  |                   |       |       |   |       |  |   |        

---

|(1) | Consists of various three-to five-year loans for the purchase of automobiles and property and equipment at an overall average annual interest rate of 6.60%, a five-year loan related
to financing our corporate aircraft at an annual interest rate of LIBOR plus 2.75%, and amounts borrowed under our Credit Facility at an annual interest rate of Prime plus 1.25%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of various three-year capital leases for property and equipment at an overall average annual interest rate of 7.52%.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of operating leases for our facilities and office equipment that expire at various times through 2010.
|--- | ---------------------------------------------------------------------------------------------------------------

|(4) | Consists of commitments to purchase third-party licenses and player terminals.
|--- | ------------------------------------------------------------------------------

|(5) | Represents the expected future payments due, based on life expectancy tables, to Gordon Graves for his noncompete agreement entered into under his Employment Agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Represents commitments for payments toward development and construction and/or expansion of tribal gaming facilities. For purposes of this table, cash obligations under development
agreements are considered payable over the next twelve months, although the actual timing of the payments may extend beyond twelve months, depending on the number and schedule of development projects ongoing at any given time.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the nine months ended June 30, 2005, we generated $58.3
million in cash from our operations, compared to $54.9 million during the same period of 2004. This $3.4 million increase in cash generated from operations over the prior period was primarily the result of the payment timing related to accounts
payable, as well as the timing of accounts and notes receivable collections. Additionally, during the nine months ended June 30, 2005, we invested $6.0 million of cash generated from operations on the implementation of the video lottery system in
Israel.



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Cash used in investing activities increased to $72.4 million in the nine months ended June 30, 2005, from $71.8 million
in the same period of 2004. The increase was primarily the result of a $28.7 million increase in net amounts advanced under development agreements, and was partially offset by a $22.8 million decrease in acquisitions of property and equipment.
During the nine months ended June 30, 2005, additions to property and equipment consisted of:



|                                                |  |                      |        |                           |   |                        |  |   |       
|----------------------------------------------- |  | -------------------- | ------ | ------------------------- | - | ---------------------- |  | - | ------
|                                                |  | CashCapital Expenses |        | Financed Capital Expenses |   | Total Additions to P&E
|Player terminal and gaming equipment            |  | $                    | 21,431 |                           | $ | 575                    |  | $ | 22,006
|Licenses                                        |  |                      | 9,148  |                           |   |                       |  |   | 9,148 
|Tribal gaming facilities and portable buildings |  |                      | 5,103  |                           |   |                       |  |   | 5,103 
|Vehicles                                        |  |                      | 7      |                           |   | 445                    |  |   | 452   
|Other                                           |  |                      | 820    |                           |   |                       |  |   | 820   
|                                                |  |                      |        |                           |   |                        |  |   |       
|Total                                           |  | $                    | 36,509 |                           | $ | 1,020                  |  | $ | 37,529
|                                                |  |                      |        |                           |   |                        |  |   |       



Cash provided by financing activities
for the nine months ended June 30, 2005 was $15.3 million, compared to $20.3 million in the same period of 2004. For the nine months ended June 30, 2005, we received $10.0 million from the proceeds of long-term debt, compared to $7.7 million in the
same period of fiscal 2004. During the nine months ended June 30, 2005, we drew a net $21.0 million under our revolving and reducing revolving lines of credit. Additionally, during the nine months ended June 30, 2005, we repurchased 1,089,991 shares
of treasury stock for a total cash consideration of $9.7 million, and we expect to continue repurchasing shares during the remainder of fiscal 2005, as discussed under Stock Repurchase Authorizations.



Our projected capital expenditures for the next year will consist of player terminals, POSTs
and related gaming equipment that are placed with our customers under participation arrangements, substantial capital outlays in connection with the joint development of new and expanded tribal gaming facilities, increased costs of maintaining
and/or upgrading our rental pool of player terminalsspecifically for ticket-in, ticket-out technologyand may include substantial capital expenditures in connection with potential acquisitions. In our strategy to partner with current and
prospective customers to jointly develop tribal gaming facilities that will house our player terminals, and in pursuing any potential acquisitions, we may make expenditures that could significantly affect our cash flow and liquidity, and use a
significant portion of both our cash flow from operations and any proceeds we receive from debt or equity financing we might undertake. Our total capital expenditures will depend upon the number of player terminals that we are able to place in
service during the year, and the number and size of tribal gaming facilities we develop under existing or future agreements. Additional capital expenditures will be required for player terminals if we are successful in introducing our games into new
markets such as additional charity bingo markets. In addition to manufacturing our own, we also purchase player terminals from Bally Gaming Inc., or Bally, and WMS Gaming Inc., or WMS, and licenses from Bally, WMS, and Progressive Gaming
International Corp. (formerly Mikohn Gaming Corp.)



To date, we have entered
into development agreements with our customers to provide up to $138.2 million towards the construction of tribal gaming facilities. The development agreements typically require that some or all of the construction advances be repaid to us. As of
June 30, 2005, we had advanced a total of $92.0 million under such agreements, and expect to advance the remaining $46.2 million over the next twelve months.



At June 30, 2005, our debt structure consisted of a Credit Facility, which provided us with a $20.0 million term loan facility, or the Term Loan, a $15.0 million
revolving line of credit, and a $35 million reducing revolver line of credit. As of June 30, 2005, we had drawn $20.2 million under the Term Loan and had $21.0 million outstanding under the revolving and reducing revolving lines of credit. The
Credit Facility contains customary financial and operational covenants, and is collateralized by substantially all our assets. We were in compliance with these covenants as of June 30, 2005.



We believe that our existing cash and cash equivalents, cash provided from our operations,
and amounts available under our Credit Facility can sustain our current operations, which will include a portion of the financing required from us in connection with our development agreements, depending upon the timing and mix of those projects.
However, our performance and financial results are, to a certain extent, subject to general conditions in or affecting the Native American gaming industry, and to general economic, political, financial, competitive and regulatory factors beyond our
control. If our business does not continue to generate cash flow at current levels, or if the level of funding required in connection with our joint development agreements is greater or proceeds at a pace faster than anticipated, we may need to
raise additional financing. In order to meet these potential additional capital



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requirements, we recently negotiated a $35 million increase in the available credit under our existing credit facility. However, this additional credit from
our current lender may not be sufficient. Other sources of such 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.



Stock Repurchase Authorizations



Our Board of Directors authorized us to repurchase 900,000 shares of our common stock, effective April 2000, an additional 3,000,000 shares of our common stock, effective
September 2001, and an additional 748,690 shares of our common stock, effective July 2004. The timing and total number of shares repurchased will depend upon prevailing market conditions and other investment opportunities. At June 30, 2005, there
were approximately 1.2 million shares authorized for repurchase.



During fiscal
2004, we repurchased 237,500 shares of our common stock with cash, at an average cost of $16.09. During the nine months ended June 30, 2005, 1,089,991 shares were repurchased at an average cost of $8.85.



During fiscal 2004, in consideration for stock options exercised by an employee, we received
22,546 shares of our common stock at the fair market value of $20.95 per share at the time of the exchange, and we settled a stockholders notes receivable and other amounts owed, in exchange for 65,196 shares of our common stock at their fair
market value of $24.52 per share at the time of the exchange.



At June 30,
2005, we had approximately 5.7 million options outstanding, with exercise prices ranging from $1.00 to $21.53 per share. At June 30, 2005, approximately 3.6 million of the outstanding options were exercisable.



SEASONALITY



We believe our operations are not materially affected by seasonal factors, although we have experienced fluctuations in our revenues from
period to period. After the holiday season, (November through December) our revenues generally build steadily, with our last fiscal quarter (July through September) traditionally being our strongest quarter.



CONTINGENCIES



For information regarding contingencies, see PART I  Item 1. Financial Statements  Commitments and Contingencies and
PART II  Item 1. Legal Proceedings.



INFLATION AND OTHER
COST FACTORS



Our operations have not been, nor are they expected to be,
materially affected by inflation. However, our 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.



FUTURE EXPECTATIONS AND FORWARD-LOOKING STATEMENTS



This Quarterly Report and the information incorporated herein by reference contains various
forward-looking statements within the meaning of federal and state securities laws, including those identified or predicated by the words believes, anticipates, expects, plans, or similar
expressions with forward-looking connotation. Such statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the
uncertainties inherent in the outcome of any litigation of the type described in this Quarterly Report under PART II  Item 1. Legal Proceedings, trends and other expectations described in PART I  Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations, risk factors disclosed in our earnings and other press releases issued to the public from time to time, as well as those other factors as described
under Certain Risk Factors set forth below. Given these uncertainties, readers of this Quarterly Report are cautioned not to place undue reliance upon such statements.



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CERTAIN RISK FACTORS



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



Historically, we have derived most of our revenue from the placement of Class II player terminals and systems for gaming activities conducted on Native American lands.
These activities are subject to federal regulation under the Johnson Act, IGRA, and under the rules and regulations adopted by both the NIGC and the gaming commissions that each Native American tribe establishes to regulate gaming. The Johnson Act
broadly defines gambling devices to include any machine or mechanical device designed and manufactured primarily for use in connection with gambling, and that, when operated, delivers money or other property to a
player as the result of the application of an element of chance. A government agency or court that literally applied this definition, and did not give effect to subsequent congressional legislation or to certain regulatory
interpretations or judicial decisions, could determine that the manufacture and use of our electronic player terminals, and perhaps other key components of our Class II gaming systems that rely to some extent upon electronic equipment to run a game,
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.



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



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



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



We also face risks from a
lack of regulatory or judicial enforcement action. In particular, we believe we have lost market share to competitors who offer games that do not appear to comply with published regulatory restrictions on Class II games, and thereby offer features
not available in our products. As a consequence of recently adopted gaming legislation in Oklahoma, we believe vendors with whom we compete as well as some tribes operating gaming facilities in Oklahoma may increase deployment of these games in
advance of final regulations required under the new legislation. To the extent tribes offer these games rather than ours, our market share, revenue and operating results may suffer.



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The NIGC has recently determined that the Players Club / Players Account card system, employed by Native American gaming
operations that use the gaming system that we developed, is an account access card system as defined in the NIGCs Minimum Internal Control Standards regulation, thereby triggering certain recordkeeping requirements. An
account access card is defined as an instrument to access customer accounts for wagering at a gaming machine. Account access cards are used in connection with a computerized database.



On July 8, 2005, the NIGC issued a Warning Notice to a tribe for, among other things, a
violation of the recordkeeping requirements applicable to account access cards. According to the Proposed Notice of Violation, the cashiers were not obtaining signatures from the customers on our receipts when cashing out. The NIGC is also of the
opinion that the Bank Secrecy Act recordkeeping requirements apply to account access cards.



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



We have been working with our legal counsel and tribal customers, exploring ways to modify the Players Club card system to eliminate the account aspect of the
system so that the card system operates like script or a bearer instrument.



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



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



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



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



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



Our growth strategy includes selling and/or licensing our systems, games and technology into segments of the gaming industry other than Native American gaming,
principally the charity and commercial bingo markets and new jurisdictions authorizing video lottery systems. These and other non-Native American gaming opportunities are not currently subject to a nationwide regulatory system such as the one
created by IGRA to regulate Native American



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gaming, so regulation is on a state-by-state, and sometimes a county-by-county basis. In addition, federal laws relating to gaming, such as the Johnson Act,
which regulates slot machines and similar gambling devices, apply to new video lottery jurisdictions, absent authorized state law exemptions.



As we expand into new markets, we expect to encounter business, legal and regulatory uncertainties similar to those we face in our Native American gaming business. Our
strategy is to attempt to be an early entrant into new and evolving markets where the legal and regulatory environment may not be well settled or well understood. As a result, we may encounter legal and regulatory challenges that are difficult or
impossible to foresee and which could result in unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. For example, we face business and legal risks in connection with a charity gaming project, in part due
to uncertainty related to the state authorization of charity gaming in that jurisdiction.



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



Generally, our selling 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 segments;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------



Beginning in January 2004, we began the first operation of our central determinant system for the video lottery terminal network that the New York Lottery operates at
licensed New York State racino racetracks. As payment for providing and maintaining the central determinant system, we receive a small portion of the network-wide hold per day. To date, we have realized substantially less revenue than
anticipated from our New York Lottery operations, in significant part due to delays in the opening of planned racino operations at several racetracks. We are nevertheless required to incur ongoing expenses associated with development and
maintenance of the New York video lottery system, and we do not currently expect to have profitable operations there at least through 2005. Delays in the anticipated development of the New York video lottery system and other emerging market
opportunities may continue to adversely affect our revenue and operating results.



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



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



Our historical revenue growth has been driven primarily by technological innovations to our gaming systems, and the increased size and use of our installed base of player
terminals in the Class II market. Our future performance will depend primarily on our ability to successfully and cost-effectively enter new gaming markets, and develop and introduce new and enhanced gaming systems and content that will be widely
accepted both by our customers and their end users. We believe our business requires us to continually offer games and technology that play quickly and provide more entertainment value than those our competitors offer. However, consumer preferences
can be difficult to predict, and we may offer new games or technologies that do not achieve market acceptance. In addition, we may experience future delays in game development, or we may not be successful in developing, introducing, and



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marketing new games or game enhancements on a timely and cost-effective basis. Furthermore, our new games may be subject to challenge by the NIGC, the DOJ,
or some other regulatory or law enforcement agencies applicable to that particular game.



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



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



For the nine months ended June 30, 2005, approximately 56% of our gaming revenues were from Native American tribes located in Oklahoma, and approximately 36% of our gaming revenues were from one tribe in that state.
The significant concentration of our customers in Oklahoma means that local economic changes may adversely affect our customers, and therefore our business, disproportionately to changes in national economic conditions, including more sudden adverse
economic declines or slower economic recovery from prior declines. The loss of any of our Oklahoma tribes as customers would have a material and adverse effect upon our financial condition and results of operations. In addition, the recent
legislation allowing tribal-state compacts in Oklahoma could result in increased competition from other vendors, who we believe have avoided entry into the Class II market due to its uncertain and ambiguous legal environment. The new legislation
allows for other types of gaming, both at tribal gaming facilities and at Oklahoma racetracks. The loss of significant market share to these new gaming opportunities or our competitors products in Oklahoma could also have a material adverse
effect upon our financial condition and results of operations.



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



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



In May 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming at racetracks, and additional types of games at tribal gaming facilities,
pursuant to a tribal-state compact. This legislation was subject to approval in a statewide referendum, which was subsequently obtained in the November 2004 elections. The Oklahoma gaming legislation allows the tribes to sign a compact with the
State of Oklahoma to operate an unlimited number of electronic instant bingo games, electronic bonanza-style bingo games, electronic amusement games and non-house-banked tournament card games. In addition, certain horse
tracks in Oklahoma will be allowed to operate a limited number of instant and bonanza-style bingo games and electronic amusement games. On March 30, 2005, our bonanza-style bingo games became the first such games
played in the state. As of June 30, we had placed more than 900 player terminals, to be operated under the compact, at ten facilities; approximately 750 were bonanza-style games, and the remainder were amusement games,
including re-spin and poker titles. All vendors placing games at any of the racetracks under the compact will ultimately be required to be licensed by the State of Oklahoma. Pursuant to the compacts, vendors placing games at tribal facilities will
have to be licensed by each tribe. All electronic games placed under the compact will have to be certified by independent testing laboratories to meet technical specifications. These were published by the Oklahoma Horse Racing Commission and the
individual tribal gaming authorities in the first calendar quarter of 2005.



We
believe the recently adopted Oklahoma legislation significantly clarifies and expands the types of gaming permitted by Native America tribes in that state. We currently expect continued intensified competition from vendors currently operating in
Oklahoma as well as new market entrants. As a result, we anticipate further pressure on our market and revenue share percentages in Oklahoma. In addition, in the immediate future, we expect continued regulatory uncertainty in Oklahoma. In
particular, although we and other vendors may not begin to offer games enabled by the new legislation until state and tribal regulations, rules and specifications adopted pursuant to that legislation become final, certain other vendors and tribes
may begin to offer new games prior to that time. It is unclear what, if any, regulatory enforcement action could or would be taken against tribes and vendors offering games not authorized by



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existing law but permitted under the newly adopted, but not yet effective, legislation. New opportunities in the Oklahoma market resulting from the recent
legislation may not develop as we anticipate, or may take longer to develop than we expected. Further, we may offer games similar to those games that do not appear to comply with published regulatory restrictions on Class II games in an effort to
compete on an equal footing. These games may be the subject of enforcement actions against us.



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



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



We are seeking to expand our business by lending money to new and existing Native American customers to develop or expand gaming
facilities, primarily in the state of Oklahoma, and we are jointly developing or expanding gaming and related facilities with some of these customers. We have limited experience with these activities and may not realize a satisfactory return, if
any, on our investment, and we could lose some or all of our investment.



We enter into development agreements to jointly develop and provide financing to construct and/or remodel tribal 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. Certain of the agreements contain performance standards for our player terminals that could allow the facility to
reduce a portion of our player terminals. In connection with these advances, we could face liquidity pressure or a complete loss of our investment if a tribe does not timely pay any amounts owed to us from such funding. In addition, future NIGC
decisions could affect our ability to place our games with these tribes. See Certain Risk Factors  Enforcement of remedies or contracts against Native American tribes could be difficult. In addition, the NIGC has expressed its view
that our development agreements violate the requirements of IGRA and tribal gaming regulations, which state that the Native American tribes must hold the sole proprietary interest in the tribes gaming operations, which presents
additional risks for our business. See Certain Risk Factors  Changes in regulation or regulatory interpretations could require us to modify the terms of our contracts with customers.



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



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



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



We compete with other vendors for customers, primarily on the basis of the amount of profit our gaming products generate for our customers in relation to other
vendors gaming products. We believe that the most important factor influencing our customers product selection is the appeal of those products to end users. This appeal has a direct effect on the volume of play by end users, and drives
the amount of revenues generated for and by our customers. Our ability to remain competitive depends primarily on our ability to continuously develop new game themes and



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systems that appeal to end users, and to introduce those game themes and systems in a timely manner. See Certain Risk Factors  Our future
performance will depend on our ability to develop and introduce new gaming systems and to enhance existing games that are widely accepted and played. We may not be able to continue to develop and introduce appealing new game themes and systems
that meet the emerging requirements in a timely manner, or at all. In addition, others may independently develop games similar to our games, and competitors may introduce noncompliant games that unfairly compete in certain markets due to uneven
regulatory enforcement policies. In addition, we have lost certain end users based upon our decision not to place pre-drawn games in the field that would be covered under the Oklahoma compact, but in advance of the effective date of the compact.
After we are able to place the compacted games, it may take some time, if at all, to regain the players that we previously lost.



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



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



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



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



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



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



We rely upon patent, copyright, trademark and trade secret laws, license agreements and employee nondisclosure agreements to protect our proprietary rights and technology, but these laws and contractual provisions provide only limited
protection. We rely to a greater extent upon proprietary know-how and continuing technological innovation to maintain our competitive position. Insofar as we rely on trade secrets, unpatented know-how and innovation, others may be able to
independently develop similar technology, or our secrecy could be breached. The issuance of a patent to us does not necessarily mean that our technology does not infringe upon the intellectual property rights of others. As the Class II market grows
and we enter into new markets by leveraging our existing technology, it



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becomes more and more likely that we will become subject to infringement claims from other parties. Problems with patents or other rights could increase the
cost of our products, or delay or preclude new product development and commercialization. If infringement claims against us are valid, we may seek licenses that might not be available to us on acceptable terms or at all. Litigation would be costly
and time consuming, but may become necessary to protect our proprietary rights or to defend against infringement claims. We could incur substantial costs and diversion of management resources in the defense of any claims relating to the proprietary
rights of others or in asserting claims against others.



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



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



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



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



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



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



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



The NIGC has recently determined that the Players Club / Players Account card system,
employed by Native American gaming operations that use the gaming system we developed, is an account access card system as defined in the NIGCs Minimum Internal Control Standards regulation, thereby triggering certain recordkeeping
requirements. An account access card is defined as an instrument to access customer accounts for wagering at a gaming machine. Account access cards are used in connection with a computerized database.



On July 8, 2004, the NIGC issued a Warning Notice of Violation to a tribe for, among other
things, a violation of the recordkeeping requirements applicable to account access cards. According to the Proposed Notice of Violation, the cashiers were not obtaining signatures from the customers on our receipts when cashing out. The NIGC is also
of the opinion that the Bank Secrecy Act recordkeeping requirements apply to account access cards.



We have been working with our legal counsel and tribal customers, exploring ways to modify the Players Club card system to eliminate the account aspect of the system, so that the card system operates like
script or a bearer instrument.



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



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On April 23, 2004, we reported that the Acting General Counsel of the NIGC had issued a letter to us and one of our
tribal customers opining that our development agreement regarding the WinStar Casino in Thackerville, Oklahoma constituted a management contract. The authority of the NIGC to review and approve gaming related contracts is limited to
management contracts and related collateral agreements. According to the Acting General Counsel, the performance of any planning, organizing, directing, coordinating or controlling with respect to any part of a gaming operation constitutes
management for purposes of determining whether an agreement for any of these activities is a management contract. We have expressed our disagreement with this interpretation by the Acting General Counsel, and our belief that her view of
management is broader than was intended by Congress. We also believe that the Acting General Counsels opinion may have been based in part on collateral agreements we provided to the NIGC in error and that are not presently in
effect. We, along with certain tribal customers, submitted additional information and documents related to the development agreements for review by the NIGC.



On December 1, 2004, we received a series of letters from the NIGC expressing the Commissions concern that certain of our agreements violate the requirements of
IGRA and tribal gaming regulations, which state that the Native American tribes hold the sole proprietary interest in the tribes gaming operations. In particular, the NIGC is concerned that our development agreements, whereby we
advance development funds to our tribal customers in exchange for allocated floor space and a share of gaming revenue, create a proprietary interest of ours in the tribes gaming operations. As a result of its concern, the NIGC has
requested that we and our tribal customers provide a written justification for the percentage of shared revenue specified in the subject agreements, which in the view of the NIGC exceeds the level permissible under a management agreement. The NIGC
has also asked that we and our tribal customers provide an explanation why our arrangements do not result in our holding a proprietary interest in our tribal customers gaming operations. In addition, on December 1, 2004, we received a letter
from the NIGC expressing the Commissions concern that our January 2000 Integrated Electronic Gaming Services Agreement with one of our customers covering one of our Legacy games, constituted a management agreement. According to the Acting
General Counsel, the performance of any planning, organizing, directing, coordinating or controlling, with respect to any part of a gaming operation, constitutes management for purposes of determining whether an agreement is a management
contract, which requires NIGC approval.



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



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



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



Enforcement of remedies or contracts against Native American tribes could be difficult.



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



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



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.



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



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



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



We may incur prize payouts in excess of game revenues.



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



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



The integrity and security of our gaming systems is critical to its ability to attract customers and players. We strive to set exacting standards of personal integrity for our employees and for system security
involving the gaming systems that we provide to our customers. Our reputation in this regard is an important factor in our business dealings with our current and potential customers. For this reason, an allegation or a finding of improper conduct on
our part of one or more of our employees that is attributable to us, or 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 renewal contracts.



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



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



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



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



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



Worsening economic conditions may adversely affect our business.



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



ITEM 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.



In June 2003, we entered into a Credit Facility to provide us with additional liquidity to meet our short-term financing needs, as further described under PART I
 Item 1. Financial Statements  Significant Accounting Policies  Credit Facility, Long-Term Debt and Capital Leases. Pursuant to the Credit Facility, we may borrow up to a total of $70 million under a $20 million Term Loan, a
$15 million revolving line of credit, and a $35 million reducing revolving line of credit. The entire Credit Facility bears an adjustable interest rate of Prime plus 1.25%.



In connection with the joint 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. It is anticipated that some of these receivables will have fixed interest rates.



As a result of our adjustable-interest-rate notes payable and fixed-interest-rate notes
receivable described above, 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 without a corresponding increase
in interest income.



We estimate that a hypothetical increase of 100 basis
points in interest rates would increase our interest expense by approximately $368,000 per annum, based on our variable debt outstanding of $36.6 million as of June 30, 2005. We do not currently manage this exposure with derivative financial
instruments.



ITEM 4. CONTROLS AND PROCEDURES



We maintain
disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, and under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of these disclosure controls and procedures. Based on this evaluation and
subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.



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There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.



As part of a continuing effort to improve our business processes, we are evaluating our internal controls and may update certain controls to accommodate any modifications
to our business processes or accounting procedures.



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PART II

OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



Summary of Stock Repurchases

(Unaudited)



|                                |  |                                |  |                             |       |                                                                               |         |                                                                             |          
|------------------------------- |  | ------------------------------ |  | --------------------------- | ----- | ----------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------- | ---------
|                                |  | Total Numberof SharesPurchased |  | Average PricePaid per Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans
or Programs |         | Maximum Numberof Shares that Mayyet be PurchasedUnder the Plans or Programs
|April 1, 2005 to April 30, 2005 |  | 277,205                        |  | $                           | 7.51  |                                                                               | 277,205 |                                                                             | 1,544,509
|May 1, 2005 to May 31, 2005     |  | 263,500                        |  |                             | 9.49  |                                                                               | 263,500 |                                                                             | 1,281,009
|June 1, 2005 to June 30, 2005   |  | 108,500                        |  | $                           | 10.89 |                                                                               | 108,500 |                                                                             | 1,172,509
|                                |  |                                |  |                             |       |                                                                               |         |                                                                             |          
|Total                           |  | 649,205                        |  | $                           | 8.88  |                                                                               | 649,205 |                                                                             |          
|                                |  |                                |  |                             |       |                                                                               |         |                                                                             |          



All shares detailed above were
repurchased as part of publicly announced repurchase plans. For a description of our authorized stock repurchase plans, see PART I  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



ITEM 6. EXHIBITS



|(a) | Exhibits
|--- | --------



See Exhibit Index.



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SIGNATURES



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



|                     |  |                        |  |                        
|-------------------- |  | ---------------------- |  | -----------------------
|Date: August 9, 2005 |  | Multimedia Games, Inc.
|                     |  |                       
|                     |  | By:                    |  | /s/ Craig S. Nouis    
|                     |  |                        |  | Craig S. Nouis         
|                     |  |                        |  | Chief Financial Officer

---

| | Mr. Nouis is signing as an authorized officer and as our Principal Financial Officer and Chief Accounting Officer.
|- | ------------------------------------------------------------------------------------------------------------------



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                 |  |          |  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -
|EXHIBIT NO. |  | TITLE                                                                                                                                                                           |  | LOCATION |  
|3.1         |  | Amended and Restated Articles of Incorporation                                                                                                                                  |  | (1       | )
|            |  |                                                                                                                                                                                
|3.2         |  | Amendment to Articles of Incorporation                                                                                                                                          |  | (10      | )
|            |  |                                                                                                                                                                                
|3.3         |  | Amended and Restated Bylaws                                                                                                                                                     |  | (2       | )
|            |  |                                                                                                                                                                                
|10.1        |  | Form of Integrated Gaming Services Agreement                                                                                                                                    |  | (3       | )
|            |  |                                                                                                                                                                                
|10.2        |  | 1994 Employee Stock Option Plan                                                                                                                                                 |  | (3       | )
|            |  |                                                                                                                                                                                
|10.3        |  | 1994 Director Stock Option Plan                                                                                                                                                 |  | (3       | )
|            |  |                                                                                                                                                                                
|10.4        |  | 1996 Stock Incentive Plan, as amended                                                                                                                                           |  | (4       | )
|            |  |                                                                                                                                                                                
|10.5        |  | Presidents Plan                                                                                                                                                                |  | (5       | )
|            |  |                                                                                                                                                                                
|10.6        |  | 1998 Senior Executive Stock Option Plan                                                                                                                                         |  | (5       | )
|            |  |                                                                                                                                                                                
|10.7        |  | 2000 Stock Option Plan                                                                                                                                                          |  | (5       | )
|            |  |                                                                                                                                                                                
|10.8        |  | 2001 Stock Option Plan                                                                                                                                                          |  | (6       | )
|            |  |                                                                                                                                                                                
|10.9        |  | Stockholder Rights Plan                                                                                                                                                         |  | (7       | )
|            |  |                                                                                                                                                                                
|10.10       |  | 2002 Stock Option Plan                                                                                                                                                          |  | (8       | )
|            |  |                                                                                                                                                                                
|10.11       |  | Employment Agreement executed March 26, 2003 between the Company and Gordon Graves                                                                                              |  | (8       | )
|            |  |                                                                                                                                                                                
|10.12       |  | 2003 Outside Directors Stock Option Plan                                                                                                                                       |  | (9       | )
|            |  |                                                                                                                                                                                
|10.13       |  | Loan and Security Agreement between the Company and Comerica Bank                                                                                                               |  | (10      | )
|            |  |                                                                                                                                                                                
|10.14       |  | First Amendment to Loan and Security Agreement between the Company and Comerica Bank                                                                                            |  | (10      | )
|            |  |                                                                                                                                                                                
|10.15       |  | Sixth Amendment to Loan and Security Agreement between the Company and Comerica Bank                                                                                            |  | (*       | )
|            |  |                                                                                                                                                                                
|10.16       |  | Employment Agreement executed September 9, 2004 between the Company and Clifton Lind                                                                                            |  | (11      | )
|            |  |                                                                                                                                                                                
|10.17       |  | Form of Indemnity Agreement entered between the Company and each of the members of the Companys Board of Directors                                                             |  | (11      | )
|            |  |                                                                                                                                                                                
|10.18       |  | Ad Hoc Option Plan                                                                                                                                                              |  | (12      | )
|            |  |                                                                                                                                                                                
|31.1        |  | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                                                             |  | (*       | )
|            |  |                                                                                                                                                                                
|31.2        |  | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                                                             |  | (*       | )
|            |  |                                                                                                                                                                                
|32.1        |  | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to U.S.C. Section 1350, as adopted, pursuant to Section
906 of the Sarbanes Oxley Act of 2002 |  | (*       | )

---

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

|(2) | Incorporated by reference to our Form 10-K filed with the Commission for the fiscal year ended September 30, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to our Form 10-KSB filed with the Commission for the fiscal year ended September 30, 1994.
|--- | --------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to our Form 10-KSB filed with the Commission for the fiscal year ended September 30, 1996.
|--- | --------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to our Registration Statement on Form S-8 filed with the Commission on December 1, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to our Registration Statement on Form S-8 filed with the Commission on October 18, 2002 (File No. 333 - 100611).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to our Registration Statement on Form 8-A, filed with the Commission on October 15, 1998.
|--- | -------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to our Form 10-Q filed with the Commission for the quarter ended March 31, 2003.
|--- | ----------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to Appendix B of our Definitive Proxy Statement on Schedule 14A filed with the Commission on January 6, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

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

|(11) | Incorporated by reference to our Form 10-K filed with the Commission for the fiscal year ended September 30, 2004.
|---- | ------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to our Registration Statement on Form S-8 filed with the Commission on October 18, 2002 (File No. 333 - 100612).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(*) | Filed herewith.
|--- | ---------------



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