**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-Q**




(Mark
      One)


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




For
      the
      quarterly period ended **June 30, 2008**


OR


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




For
      the
      transition period from ______ to ______




**Commission
      File Number: 001-14551**




**Multimedia
      Games, Inc.**


(Exact
      name of Registrant as specified in its charter)




**Texas**
            **74-2611034**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)**206
                Wild Basin Road, Building B, Fourth Floor****Austin,
                Texas**
            **78746**(Address
                of principal executive offices)
            (Zip
                Code)




**(512)
      334-7500**


(Registrant’s
      telephone number, including area code)


Registrant’s
      website:  **www.multimediagames.com**




**None**


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






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




Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act:




Large
                Accelerated Filer o
            Accelerated
                Filer xNon-Accelerated
                Filer o
            Smaller
                Reporting Company o




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




As
      of
      August 1, 2008, there were 26,587,821 shares of the Registrant’s
      common stock, par value $0.01 per share, outstanding.





**FORM** **10-Q**




**INDEX**




**PART
                I. FINANCIAL INFORMATION**Item
                1.
            Condensed
                Financial Statements (Unaudited)Consolidated
                Balance Sheets
              (As
                of June 30, 2008 and September 30, 2007)
            3Consolidated
                Statements of Operations
              (For
                the three months ended June 30, 2008 and 2007)
            5Consolidated
                Statements of Operations
              (For
                the nine months ended June 30, 2008 and 2007)
            6Consolidated
                Statements of Cash Flows
              (For
                the nine months ended June 30, 2008 and 2007)
            7Notes
                to Consolidated Financial Statements
            8Item
                2.
            Management’s
                Discussion and Analysisof
                Financial Condition and Results of Operations
            21Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            35Item
                4.
            Controls
                and Procedures
            35**PART
                II. OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            36Item
                1A.
            Risk
                Factors
            36Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            46Item
                3.
            Defaults
                upon Senior Securities
            46Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            46Item
                5.
            Other
                Information
            46Item
                6.
            Exhibits
            46Signatures
            
            47Exhibit
                Index
            48


-2-




**PART
      I**


**FINANCIAL
      INFORMATION**




**Item
      1. Condensed Financial Statements**


**MULTIMEDIA
      GAMES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of June 30, 2008**  **and
      September 30, 2007**


(In
      thousands)


(Unaudited)





**June 30,**
              **2008**
            
            **September 30,**
              **2007****ASSETS**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            4,193
            
            $
            5,805Accounts
                receivable, net of allowance for doubtful accounts
              of
                $1,138 and $854, respectively
            
            
            25,209
            
            
            22,176Inventory
            
            
            2,445
            
            
            3,602Deferred
                contract costs
            
            
            212
            
            
            —Prepaid
                expenses and other
            
            
            2,226
            
            
            2,906Current
                portion of notes receivable, net
            
            
            20,499
            
            
            12,248Federal
                and state income tax receivable
            
            
            511
            
            
            —Deferred
                income taxes
            
            
            3,950
            
            
            1,932**Total
                current assets**
            
            
            **59,245**
            
            
            **48,669**Restricted
                cash and long-term investments
            
            
            868
            
            
            928Leased
                gaming equipment, net
            
            
            35,829
            
            
            38,579Property
                and equipment, net
            
            
            73,055
            
            
            75,332Long-term
                portion of notes receivable, net
            
            
            54,663
            
            
            36,797Intangible
                assets, net
            
            
            39,802
            
            
            35,884Other
                assets
            
            
            5,248
            
            
            3,497Deferred
                income taxes
            
            
            19,081
            
            
            16,583**Total
                assets**
            
            **$**
            **287,791**
            
            **$**
            **256,269****LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIES:Current
                portion of long-term debt
            
            $
            1,259
            
            $
            563Accounts
                payable and accrued expenses
            
            
            21,455
            
            
            22,021Federal
                and state income tax payable
            
            
            2,021
            
            
            2,444Current
                deferred revenue
            
            
            2,177
            
            
            1,020**Total
                current liabilities**
            
            
            **26,912**
            
            
            **26,048**Revolving
                line of credit
            
            
            34,171
            
            
            7,000Long-term
                debt, less current portion
            
            
            69,262
            
            
            74,484Other
                long-term liabilities
            
            
            1,168
            
            
            928Deferred
                revenue, less current portion
            
            
            4,146
            
            
            —**Total
                liabilities**
            
            
            **135,659**
            
            
            **108,460**Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock:
              Series
                A, $0.01 par value, 1,800,000 shares authorized,
              no
                shares issued and outstanding
            
            
            —
            
            
            —Series
                B, $0.01 par value, 200,000 shares authorized,
              no
                shares issued and outstanding
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 75,000,000 shares authorized,
              32,491,238
                and 32,134,614 shares issued, and
              26,587,821
                and 26,231,197 shares outstanding, respectively
            
            
            325
            
            
            321


-3-





**MULTIMEDIA
      GAMES, INC.**


**CONSOLIDATED
      BALANCE SHEETS –** **(Continued)**


**As
      of June 30, 2008**  **and
      September 30, 2007**


(In
      thousands, except shares)


(Unaudited)





**June 30,**
              **2008**
            
            **September 30,**
              **2007**Additional
                paid-in capital
            
            
            82,448
            
            
            80,112Treasury
                stock, 5,903,417 common shares at cost
            
            
            (50,128
            )
            
            (50,128
            )Retained
                earnings
            
            
            119,024
            
            
            117,498Accumulated
                other comprehensive income, net
            
            
            463
            
            
            6**Total
                stockholders’ equity**
            
            
            **152,132**
            
            
            **147,809****Total
                liabilities and stockholders’ equity**
            
            **$**
            **287,791**
            
            **$**
            **256,269**





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




-4-


**MULTIMEDIA
      GAMES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Three Months Ended June 30, 2008
      and 2007**


(In
      thousands, except per share data)


(Unaudited)





**Three
                Months Ended**
              **June 30,****2008**
            
            **2007**REVENUES:Gaming
                revenue:Class II
            
            $
            6,239
            
            $
            10,269Oklahoma
                compact
            
            
            14,562
            
            
            10,909Charity
            
            
            3,332
            
            
            4,368All
                other
            
            
            5,467
            
            
            3,679Gaming
                equipment, system sale and lease revenue
            
            
            314
            
            
            1,181Other
            
            
            338
            
            
            492**Total
                revenues**
            
            
            **30,252**
            
            
            **30,898**OPERATING
                COSTS AND EXPENSES:Cost
                of gaming equipment and systems sold
              and
                royalty fees
            
            
            336
            
            
            1,023Selling,
                general and administrative expenses
            
            
            16,102
            
            
            15,376Amortization
                and depreciation
            
            
            13,605
            
            
            14,771**Total
                operating costs and expenses**
            
            
            **30,043**
            
            
            **31,170****Operating
                income (loss)**
            
            
            **209**
            
            
            **(272**
            **)**OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            1,342
            
            
            924Interest
                expense
            
            
            (2,031
            )
            
            (1,003
            )Other
                income
            
            
            828
            
            
            1,607**Income
                before income taxes**
            
            
            **348**
            
            
            **1,256**Income
                tax expense
            
            
            184
            
            
            571**Net
                income**
            
            **$**
            **164**
            
            **$**
            **685**Basic
                earnings per common share
            
            $
            0.01
            
            $
            0.02Diluted
                earnings per common share
            
            $
            0.01
            
            $
            0.02Shares
                used in earnings per common share:Basic
            
            
            26,339
            
            
            27,911Diluted
            
            
            27,153
            
            
            29,747





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


-5-





**MULTIMEDIA
      GAMES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


For
      the
      Nine Months EndedJune 30,2008
      and 2007


(In
      thousands, except per share data)


(Unaudited)





**Nine
                Months Ended**
              **June 30,****2008**
            
            **2007**REVENUES:Gaming
                revenue:Class II
            
            $
            21,825
            
            $
            38,499Oklahoma
                compact
            
            
            40,261
            
            
            25,494Charity
            
            
            11,585
            
            
            13,570All
                other
            
            
            15,367
            
            
            9,203Gaming
                equipment, system sale and lease revenue
            
            
            2,463
            
            
            2,208Other
            
            
            1,188
            
            
            1,700**Total
                revenues**
            
            
            **92,689**
            
            
            **90,674**OPERATING
                COSTS AND EXPENSES:Cost
                of gaming equipment and systems sold
              and
                royalty fees
            
            
            1,540
            
            
            1,739Selling,
                general and administrative expenses
            
            
            48,836
            
            
            50,521Amortization
                and depreciation
            
            
            38,561
            
            
            44,209**Total
                operating costs and expenses**
            
            
            **88,937**
            
            
            **96,469****Operating
                income (loss)**
            
            
            **3,752**
            
            
            **(5,795**
            **)**OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            3,612
            
            
            3,573Interest
                expense
            
            
            (6,662
            )
            
            (3,534
            )Other
                income
            
            
            2,038
            
            
            2,718**Income
                (loss) before income taxes**
            
            
            **2,740**
            
            
            **(3,038**
            **)**Income
                tax expense (benefit)
            
            
            919
            
            
            (917
            )**Net
                income (loss)**
            
            **$**
            **1,821**
            
            **$**
            **(2,121**
            **)**Basic
                earnings (loss) per common share
            
            $
            0.07
            
            $
            (0.08
            )Diluted
                earnings (loss) per common share
            
            $
            0.07
            
            $
            (0.08
            )Shares
                used in earnings (loss) per common share:Basic
            
            
            26,271
            
            
            27,708Diluted
            
            
            27,242
            
            
            27,708





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


-6-


**MULTIMEDIA
      GAMES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Nine Months Ended** **June 30, 2008**  **and
      2007**


(In
      thousands)


(Unaudited)





**Nine
                Months Ended**
              **June 30,****2008**
            
            
            **2007****CASH
              FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            1,821
            
            $
            (2,121
            )Adjustments
                to reconcile net income (loss) to cash andcash
                equivalentsprovided
                by operating activities:Amortization
            
            
            3,450
            
            
            4,975Depreciation
            
            
            35,111
            
            
            39,233Accretion
                of contract rights
            
            
            3,007
            
            
            4,383Provisions
                for inventory and long-lived assets
            
            
            234
            
            
            (146
            )Deferred
                income taxes
            
            
            (4,516
            )
            
            (8,640
            )Share-based
                compensation
            
            
            895
            
            
            956Provision
                for doubtful accounts
            
            
            300
            
            
            562Interest
                income from imputed interest on development agreements
            
            
            (3,064
            )
            
            (1,845
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (264
            )
            
            585Inventory
            
            
            1,157
            
            
            1,710Deferred
                contract costs
            
            
            (212
            )
            
            —Prepaid
                expenses and other
            
            
            321
            
            
            (2,902
            )Federal
                and state income tax payable/receivable
            
            
            (1,229
            )
            
            1,851Notes
                receivable
            
            
            (854
            )
            
            (46
            )Accounts
                payable and accrued expenses
            
            
            (566
            )
            
            (10,937
            )Other
                long-term liabilities
            
            
            300
            
            
            (96
            )Deferred
                revenue
            
            
            (4,760
            )
            
            (488
            )NET
                CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            **31,131**
            
            
            **27,034****CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Acquisition
                of property and equipment andleased
                gaming equipment
            
            
            (30,698
            )
            
            (42,960
            )Proceeds
                from disposal of assets
            
            
            340
            
            
            1,447Acquisition
                of intangible assets
            
            
            (3,849
            )
            
            (3,088
            )Advances
                under development agreements
            
            
            (41,660
            )
            
            (12,489
            )Repayments
                under development agreements
            
            
            19,060
            
            
            31,505Proceeds
                from development agreement floor space buyback
            
            
            —
            
            
            10,000NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            **(56,807**
            **)**
            
            **(15,585**
            **)****CASH
                FLOWS FROM /USED IN FINANCING ACTIVITIES:**Proceeds
                from exercise of stock options, warrants,
              and
                related tax benefit
            
            
            277
            
            
            3,774Proceeds
                from shares issued
            
            
            1,168
            
            
            —Proceeds
                from long-term debt
            
            
            3,196
            
            
            —Principal
                payments of long-term debt and capital leases
            
            
            (7,722
            )
            
            (5,124
            )Proceeds
                from revolving lines of credit
            
            
            31,052
            
            
            64,672Payments
                on revolving lines of credit
            
            
            (3,881
            )
            
            (77,514
            )NET
                CASH PROVIDED FROM / USED IN FINANCING ACTIVITIES
            
            
            **24,090**
            
            
            **(14,192**
            **)**EFFECT
                OF EXCHANGE RATES ON CASH
            
            
            (26
            )
            
            (4
            )Net
                decrease in cash and cash equivalents
            
            
            (1,612
            )
            
            (2,747
            )Cash
                and cash equivalents, beginning of period
            
            
            5,805
            
            
            4,939Cash
                and cash equivalents, end of period
            
            $
            4,193
            
            $
            2,192**SUPPLEMENTAL
                CASH FLOW DATA:**Interest
                paid
            
            $
            5,390
            
            $
            3,324Income
                tax paid
            
            $
            6,661
            
            $
            4,517**NON-CASH
                INVESTING AND FINANCING TRANSACTIONS:**Contract
                rights resulting from imputed interest on development agreementnotes
                receivable
            
            
            6,876
            
            
            2,082





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


-7-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**


**(Unaudited)**





**1.**  **SIGNIFICANT
      ACCOUNTING POLICIES**




The
      accompanying consolidated financial statements should be read in conjunction
      with the Company’s consolidated financial statements and footnotes contained
      within the Company’s Annual Report on Form 10-K for the year ended
      September 30, 2007, as amended by Amendment No. 1 on
      Form 10-K/A thereto.




The
      financial statements included herein as of June 30, 2008, and for each
      of the three and nine months ended June 30, 2008 and 2007, have
      been prepared by the Company without an audit, pursuant to accounting principles
      generally accepted in the United States, and the rules and regulations of the
      Securities and Exchange Commission, or SEC. They do not include all of the
      information and footnotes required by accounting principles generally accepted
      in the United States for complete financial statements. The information
      presented reflects all adjustments consisting solely of normal recurring
      adjustments which are, in the opinion of management, considered necessary to
      present fairly the financial position, results of operations, and cash flows
      for
      the periods. Operating results for the three and nine months ended
      June 30, 2008, are not necessarily indicative of the results which
      will be realized for the year ending September 30, 2008.




***Operations –*** The
      Company is a supplier of interactive systems, electronic games, and player
      terminals for the Native American gaming market, as well as for the racetrack
      casino, charity and commercial bingo/sweepstakes and video lottery markets.
      The
      Company designs and develops networks, software and content that provide its
      customers with, among other things, comprehensive gaming systems delivered
      through a telecommunications network linking the Company’s player terminals with
      one another, both within and among gaming facilities, thereby enabling players
      to simultaneously participate in the same game and to compete against one
      another to win common pooled prizes. The Company’s ongoing development and
      marketing efforts focus on Class II and Class III gaming systems and
      products for use by Native American tribes throughout the United States, video
      lottery systems, sweepstakes, amusement with prize games, other products for
      domestic and international lotteries, and products for domestic and
      international charity and commercial bingo facilities. 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
      offers content for its gaming systems that has been designed and developed
      by
      the Company, as well as game themes the Company has licensed from others. The
      Company currently operates in one business segment.




***Consolidation
      Principles –*** The
      Company’s financial statements include the accounts of Multimedia Games, Inc.
      and its wholly-owned subsidiaries: Megabingo, Inc., MGAM Systems, Inc.,
      Innovative Sweepstakes Systems, Inc., MGAM Services, LLC, MGAM Systems
      International, Inc., Megabingo International, LLC, Multimedia Games de
      Mexico 1, S. de R.L. de C.V., and Servicios de Wild
      Basin S. de R.L. de C.V. Intercompany balances and transactions
      have been eliminated.




***Accounting
      Estimates*** ***–*** The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, the disclosure of contingent assets and liabilities
      at
      the date of the financial statements, and the reported amounts of revenues
      and
      expenses during the reporting period. Examples include share-based compensation,
      provisions for doubtful accounts and contract losses, estimated useful lives
      of
      property and equipment and intangible assets, impairment of property and
      equipment and intangible assets, deferred income taxes, and the provision for
      and disclosure of litigation and loss contingencies. Actual results may differ
      materially from these estimates in the future.




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




***Revenue
      Recognition*** ***–*** In
      accordance with the provision of Staff Accounting Bulleting No. 104,
“Revenue Recognition,” or SAB 104, the Company recognizes revenue when all
      of the following have been satisfied:




§
            Persuasive
                evidence of an arrangement exists;




§
            Delivery
                has occurred;




§
            Price
                to the buyer is fixed or determinable;
                and




§
            Collectibility
                is probable.


-8-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




***Gaming
      Revenue***




The
      Company derives Gaming Revenue from the following sources:




·
            Class II
            –
            Participation
                revenue generated from the Company’s Native American Class II
                product·
            Oklahoma
                Compact
            –
            Participation
                revenue generated from its games placed by the Company under the
                Oklahoma
                Compact·
            Charity
            –
            Participation
                revenue generated from its charity bingo product·
            All
                Other
            –
            Participation
                revenue from Class III back-office systems, New York Lottery system,
                Mexico bingo market, and certain other participation based markets




The
      majority of the Company’s gaming revenue is of a recurring nature, and is
      generated under lease participation arrangements when the Company provides
      its
      customers with player terminals, player terminal-content licenses and
      back-office equipment, collectively referred to as gaming equipment. Under
      these
      arrangements, the Company retains ownership of the gaming equipment installed
      at
      customer facilities, and the Company receives revenue based on a percentage
      of
      the net win per day generated by the gaming equipment. Revenue from lease
      participation arrangements are considered both realizable and earned at the
      end
      of each gaming day.




Gaming
      Revenue generated by player terminals deployed at sites under development
      agreements is reduced by the accretion of contract rights from those development
      agreements. Contract rights are amounts allocated to intangible assets for
      dedicated floor space resulting from development agreements, described under
      “Development Agreements.” The related amortization expense, or accretion of
      contract rights, is netted against its respective revenue category in the
      consolidated statements of operations.




The
      Company also generates gaming revenues from back-office fees with certain
      customers. Back-office fees cover the service and maintenance costs for
      back-office servers installed in each gaming facility to run its gaming
      equipment, as well as the cost of related software updates. Back-office fees
      are
      considered both realizable and earned at the end of each gaming
      day.




***Gaming
      equipment and system sales***




The
      Company periodically sells gaming equipment and gaming systems under independent
      sales contracts through normal credit terms or may grant extended credit terms
      under contracts secured by the related equipment, with interest recognized
      at
      market rates.




For
      sales
      arrangements with multiple deliverables, the Company applies the guidance from
      Statement of Position, or SOP 97-2, “Software Revenue Recognition,” as amended,
      and Emerging Issues Task Force, or EITF 00-21, “Revenue Arrangements with
      Multiple Deliverables.” Deliverables are divided into separate units of
      accounting if: (i) each item has value to the customer on a stand-alone
      basis; (ii) there is objective and reliable evidence of the fair value of
      the undelivered items; and (iii) delivery of the undelivered item is
      considered probable and substantially in the Company’s control.




The
      majority of the Company’s multiple element sales contracts are for some
      combination of gaming equipment, player terminals, content, system software,
      license fees and maintenance. For multiple element contracts considered a single
      unit of accounting, the Company recognizes revenues based on the method
      appropriate for the last delivered item.




The
      Company allocates revenue to each accounting unit based upon its fair value
      as
      determined by Vendor Specific Objective Evidence, or VSOE. VSOE of fair value
      for all elements of an arrangement is based upon the normal pricing and
      discounting practices for those products and services when sold individually.
      The Company recognizes revenue when the product is physically delivered to
      a
      customer controlled location or over the period in which the service is
      performed and defers revenue for any undelivered elements.




§
            In
                those situations where each element is not essential to the function
                of
                the other, the “multiple deliverables” are bifurcated into accounting
                units based on their relative fair market value against the total
                contract
                value and revenue recognition on those deliverables are recorded
                when all
                requirements of revenue recognition have been
                met.




§
            If
                any element is determined to be essential to the function of the
                other,
                revenues are generally recognized over the term of the services that
                are
                rendered.


-9-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




In
      those
      situations where VSOE does not exist for any undelivered elements of a multiple
      element arrangement, then the aggregate value of the arrangement, including
      the
      value of products and services delivered or performed, is initially deferred
      until all products or services are delivered, and then is recognized ratably
      over the period of the last deliverable, generally the service period of the
      contract. Depending upon the elements and the terms of the arrangement, the
      Company recognizes certain revenues under the residual method. Under the
      residual method, revenue is recognized when VSOE of fair value exists for
      all of the undelivered elements in the arrangement, but does not exist for
      one
      or more of the delivered elements in the arrangement. Under the residual method,
      the Company defers the fair value of undelivered elements, and the remainder
      of
      the arrangement fee is then allocated to the delivered elements and is
      recognized as revenue, assuming the other revenue recognition criteria are
      met.




***Costs
      and Billings on Uncompleted Contract*** **-** During
      fiscal 2008, the Company entered into a fixed-price contract with a
      customer, pursuant to which it will deliver an electronic bingo system. Revenues
      from this fixed-price contract will be recognized on the completed-contract
      method.




Contract
      costs include all direct material and labor costs, and those indirect costs
      related to contract performance, such as indirect labor, supplies and tools.
      General and administrative costs are charged to expense as incurred. Provisions
      for estimated losses on uncompleted contracts are made in the period in which
      such losses are determined.




Costs
      in
      excess of amounts billed are classified as current assets under “Deferred
      contract costs.”




At
      June
      30, 2008, the following amounts were recorded in the Company’s consolidated
      financial statements:


**June 30,**
                **2008**(in thousands)Costs
                  incurred on uncompleted contracts
              
              $
              564Billings
                  on uncompleted contracts
              
              
              (352
              )Deferred
                  contract costs
              
              $
              212




***Cash
      and Cash Equivalents –*** The
      Company considers all highly liquid investments (i.e., investments which, when
      purchased, have original maturities of three months or less) to be cash
      equivalents.




***Restricted
      Cash and Long-Term Investments –*** Restricted
      cash and long-term investments at June 30, 2008, were
      $868,000 representing the fair value of investments held by the Company’s
      prize fulfillment firm related to outstanding MegaBingo ® jackpot
      prizes.




***Allowance
      for Doubtful Accounts –*** The
      Company maintains an allowance for doubtful accounts related to its accounts
      receivable and notes receivable that have been deemed to have a high risk of
      uncollectibility. Management reviews its accounts receivable and notes
      receivable on a monthly basis to determine if any receivables will potentially
      be uncollectible. Management analyzes historical collection trends and changes
      in its customer payment patterns, customer concentration, and creditworthiness
      when evaluating the adequacy of its allowance for doubtful accounts. In its
      overall allowance for doubtful accounts, the Company includes any receivable
      balances where uncertainty exists as to whether the account balance has become
      uncollectible. Based on the information available, management believes the
      allowance for doubtful accounts is adequate; however, actual write-offs might
      exceed the recorded allowance.




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




***Property
      and Equipment and Leased Gaming Equipment –*** Property
      and equipment and leased gaming equipment are stated at cost. The cost of
      property and equipment and leased gaming equipment is depreciated over their
      estimated useful lives, generally using the straight-line method for financial
      reporting, and regulatory acceptable methods for income tax reporting purposes.
      Player terminals placed with customers under participation arrangements are
      included in leased gaming equipment. Leased gaming equipment includes a “pool”
of rental terminals, i.e., the “rental pool.” Rental pool units are those units
      that have previously been placed in the field under participation arrangements,
      but are currently back with the Company, being refurbished and/or awaiting
      redeployment. Routine maintenance of property and equipment and leased gaming
      equipment is expensed in the period incurred, while major component upgrades
      are
      capitalized and depreciated over the estimated remaining useful life of the
      component. Sales and retirements of depreciable property are recorded by
      removing the related cost and accumulated depreciation from the accounts. Gains
      or losses on sales and retirements of property are reflected in the Company’s
      results of operations.


-10-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




Management
      reviews long-lived asset classes for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. Recoverability of assets to be held and used is measured by a
      comparison of the carrying amount of an asset to its fair value, which considers
      the future undiscounted cash flows expected to be generated by the asset. If
      such assets are considered to be impaired, the impairment recognized is measured
      by the amount by which the carrying amount of the assets exceeds their fair
      value. Assets to be disposed of are reported at the lower of the carrying amount
      or the fair value less costs of disposal.




***Deferred
      Revenue –*** Deferred
      revenue represents amounts from the sale of gaming equipment and systems that
      have been billed, or for which notes receivable have been executed, but which
      transaction has not met the Company’s revenue recognition criteria. The cost of
      the related gaming equipment and systems has been offset against deferred
      revenue. Amounts are classified between current and long-term liabilities,
      based
      upon the expected period in which the revenue will be recognized.




***Other
      Income -*** Other
      income was $828,000 for the quarter ended June 30, 2008. Other
      income consisted of distributions from a limited partnership interest, accounted
      for on the cost basis.




***Other
      Long-Term Liabilities –*** Other
      long-term liabilities at June 30, 2008, include investments held at
      fair value by the Company’s prize-fulfillment firm related to outstanding
      MegaBingo jackpot-prize-winner annuities of $868,000. At
      June 30, 2008, other long term liabilities also included $300,000
      related to a separation agreement with a former Chief Executive
      Officer.




***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, 2008, the carrying amounts for
      the Company’s financial instruments, which include accounts and notes
      receivable, accounts payable, the Revolving Credit Facility, and long-term
      debt
      and capital leases, approximate fair value.




***Income
      Taxes –*** The
      Company accounts for income taxes using the asset and liability method and
      applies the provisions of Statement of Financial Accounting Standards, or
      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 bases for financial reporting, and are
      subject to tests of recoverability in the case of deferred tax assets. Deferred
      tax assets and liabilities are measured using enacted tax rates expected to
      apply to taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred tax assets and
      liabilities of a change in tax rates is recognized in income in the period
      that
      includes the enactment date. A valuation allowance is provided for deferred
      tax
      assets to the extent realization is not judged to be more likely than
      not.




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




***Share-Based
      Compensation –*** Prior
      to
      October 1, 2005, the Company elected to follow the
      intrinsic-value-based method prescribed by Accounting Principles Board Opinion,
      or APB, No. 25, “Accounting for Stock Issued to Employees,” to account for
      its stock option plans, as allowed by SFAS No. 123, “Accounting for Stock
      Based Compensation.” Under APB No. 25 and its interpretations, the
      Company did not recognize compensation expense for stock option grants to
      common-law employees and directors, where the options had an exercise price
      equal to or greater than the market price of the stock on the date of
      grant.




On
      October 1, 2005, the Company adopted the provisions of
      SFAS No. 123(revised), “Share-Based Payment.”
SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes
      APB No 25. Among other items, SFAS No. 123(R) eliminated the use
      of APB No. 25 and the intrinsic value method of accounting, and
      requires the Company to recognize in the financial statements, the cost of
      employee services received in exchange for awards of equity instruments, based
      on the grant date fair value of those awards. To measure the fair value of
      stock
      options granted to employees, the Company currently utilizes the
      Black-Scholes-Merton option-pricing model, consistent with the method used
      for
      pro forma disclosures under SFAS No. 123. SFAS No. 123(R) permits
      companies to adopt its requirements using either a “modified prospective”
method, or a “modified retrospective” method. The Company applied the “modified
      prospective” method, under which compensation cost is recognized in the
      financial statements beginning with the adoption date for all share-based
      payments granted after that date, and for all unvested awards granted prior
      to
      the adoption date of SFAS No. 123(R).


-11-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




The
      Black-Scholes-Merton model incorporates various assumptions, including expected
      volatility, expected life, and risk-free interest rates. The expected volatility
      is based on the historical volatility of the Company’s common stock over the
      most recent period commensurate with the estimated expected life of the
      Company’s stock options, adjusted for the impact of unusual fluctuations not
      reasonably expected to recur. The expected life of an award is based on
      historical experience and on the terms and conditions of the stock awards
      granted to employees.




During
      the quarter ended June 30, 2008, options to purchase 1.3 million
      shares of common stock were granted. The 1.3 million shares granted
      were valued at $2.231 per share, resulting in stock compensation expense
      of $2,900,300 that will be expensed over the four-year vesting term.
      Assumptions used in computing the $2.231 value per share were i) a 50%
      volatility rate; ii) a 5-year expected term; iii) a 3.73% risk-free
      interest rate; and iv) a 5.31% forfeiture rate; and v) a 0% dividend
      rate. During the quarter ended June 30, 2008, approximately $29,000 of
      the $2,900,300 was recorded, leaving $2,871,300 million to be expensed over
      the next four years. Total pretax share-based compensation for the quarter ended June 30, 2008, was $308,000 .
      The
      total income tax benefit recognized in the statement of operations for
      share-based compensation arrangements was $28,000 for
      the
      quarter ended June 30, 2008 .
      As of
      June 30, 2008, $3.8 million of unamortized stock compensation
      expense will be recognized over the vesting periods of the various option
      grants.




***Foreign
      Currency Translation.*** The
      Company accounts for currency translation in accordance with
      SFAS No. 52, “Foreign Currency Translation.” Balance sheet accounts
      are translated at the exchange rate in effect at each balance sheet date. Income
      statement accounts are translated at the average rate of exchange prevailing
      during the period. Translation adjustments resulting from this process are
      charged or credited to other comprehensive income (loss) in accordance with
      SFAS 130, “Reporting Comprehensive Income.”




***Recent
      Accounting Pronouncements Issued.*** On
      July 13, 2006, the Financial Accounting Standards Board, or FASB,
      issued FASB Interpretation No. 48, or FIN 48, “Accounting for
      Uncertainty in Income Taxes,” an interpretation of SFAS, No. 109.
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with
      SFAS No. 109. FIN 48 also prescribes a recognition threshold and
      measurement attribute for the financial statement recognition, and for the
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      new FASB standard also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. The Interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company adopted FIN 48 in the first
      quarter of fiscal 2008 and recorded a reserve of $295,000 related to
      uncertain tax positions in the first quarter of fiscal 2008. There have
      been no additional reserves booked in fiscal 2008 related to
      FIN 48.




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




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




In
      December 2007, the FASB issued SFAS No. 141 (revised), “Business
      Combinations.” SFAS No. 141(R) changes the accounting for business
      combinations including the measurement of acquirer shares issued in
      consideration for a business combination, the recognition of contingent
      consideration, the accounting for preacquisition gain and loss contingencies,
      the recognition of capitalized in-process research and development, the
      accounting for acquisition-related restructuring cost accruals, the treatment
      of
      acquisition related transaction costs and the recognition of changes in the
      acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for
      fiscal years beginning after December 15, 2008, with early adoption
      prohibited. The Company will be required to adopt SFAS No. 141(R) in the
      first quarter of fiscal year 2009.


-12-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




In
      December 2007, the FASB issued SFAS No. 160, “Non Controlling
      Interests in Consolidated Financial Statements, an amendment of Accounting
      Research Bulletin, or ARB No. 51, “Consolidated Financial Statements.” SFAS
      No. 160 changes the accounting for non controlling (minority) interests in
      consolidated financial statements including the requirements to classify non
      controlling interests as a component of consolidated stockholders’ equity, and
      the elimination of “minority interest” accounting in results of operations with
      earnings attributable to non controlling interests reported as part of
      consolidated earnings. Additionally, SFAS No. 160 revises the accounting
      for both increases and decreases in a parent’s controlling ownership interest.
      SFAS No. 160 is effective for fiscal years beginning after
      December 15, 2008, with early adoption prohibited The Company will be
      required to adopt SFAS No. 160 in the first quarter of fiscal
      year 2009. The Company does not expect the adoption of SFAS No. 160 to
      have a material effect on its operations or financial position.




**2.**  **DEVELOPMENT
      AGREEMENTS**




The
      Company enters into development agreements to provide financing for new gaming
      facilities or for the expansion of existing facilities. In return, the facility
      dedicates a percentage of its floor space to placement of the Company’s player
      terminals, and the Company receives a fixed percentage of those player
      terminals’ hold per day over the term of the agreement. The agreements typically
      provide for some or all of the advances to be repaid by the customer to the
      Company. Amounts advanced in excess of those to be reimbursed by the customer
      are allocated to intangible assets and are generally amortized over the life
      of
      the contract, which is recorded as a reduction of revenue generated from the
      gaming facility. Certain of the agreements contain player terminal performance
      standards that could allow the facility to reduce a portion of the Company’s
      floor space. In the past and in the future, the Company may by mutual agreement
      and for consideration, amend these contracts to reduce its floor space at the
      facilities. Any proceeds received for the reduction of floor space is first
      applied as a recovery against the intangible asset or property and development
      for that particular development agreement, if any. In the second quarter of
      fiscal 2008, the Company modified a development agreement by agreeing to
      reduce the number of player terminals at a development site. In return, the
      Company received a complete payoff of a note receivable in the amount of
      $4.5 million.




The
      Company has committed to a significant, existing tribal customer to provide
      approximately 43.8%, or $65.6 million, of the total funding for a
      facility expansion. In return for this commitment to fund the expansion, the
      Company will receive approximately 39% of the 3,600 additional gaming
      units that are expected to be placed in the expanded facility in southern
      Oklahoma. The Company recorded all advances as a note receivable and imputed
      interest on the interest free loan. The discount (imputed interest) was recorded
      as contract rights and will be amortized over the life of the agreement. The
      repayment period of the note will be based on the performance of the facility.
      The funding, which commenced in the third quarter of 2007, continued
      with $19.4 million funded in the first quarter of 2008,
      $15.4 million in the second quarter of 2008, and the remaining
      $6.1 million was funded in the third quarter of 2008. As of June 30, 2008 ,
      the
      Company had advanced $65.6 million toward this commitment.




Management
      reviews intangible assets related to development agreements for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. There were no events or changes in circumstance
      during the three and nine months ending June 30, 2008, that would
      require an impairment change to the assets’ carrying value.




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




**June 30,**
              **2008**
            
            **September 30,**
              **2007**Included
                in:
            
            (In
                thousands)Notes
                receivable, net
            
            $
            68,219
            
            $
            49,045Property
                and equipment,
              net
                of accumulated depreciation
            
            
            —
            
            
            56Intangible
                assets - contract rights,
              net
                of accumulated amortization
            
            
            30,948
            
            
            27,080


-13-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




**3.**  **PROPERTY
      AND EQUIPMENT AND LEASED GAMING EQUIPMENT**




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




**June 30,**
              **2008**
            
            **September 30,**
              **2007**
            
            **Estimated**
              **Useful**
              **Lives**(In
                thousands)Gaming
                equipment and third-party gaming content licenses available for deployment(1)
            
            $
            32,808
            
            $
            32,013Deployed
                gaming equipment
            
            
            97,978
            
            
            94,564
            
            
            3-5
                yearsDeployed
                third-party gaming content licenses
            
            
            36,015
            
            
            28,366
            
            
            1.5-3
                yearsTribal
                gaming facilities and portable buildings
            
            
            5,119
            
            
            5,296
            
            
            5-7
                yearsThird-party
                software costs
            
            
            8,554
            
            
            8,434
            
            
            3-5
                yearsVehicles
            
            
            3,459
            
            
            3,499
            
            
            3-10
                yearsOther
            
            
            3,198
            
            
            3,263
            
            
            3-7
                yearsTotal
                property and equipment
            
            
            187,131
            
            
            175,435Less
                accumulated depreciation and amortization
            
            
            (114,076
            )
            
            (100,103
            )**Total
                property and equipment, net**
            
            **$**
            **73,055**
            
            **$**
            **75,332**Leased
                gaming equipment
            
            $
            164,875
            
            $
            154,769
            
            
            3
                yearsLess
                accumulated depreciation
            
            
            (129,046
            )
            
            (116,190
            )**Total
                leased gaming equipment, net**
            
            **$**
            **35,829**
            
            **$**
            **38,579**





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




During
      the three and nine months ended June 30, 2008, the Company disposed of
      or wrote off $484,000 and $615,000 ,
      respectively, of third-party gaming content licenses, tribal gaming facilities
      and portable buildings, vehicles, deployed gaming equipment, and other
      equipment.




Leased
      gaming equipment includes player terminals placed under participation
      arrangements that are either at customer facilities or in the rental
      pool.




**4.**  **INTANGIBLE
      ASSETS**




The
      Company’s intangible assets consisted of the following:




**June 30,**
              **2008**
            
            **September 30,**
              **2007**
            
            **Estimated**
              **Useful**
              **Lives**(In
                thousands**)**Contract
                rights under development agreements
            
            $
            41,821
            
            $
            34,946
            
            
            5-7
                yearsInternally-developed
                gaming software
            
            
            25,902
            
            
            23,255
            
            
            1-5
                yearsPatents
                and trademarks
            
            
            8,302
            
            
            7,450
            
            
            1-5
                yearsOther
            
            
            2,376
            
            
            2,376
            
            
            3-5
                yearsTotal
                intangible assets
            
            
            78,401
            
            
            68,027Less
                accumulated amortization - all other
            
            
            (38,599
            )
            
            (32,143
            )**Total
                intangible assets, net**
            
            **$**
            **39,802**
            
            **$**
            **35,884**




Contract
      rights are amounts allocated to intangible assets for dedicated floor space
      resulting from development agreements. For a description of intangible assets
      related to development agreements, see “Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations .”
The
      related amortization expense, or accretion of contract rights, is netted against
      its respective revenue category in the consolidated statements of operations.
      In
      the preceding table, $14.6 million of the $41.8 million in contract
      rights is not currently being amortized pending completion of a customer
      facility expansion.


-14-
  **MULTIMEDIA
        GAMES, INC.**
 **NOTES
        TO** **CONSOLIDATED
        FINANCIAL STATEMENTS**–**(Continued)**
 **(Unaudited)**


Internally
      developed gaming software is accounted for under the provisions of SFAS
      No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased
      or Otherwise Marketed,” and is stated at cost, which is amortized over the
      estimated useful life of the software, generally using the straight-line method.
      The Company amortizes internally-developed games over a twelve-month period,
      gaming engines over an eighteen-month period, gaming systems over a three-year
      period and its central management systems over a five-year period. Software
      development costs are capitalized once technological feasibility has been
      established, and are amortized when the software is placed into service. Any
      subsequent software maintenance costs, such as bug fixes and subsequent testing,
      are expensed as incurred. Discontinued software development costs are expensed
      when the determination to discontinue is made. For
      the
      three months ended June 30, 2008 and 2007, amortization expense related to internally-developed gaming
      software was  $891,000
      and $1.1 million, respectively. For the nine months
      ended June 30, 2008 and 2007, amortization expense related to internally-developed gaming
      software was $2.4 million and $3.4 million, respectively. During the
      three months ended June 30, 2008 ,
      the
      Company wrote off $42,000 related to internally-developed gaming software,
      compared to a write off of $19,000 in the same period of 2007. For the nine months
      ended June 30, 2008 and 2007, the Company wrote off $350,000 and $245,000,
      respectively.




Management
      reviews intangible assets for impairment at least once per year or whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable.




**5.**  **NOTES
      RECEIVABLE**




The
      Company’s notes receivable consisted of the following:




**June 30,**
              **2008**
            
            **September 30,**
              **2007**(In
                thousands)Notes
                receivable from development agreements
            
            $
            80,914
            
            $
            57,929Less
                imputed interest discount reclassed to contract rights
            
            
            (12,695
            )
            
            (8,884
            )Notes
                receivable from equipment sales and other
            
            
            6,943
            
            
            —Notes
                receivable, net
            
            
            75,162
            
            
            49,045Less
                current portion
            
            
            (20,499
            )
            
            (12,248
            )Notes
                receivable – non-current
            
            $
            54,663
            
            $
            36,797




Notes
      receivable from development agreements are generated from reimbursable amounts
      advanced under development agreements.




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




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




**June 30,**
              **2008**
            
            **September 30,**
              **2007**(In
                thousands)Long-term
                revolving lines of credit
            
            $
            34,171
            
            $
            7,000Term
                loan facility
            
            $
            70,521
            
            $
            75,047Less
                current portion
            
            
            (1,259
            )
            
            (563
            )Long-term
                debt and capital leases, less current portion
            
            $
            69,262
            
            $
            74,484




***Credit
      Facility.*** On
      April 27, 2007, the Company entered into a $150 million Revolving
      Credit Facility which replaced its previous Credit Facility in its entirety.
      O n
      October 26, 2007, the
      Company amended the Revolving Credit Facility, transferring $75 million
      of the revolving credit commitment to a fully funded $75 million term loan
      due April 27, 2012. The Term Loan is amortized at an annual amount of
      1% per year, payable in equal quarterly installments beginning
      January 1, 2008, with the remaining amount due on the maturity date.
      The Company entered into a second amendment to the Revolving Credit facility
      on
      December 20, 2007. The second amendment (i) extended the hedging
      arrangement date related to a portion of the term loan to
      June 1, 2008; and (ii) modified the interest rate margin
      applicable to the Revolving Credit Facility and the term loan.




The
      Credit Facility provides the Company with the ability to finance development
      agreements and acquisitions and working capital for general corporate purposes.
      Amounts under the $75 million revolving credit commitment and
      the $75 million term loan mature in five years, and advances under the
      term loan and revolving credit commitment bear interest at the Eurodollar rate
      plus the applicable spread (6.25% and 7.00%, respectively, as of June 30, 2008 )
      tied to
      various levels of interest pricing determined by total debt to
      EBITDA.


-15-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**




T he
      Credit
      Facility is collateralized by substantially all of the Company’s assets, and
      also contains financial covenants as defined in the agreement.  These
      covenants include (i) a minimum fixed-charge coverage-ratio of not less
      than 1.50 : 1.0; (ii) a maximum total debt to EBITDA ratio
      of not more than 2.25 : 1.00 through June 30, 2008,
      and 1.75 : 1.00 from September 30, 2008 thereafter; and
      (iii) a minimum trailing twelve-month EBITDA of not less
      than $ 57 million
      for the quarter ended September 30, 2007,
      and $ 60 million
      for each quarter thereafter. As of June 30, 2008 ,
      the
      Company is in compliance with its loan covenants. The Credit Facility requires
      certain mandatory prepayments be made on the term loan from the net cash
      proceeds of certain asset sales and condemnation proceedings (in each case
      to
      the extent not reinvested, within certain specified time periods, in the
      replacement or acquisition of property to be used in its businesses). In the
      second quarter of 2008, the Company made a mandatory prepayment of the term
      loan in the amount of $4.5 million due to an early prepayment of a
      development agreement note receivable. As of June 30, 2008 ,
      the
      Credit Facility had availability of $40.2 million,
      subject to covenant restrictions.




The
      Credit Facility also required that the Company enter into hedging arrangements
      covering at least $50 million of the term loan for a three-year period by
      June 1, 2008; therefore, on May 29, 2008, the Company
      purchased, for $390,000, an interest rate cap (5% cap rate) covering
      $50 million of the term loan. The
      Company accounts for this hedge in accordance with FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” which requires
      entities to recognize all derivative instruments as either assets or liabilities
      in the balance sheet, at their respective fair values. We record changes on
      a
      mark to market basis reflecting these changes through interest expense in the
      statement of operations.




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


-16-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS**–**(Continued)**


**(Unaudited)**


**7.**  **EARNINGS
      (LOSS) PER COMMON SHARE**




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




**Three months ended June 30,**
            
            **Nine months ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Income
                (loss) available to common stockholders
              (in
                thousands)
            
            $
            164
            
            $
            685
            
            $
            1,821
            
            $
            (2,121
            )Weighted
                average common shares outstanding
            
            
            26,338,774
            
            
            27,911,379
            
            
            26,270,676
            
            
            27,708,412Effect
                of dilutive securities:Options
            
            
            814,539
            
            
            1,835,164
            
            
            971,046
            
            
            —Weighted
                average common
              and
                potential shares outstanding
            
            
            27,153,313
            
            
            29,746,543
            
            
            27,241,722
            
            
            27,708,412Basic
                earnings (loss) per share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.07
            
            $
            (0.08
            )Diluted
                earnings (loss) per share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.07
            
            $
            (0.08
            )




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




**Three months ended June 30,**
            
            **Nine months ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Common
                Stock Options
            
            
            2,704,241
            
            
            720,233
            
            
            2,483,158
            
            
            4,736,268Range
                of exercise price
            
            $
            4.68-21.53
            
            $
            8.95-21.53
            
            $
            7.40-21.53
            
            $
            1.00-21.53




**8.**  **COMMITMENTS
      AND CONTINGENCIES**




**Litigation**




The
      Company is subject to the possibility of loss contingencies arising in its
      business and such contingencies are accounted for in accordance with SFAS
      No. 5, “Accounting for Contingencies.” In determining loss contingencies,
      the Company considers the possibility of a loss as well as the ability to
      reasonably estimate the amount of such loss or liability. An estimated loss
      is
      recorded when it is considered probable that a liability has been incurred
      and
      when the amount of loss can be reasonably estimated.




***Diamond
      Games.*** On
      November 16, 2004, Diamond Games, Inc., or Diamond Games, filed suit
      in the State Court in Oklahoma City, Oklahoma, against the Company, along with
      others, including Clifton Lind, Robert Lannert, Gordon Graves, Video Gaming
      Technologies, Inc., or VGT, and its president, alleging five causes of action:
      (i) deceptive trade practices; (ii) unfair competition;
      (iii) wrongful interference with business; (iv) malicious wrong /
      prima facie tort; and (v) restraint of trade. The case asserts that the
      Company offered allegedly illegal Class III games on the
      MegaNanza ® and Reel
      Time Bingo ® gaming
      systems to Native American tribes in Oklahoma. Diamond Games claims that the
      offer of these games negatively affected the market for its pull-tab game,
      Lucky
      Tab II. Diamond Games also alleges that the Company’s development
      agreements with Native American tribes unfairly interfere with the ability
      of
      Diamond Games to successfully conduct its business. Diamond Games is seeking
      unspecified damages and injunctive relief.


-17-




**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS – (Continued)**


**(Unaudited)**




Diamond
      Games has recently settled their claims against VGT and its principals. Two
      motions have been pending before the court in connection with the matter:
      (i) Diamond Games filed a motion for partial summary judgment seeking a
      court ruling on game classification for MegaNanza and Reel Time Bingo; and
      (ii) The
      Company filed a
      motion seeking summary judgment based on jurisdictional issues. On
      November 29, 2007, the trial court denied the
      Company’s motion
      for summary judgment on the jurisdictional issues, and ruled on Diamond Games’
motion for partial summary judgment that the
      Company’s MegaNanza and Reel Time Bingo versions 1.0, 1.1
      and 1.2 games are not Class II games under the Indian Gaming
      Regulatory Act of 1988, or IGRA, but instead are Class III
      games.




The
      court’s ruling stated that it was not binding on the
      Company’s tribal
      customers and the
      Company does not
      expect any of the approximately 1,100 Reel Time Bingo games currently in
      play in Oklahoma to be removed as a result of the court’s ruling. Other game
      versions included in the ruling are not in play in Oklahoma. The court’s rulings
      are not dispositive of the case and the opinion has no affect on the right
      of
      Native American tribes to play games offered by the
      Company .
      The
      trial court granted the
      Company’s motion
      for immediate certification of its ruling to the Oklahoma Supreme Court. The
      Company sought
      immediate review of the trial court’s decision. On February 19, 2008,
      the Oklahoma Supreme Court denied the Company’s request for immediate review of
      the trial court’s decision. The action of the Oklahoma Supreme Court does not
      preclude a subsequent appeal of the trial court’s decision and the Company will
      continue to assert that the games in question are legal Class II games, and
      that game classification cannot be decided by an Oklahoma State Court.
      Presently, the parties are engaged in pre-trial discovery. Given the inherent
      uncertainties in this litigation, t he
      Company is
      unable to make any prediction as to the ultimate outcome.




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




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




Upon
      the
      Company’s motion, Gamco’s original complaint was dismissed for lack of standing.
      On March 27, 2006, Gamco filed its Supplemental and Second Amended
      Complaint. On April 17, 2006, the Company filed another motion to
      dismiss, challenging the sufficiency of the rights granted by IGT to Gamco
      to
      sue the Company for patent infringement. The court denied the Company’s motion,
      but acknowledged that the court was creating new case law by permitting Gamco
      to
      sue the Company for patent infringement, given Gamco’s limited patent rights. As
      a result, the court granted the Company’s request to certify the court’s ruling
      for direct review by the Federal Circuit. The Company’s Request for
      Interlocutory Appeal with the Federal Circuit was granted by the Federal
      Circuit. On October 15, 2007, the Federal Circuit reversed the
      District Court’s Order refusing to dismiss Gamco’s complaint against the
      Company. The Federal Circuit held that Gamco does not have sufficient rights
      in
      the ‘035 Patent to sue the Company without the involvement of the patent
      owner, IGT.




On
      December 4, 2007, Gamco and IGT entered into an Amended and
      Restated Exclusive License Agreement whereby IGT granted to Gamco exclusive
      rights to the ‘035 Patent in the state of New York and the right to sue for
      past infringement of the same. On January 9, 2008, Gamco filed its
      Third Amended Complaint for Infringement of the ‘035 Patent against the
      Company. On January 28, 2008, the Company filed an Answer to the
      Complaint denying liability. The Company also filed a Second Amended
      Counterclaim against Oasis, Gamco, and certain officers at Gamco, promise
      without intent to perform, negligent misrepresentation, breach of contract,
      specific performance and reformation of contract with regard to the Company’s
      rights under the Sublicense Agreement for the ‘035 Patent, as well as for
      non infringement and invalidity of the Patent. The court has scheduled a Markman
      hearing to construe the claims of the ‘035 Patent for
      November 19, 2008. A trial date has not been set by the
      court.


-18-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS – (Continued)**


**(Unaudited)**




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




***Aristocrat
      Technologies, Inc.*** On
      January 27, 2005, Aristocrat Technologies, Inc., or Aristocrat, filed
      suit in the U.S. District Court for the Central District of California against
      the Company, alleging that deployment of the Company’s networked
      central-determinant instant lottery system infringes U.S. Letters Patent
      No. 4,817,951, entitled
      “Player Operable Lottery Machine Having Display Means Displaying Combination
      of
      Game Result Indicia,” or
      the ‘951 Patent. Aristocrat sought an injunction, damages, and a
      trebling of damages for willful infringement. On April 10, 2006, the
      Company filed a Motion for Summary Judgment challenging the validity of the
      ‘951 Patent under 35 U.S.C. §§ 112(2) and (6). On
      April 13, 2007, the court granted the Company’s motion and judgment
      was entered against Aristocrat and in favor of the Company on
      April 16, 2007. Aristocrat appealed to the Federal Circuit Court of
      Appeals the district court’s order invalidating the ‘951 Patent. A hearing
      on the matter was held on January 8, 2008.




On
      February 22, 2008, the Federal Circuit issued a decision reversing the
      District Court’s order granting summary judgment and remanding the case for
      further proceedings. The Federal Circuit held that the record needed further
      development and clarification before a decision on the validity of the Patent
      under 35 U.S.C. § 112(6) could be determined. The district court
      ordered the Company to file its renewed motion for summary judgment in light
      of
      the Federal Circuit’s decision by May 9, 2008. The Company filed its
      renewed motion and a hearing was scheduled for
      August 1, 2008.




On
      June 30, 2008, the Company and Aristocrat attended a settlement
      conference. At that conference, the parties reached agreement on the terms
      of a
      resolution to their dispute which will result in a dismissal of the case with
      prejudice. The pending settlement will not require the Company to record a
      liability.




***WMS
      Industries, Inc.*** In
      April 2007, WMS Gaming, Inc., or WMS, a third-party game supplier from
      which the Company and its wholly-owned subsidiary, MegaBingo, Inc., license
      games and purchase game machines, contacted the Company and claimed that the
      form of the reports that the Company had provided for several years was not
      adequate with respect to WMS game themes placed on gaming machines in the field.
      WMS asserted that the reports were insufficient to permit a definitive
      determination that reported transactions were non-chargeable transfers rather
      than chargeable new placements. WMS also asserted that governing license
      agreements, or the Agreements, did not give the Company the right to substitute
      a game theme on a gaming machine without the payment of an additional license
      fee. The Company responded that the reporting had been adequate and accepted
      by
      WMS and that the substitution was supported by the Agreements and by the
      original intent and course of dealing of the parties. On or about
      December 21, 2007, the Company and WMS entered into an agreement
      that settled all pending disputes between them. In
      addition to clarifying disputed contractual language, the modifications to
      the
      Agreements require the Company to purchase, at previously negotiated prices,
      additional units and licenses by December 31, 2008




***Cory
      Investments Ltd.***  On
      May 7,
      2008, Cory Investments, LTD., or Cory Investments, filed suit in the State
      Court
      in Oklahoma City, Oklahoma against the Company, along with others, including
      Clifton Lind, Robert Lannert, Gordon Graves, Video Gaming Technologies, Inc.
      or
      VGT, its president, Jon Yarbrough, John Marley, Worldwide Gaming Technologies,
      AGS, LLC, d/b/a American Gaming Systems, AGS Partners, LLC, Ron Clapper, Sierra
      Design Group and Bally. The case asserts that the Company offered allegedly
      illegal Class III games on the MegaNanza and Reel Time Bingo gaming systems
      to Native American tribes in Oklahoma which had a severe negative impact on
      Cory
      Investments’ market for its legal Class II games. Cory Investments also alleges
      that the Defendants conspired to drive it and other Class II competitors
      out of the Class II market in Oklahoma and other states. In addition to the
      conspiracy allegations, Corey Investments alleges six causes of action:
      (i) deceptive trade practices; (ii) common law unfair competition;
      (iii) wrongful interference with business; (iv) malicious wrong /
      prima facie tort; (v) intentional interference with contract; and
      (vi) unreasonable restraint of trade. Cory Investments is seeking
      unspecified actual and punitive damages and equitable relief.




The
      Company and the other defendants were only recently served with summons and
      a
      copy of the lawsuit during the week of July 21, 2008 and a response to
      the petition is not yet due. The Company believes that the claims of Cory
      Investments are without merit and intends to defend the case vigorously. Given
      the inherent uncertainties in this litigation, the
      Company is unable
      to
      make any prediction as to the ultimate outcome.


-19-


**MULTIMEDIA
      GAMES, INC.**


**NOTES
      TO** **CONSOLIDATED
      FINANCIAL STATEMENTS – (Continued)**


**(Unaudited)**




***NIGC
      Class II Game Classification Regulations*** ***.***  On
      October 24, 2007, the National Indian Gaming Commission, or NIGC,
      published in the Federal Register, four proposed rules concerning classification
      standards to distinguish between Class II games played with technologic
      aids and Class III facsimiles of games of chance, a revision of the
      definition of “electronic or electromechanical facsimile,” technical standards
      for Class II gaming and Class II minimum internal control standards.
      If the classification standards and the revised definition of “electronic or
      electromechanical facsimile” become final regulations, the Company anticipates
      that these regulations will have a material and adverse economic impact on
      the
      Class II gaming market by limiting the use of Class II electronic
      technology and severely restricting the manner in which bingo may be played,
      thereby making Class II games less attractive to customers. On
      January 15, 2008, the NIGC extended the comment period for the
      proposed Class II gaming regulations until March 9, 2008.
      However, in May 2008, the
      Chairman of the NIGC announced that the NIGC would not move forward with its
      plans to publish final regulations revising the definition of “electronic or
      electromechanical facsimile” and implementing new Class II gaming
      classification standards.  The
      NIGC
      still plans to publish two other sets of regulations establishing technical
      standards for Class II electronic gaming and Class II minimum internal
      control standards.




***Development
      Agreements.*** In 2004,
      the Company received a letter from the Acting General Counsel of the NIGC,
      dated
      November 30, 2004, advising the Company that its agreements with a
      certain customer may evidence a proprietary interest by it in a tribe’s gaming
      activities, in violation of IGRA and the tribe’s gaming ordinances. The NIGC
      invited the Company and the tribe to submit any explanation or information
      that
      would establish that the agreements’ terms do not violate the requirement that
      tribes maintain sole proprietary interest in their own gaming
      operations.




In
      a
      letter dated November 8, 2007, the Acting General Counsel of the NIGC
      reiterated the statements made in her November 30, 2004 letter, that
      the NIGC did not then conclude that the agreements with the tribe that it
      reviewed constituted management agreements, but that the NIGC was concerned
      that, taken together, the agreements demonstrated a proprietary interest, by
      the
      Company, in the tribe’s gaming activity that may be contrary to law. Although the
      Company believes that it responded to the NIGC in 2004, explaining why the
      agreements did not violate the sole proprietary interest prohibition of IGRA
      and
      did not constitute a management agreement, the November 8, 2007 letter
      indicated that the NIGC did not receive the written explanation or further
      information and is now requesting an explanation. On
      December 17, 2007, the Company responded in writing to the NIGC,
      correcting the misstatements contained in the NIGC’s 2004 letter. To date,
      the Company has received no further communication from the NIGC on this
      issue.




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




The
      Company’s development agreements could be subject to further review at any time.
      Any further review of the Company’s development agreements by the NIGC, or
      alternative interpretations of applicable laws and regulations could require
      substantial modifications to the agreements, or result in their designation
      as
“management contracts,” which could materially and adversely affect the terms on
      which the Company 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
      various other claims will not have a material adverse effect on its results
      of
      operations or financial condition.




***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.


-20-




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




**FUTURE
      EXPECTATIONS AND FORWARD-LOOKING STATEMENTS**




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




**Overview**




We
      are a
      leading developer and distributor of comprehensive systems, content, electronic
      games and gaming player terminals for the casino, charity, international bingo,
      and video lottery markets. Initially, our customers were located primarily
      in
      the Native American gaming sector; however, around 2003, we began
      diversifying into broader domestic and international gaming
      markets.




Although
      we continue to develop systems and products for Native American tribes
      throughout the United States, we now develop and market i) products and
      services for the commercial casino market; ii) video lottery systems and
      other products for domestic and international lotteries; and iii) products
      for charity and international bingo and other emerging markets.




Our
      products cover a broad spectrum of the gaming industry, including: interactive
      systems for both server-based and stand-alone gaming operations; interactive
      electronic bingo games for the Class II gaming market and for the
      Class III, stand-alone and video lottery markets; proprietary gaming player
      terminals in multiple configurations and formats; electronic instant lottery
      scratch ticket systems; casino management systems, including player tracking,
      cash and cage, slot accounting, and slot management modules; unified currency
      systems; and other electronic and paper bingo systems. In addition, we provide
      maintenance, operations support and other services for our customers and
      products.




We
      design
      and develop networks, software and content that provide our customers with,
      among other things, comprehensive gaming systems, some of which are delivered
      through a telecommunications network that links our player terminals with one
      another, both within a single gaming facility or among several gaming
      facilities.




We
      derive
      the majority of our gaming revenue from participation (revenue sharing)
      agreements, pursuant to which we place systems, player terminals, proprietary
      and licensed content operated on player terminals, and back-office systems
      and
      equipment (collectively referred to as “gaming systems”), into gaming
      facilities. To a lesser degree, we earn revenue from the sale or placement
      of
      gaming systems (e.g., the opening of a new casino, or a change in the law that
      allows existing casinos to increase the number of player terminals permitted
      under prior law) on a lease-purchase or participation basis and from the
      back-office fees generated by video lottery systems, principally in the
      Washington State, Class III market. We also generate gaming revenue as
      consideration for providing the central determinant system for a network of
      player terminals operated by the New York State Division of the Lottery. In
      addition, we earn a small portion of our revenue from the sale of lottery
      systems and the placement of nontraditional gaming products, such as electronic
      scratch tickets, sweepstakes, or linked interactive paper bingo systems.
      Recently, we entered the international electronic bingo market and currently
      supply bingo systems to three customers in Mexico, whereby we receive fees
      based
      on the net earnings of each system. During fiscal 2009, we intend to
      generate revenue from the sale of non-linked Class III player terminals to
      Class III Native American markets.


-21-




**Class II
      Market**




We
      derive
      our Class II gaming revenues from participation arrangements with our
      Native American customers. Under these arrangements, we retain ownership of
      the
      gaming equipment installed at our customers’ tribal gaming facilities, and
      receive revenue based on a percentage of the hold per day generated by each
      gaming system. Our portion of the hold per day is reported by us as “Gaming
      revenue - Class II” and represents the total amount that end users wager,
      less the total amount paid to end users for prizes, the amounts retained by
      the
      facilities for their share of the hold and the accretion of contract
      rights.




As
      the
      Class II market has matured, we have seen new competitors with significant
      gaming experience and financial resources enter the market. New tribal-state
      compacts, such as the Oklahoma gaming legislation passed by referendum
      in 2004, have also led to increased competition. In addition, there has
      been what we believe to be an extended period of non enforcement by regulators
      of existing restrictions on non-Class II devices, which has forced us to
      continue competing against games that do not appear to comply with the published
      regulatory restrictions on Class II games. As a result of this increased
      competition in Oklahoma, and continued conversion to games played under the
      compact, we have and may continue to experience pressure on our pricing model
      and hold per day, with the result that gaming providers, including the Company,
      are competing on the basis of price as well as the entertainment value and
      technological superiority of their products. We have also experienced and expect
      to continue to experience a decline in the number of our Class II games
      deployed in Oklahoma, in accordance with our recent conversion strategy. While
      we will continue to compete by regularly introducing new and more entertaining
      games with technological enhancements that we believe will appeal to end users,
      we believe that the level of revenue retained by our customers from their
      installed base of player terminals will become a more significant competitive
      factor, one that may require us to change the terms of our participation
      arrangements with customers. We will continue the deployment of one-touch,
      compact-compliant Class III games in Oklahoma, which will reduce the number
      of Class II machines in play.




ClassIII
      Games and Systems for Oklahoma




During 2004,
      the Oklahoma Legislature passed legislation authorizing certain forms of gaming
      at racetracks, and additional types of games at tribal gaming facilities,
      pursuant to a tribal-state compact. The Oklahoma gaming 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 are allowed to operate a limited
      number of instant and bonanza-style bingo games and electronic amusement games.
      All vendors placing games at any of the racetracks under 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 have to be certified
      by independent testing laboratories to meet technical specifications. These
      technical specifications were published by the Oklahoma Horse Racing Commission
      and the individual tribal gaming authorities in the first calendar quarter
      of 2005. We are fully licensed in Oklahoma and as of June 30, 2008 ,
      we had
      placed 5,325 player terminals at 41 facilities
      that are operating under the Oklahoma gaming compact. We generally receive
      a 20% revenue share for the games played under the Oklahoma Gaming
      Compact.




**Class III
      Games and Systems for Native American and Commercial Casino
      Markets**




During
      fiscal 2007, we began designing and developing stand-alone Class III
      player terminals to be sold or placed on a revenue share basis in the large
      and
      broad Class III stand-alone gaming market for Native American casinos as
      well as domestic and international commercial casinos. All player terminals
      delivered to these markets will have to receive specific jurisdictional
      approvals from the appropriate testing laboratory and from the appropriate
      regulatory agency. Our first group of stand-alone player terminals has been
      placed in the Class III stand-alone market in Rhode Island. We believe that
      we will deliver additional player terminals to other Class III markets
      beginning in fiscal 2009. We have recently announced key senior management
      personnel additions which we believe will help accelerate our entrance into
      new
      class III markets.




**Charity
      Market**




Charity
      bingo and other forms of charity gaming are operated by or for the benefit
      of
      non profit organizations for charitable, educational and other lawful purposes.
      These games are typically only interconnected within the gaming facility where
      the terminals are located. Regulation of charity gaming is vested with each
      individual state, and in some states, regulatory authority is delegated to
      county or municipal governmental units. In
      Alabama, our largest charity market, constitutional amendments have been passed
      authorizing charity bingo in certain locations. The regulation of charity bingo
      in Alabama is typically vested with a local governmental authority. We
      typically place player terminals under participation arrangements in the charity
      market and receive a percentage of the hold per day generated by each of the
      player terminals. As of June 30, 2008 ,
      we had
      2,290 high-speed, standard bingo games installed for the charity market in
      three Alabama facilities.


-22-




**All
      Other Gaming Markets**




***Class III
      Washington State Market.*** ** The
      majority of our Class III gaming equipment in Washington State has been
      sold to customers outright, for a one-time purchase price, which is reported
      in
      our results of operations as “Gaming equipment, system sale and lease revenue.”
Certain game themes we use in the Class III market have been licensed from
      third parties and are resold to customers along with our Class III player
      terminals. Historically, revenue from the sale of Class III gaming
      equipment is recognized when the units are delivered to the customer, and the
      licensed games installed, or over the contract term when fair value of
      undelivered products has not been established. Because we sell new products,
      systems and services for which fair value has not been established, beginning
      in
      fiscal 2008, revenue generated from this market will generally be
      recognized over the terms of the contracts. To a considerably lesser extent,
      we
      also enter into either participation arrangements or lease-purchase arrangements
      for our Class III player terminals, on terms similar to those used for our
      player terminals in the Class II market.




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




***State
      Video Lottery Market.***  In
      January 2004, we installed our central determinant system for the video
      lottery terminal network that the New York Lottery operates at licensed New
      York
      State racetrack casinos. As payment for providing and maintaining the central
      determinant system, we receive a small portion of the network-wide hold per
      day.
      Our contract with the New York Lottery provides for a three-year term with
      an
      additional three one-year automatic renewal under certain conditions. We are
      seeking to take advantage of the recently passed legislation in New York State
      that allows the New York Lottery to extend its vendor contracts at its sole
      discretion. Assuming that the automatic renewals will continue, we are working
      to significantly extend the current contract which is set to expire
      in 2010.




***International
      Commercial Bingo Market.***  In
      March 2006, we entered into a contract with Apuestas
      Internacionales,  S.A.
      de C.V., or Apuestas, a subsidiary of Grupo Televisa, S.A., to provide
      traditional and electronic bingo gaming, technical assistance, and related
      services for Apuestas’ locations in Mexico. Apuestas currently has a permit
      issued by the Mexican Ministry of the Interior (Secretaria de Gobernación) to
      open and operate 65 bingo parlors. Apuestas is projecting that all
      65 bingo parlors will be open by May 2011. As of June 30, 2008 ,
      we had
      installed 4,115 player terminals at 17 bingo
      parlors in Mexico under this contract with Apuestas. At June 30, 2008 ,
      all
      installed player terminals placed in the Apuestas bingo parlors are pursuant
      to
      a revenue share arrangement that is comparable with our Oklahoma
      market.




As
      of
      June 30, 2008, we had entered into separate contracts with two other
      companies incorporated in Mexico to provide traditional and electronic bingo
      gaming, technical assistance, and related services for bingo parlors in Mexico.
      As of June 30, 2008 ,
      we had
      installed 179 player
      terminals at two parlors in Mexico under these contracts.




**Development
      Agreements**




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




Amounts
      advanced that are in excess of those to be reimbursed by such tribes for real
      property and land improvements are allocated to intangible assets and are
      generally amortized over the life of the contract on a straight-line
      basis.




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


-23-




We
      have
      in the past and may in the future, reduce the number of player terminals in
      certain of our facilities as a result of ongoing competitive pressures faced
      by
      our customers from alternative gaming facilities and pressures faced by our
      machines from competitors’ products. We have in the past and in the future may
      also, by mutual agreement and for consideration, amend these contracts in order
      to reduce the number of player terminals at these facilities. In the second
      quarter of fiscal 2008, the Company modified a development agreement by
      agreeing to reduce the number of player terminals at a development site. In
      return, the Company received a complete payoff of a note receivable in the
      amount of $4.5 million.




We
      recently committed to a significant, existing tribal customer to provide
      approximately 43.8%, or $65.6 million, of the total funding for a
      facility expansion. In return for this commitment to fund the expansion, we
      will
      receive approximately 39% of the 3,600 additional gaming units that
      are expected to be placed in the expanded facility in southern Oklahoma. We
      recorded all advances as a note receivable and imputed interest on the interest
      free loan. The discount (imputed interest) was recorded as contract rights
      and
      will be amortized over the life of the agreement. The repayment period of the
      note will be based on the performance of the facility. The funding, which
      commenced in the third quarter of 2007, continued with $19.4 million
      funded in the first quarter of 2008, $15.4 million in the second
      quarter of 2008, and the remaining $6.1 million funded in the third
      quarter of 2008. As of June 30, 2008 ,
      the
      Company had advanced $65.6 million toward this commitment.




As
      a
      result of the recent substantial levels of development activity in Oklahoma,
      we
      expect the future pace of development agreements there to decline somewhat.
      Accordingly, we do not anticipate future levels of development participation
      on
      our part in Oklahoma to keep pace with our historical levels. As of
      June 30, 2008, we have placed 3,930 units
      in 10 facilities in Oklahoma pursuant to development
      agreements.


-24-




**RESULTS
      OF OPERATIONS**




The
      following tables outline our end-of-period and average installed base of player
      terminals for the three and nine months ended
      June 30, 2008 and 2007 .




**At
                June 30,****2008**
            
            **2007****End-of-period
                installed player terminal base**Class II
                player terminalsNew
                Generation system - Reel Time Bingo®
            
            
            2,132
            
            
            4,624Legacy
                system
            
            
            303
            
            
            353Oklahoma
                compacted games
            
            
            5,325
            
            
            3,973Mexico
            
            
            4,294
            
            
            2,426Other
                player terminals(1)
            
            
            2,664
            
            
            2,735





**Three
                Months Ended**
              **June 30,**
            
            **Nine
                Months Ended**
              **June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Average installed player terminal base:**Class II
                player terminalsNew
                Generation System - Reel Time Bingo
            
            
            2,046
            
            
            4,757
            
            
            2,943
            
            
            5,675Legacy
                system
            
            
            306
            
            
            353
            
            
            330
            
            
            359Oklahoma
                compact games
            
            
            5,305
            
            
            3,846
            
            
            4,708
            
            
            3,363Mexico
            
            
            4,355
            
            
            1,893
            
            
            3,717
            
            
            1,196Other
                player terminals(1)
            
            
            2,752
            
            
            2,662
            
            
            2,754
            
            
            2,572





(1)  Other
      player terminals include charity, Rhode Island Lottery and Malta.




**Three
      Months Ended June 30, 2008, Compared to Three Months Ended
      June 30, 2007**




Total
      revenues for the three months ended June 30, 2008, were $30.3 million,
      compared to $30.9 million,
      a decrease of $ 646,000,
      or 2% for the same period of 2007.




***Gaming
      Revenue***–***Class II***




§
            Class II
                gaming revenue was$6.2million
                in the three months ended June 30, 2008, compared to$10.3million
                in the three months endedJune 30, 2007,
                a$4.1million
                or 39% decrease.We
                expect the number of Class II terminals to continue to decrease as
                they are replaced with higher-earning Oklahoma compact player
                terminals.




§
            Reel
                Time Bingo revenue was$5.7million
                for the quarter ended June 30, 2008, compared to$9.6million
                in the quarter ended June 30, 2007, a$3.9million
                or 41% decrease. The average installed base of player terminals
                decreased 57%, which was partially offset by a 46% increase in
                the average hold per day. Accretion of contract rights related to
                development agreements, which is recorded as a reduction of revenue,
                decreased$302,000
                or 61%, to$195,000
                in the three months ended June 30, 2008, compared
                to$497,000in
                the three months ended June 30, 2007.The
                reduction in accretion of contract rights is the result of allocating
                the
                total accretion rights across all product lines with the majority
                being
                allocated against Oklahoma compact revenue.During
                fiscal 2008, we will continue to convert Reel Time Bingo player
                terminals to games played under the compact, which are included in
“Gaming
                revenue **–** Oklahoma compact,” and we expect this
                trend to continue in the future as Reel Time Bingo competes with
                the
                higher hold per day of compact
                games.


-25-




§
            Legacy
                revenue decreased$128,000,
                or 18%, to$566,000in
                the three months ended June 30, 2008, from$694,000in
                the three months ended June 30, 2007. The average installed base
                of Legacy player terminals decreased 13%, and the hold per day
                was consistent in both periods.




***Gaming
      Revenue***–***Oklahoma
      Compact***




§
            In
                March 2005, we began converting Reel Time Bingo player terminals to
                games that could be played under the Oklahoma compact. The Oklahoma
                compact games generated revenue of$14.6million
                in the three months ended June 30, 2008, compared to$10.9million
                during the same period of 2007, an increase of$3.7million,
                or 33%. The average installed base of the Oklahoma compact games
                increased 38%, as the conversion of Class II player terminals to
                compact games continues, while hold per day decreased 3%. We expect
                the rate of conversion from Class II to compact games to decline in
                the future, as over 80% of the Oklahoma installed base at
                June 30, 2008, consisted of Oklahoma compact units.Accretion
                of contract rights related to development agreements, which is recorded
                as
                a reduction of revenue, decreased $22,000, or 3%, to $815,000,
                in 2008, compared to $837,000in2007.




***Gaming
      Revenue***–***Charity***




§
            Charity
                gaming revenues decreased$1.1 million,
                or 24%, to$3.3million
                for the June 30, 2008 quarter, compared to $4.4 million for
                the same quarter of 2007. The average installed base of charity
                player terminals decreased 5%, and the hold per day
                decreased 26%. The decrease in the hold per day is primarily
                attributable to competitive factors and to a lesser extent, economic
                factors. Competitive factors would include, but not limited to, a
                significant increase of competitor units added to the gaming floor
                of our
                largest charity operation, players reward programs not offered on
                our
                player terminals and location of our player terminals on the gaming
                floor.




***Gaming
      Revenue***–***All Other***




§
            Class III
                back-office fees increased$48,000,
                or 5%, to$958,000in
                the three months ended June 30, 2008, from $910,000 during the
                same period of 2007.




§
            Revenues
                from the New York Lottery system increased$297,000,or 19%, to$1.9million
                in the three months ended June 30, 2008,
                from $1.6 million in the three months ended
                June 30, 2007. Currently, eight of the nine planned racetrack
                casinos are operating, with approximately 13,000 total terminals. At
                the current placement levels, we have obtained near break-even operations
                for the New York Lottery system and expect to achieve profitable
                operations after all of the facilities are
                operating.




§
            Revenues
                from the Mexico bingo market increased $1.2 million to
                $2.4millionin
                the three months endedJune 30, 2008,
                from $1.2 million during the same period of2007.As
                of June 30, 2008, we had installed 4,294 player terminals
                at 19 bingo parlors in Mexico compared to 2,426 terminals
                installed at eight bingo parlors at June 30, 2007. Our revenue
                share is in the range of the other electronic bingo markets in which
                we
                operate.




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




§
            Gaming
                equipment and system sale and lease revenue decreased$867,000,
                or 73%,to$314,000for
                the quarter ended June 30, 2008, from $1.2 million for
                the same period of 2007. For the three months ended
                June 30, 2008 and 2007, gaming equipment and system sale
                and lease revenue of$89,000
                and $694,000, respectively,was
                generated by the sale of gaming equipment. In the three months ended
                June 30, 2007, gaming equipment sale revenue included revenues
                of$273,000related to a certain equipment sale being recognized ratably over
                the term
                of the agreement. License revenues for the three
                months endedJune 30, 2008,
                were$225,000,
                compared to$214,000for the three months ended June 30, 2007, an increase
                of$11,000,
                or 5%. Total cost of sales, which includes cost of royalty fees,
                decreased$687,000,
                to$336,000in
                the three months ended June 30, 2008, from$1.0 millionin
                the three months ended June 30, 2007. The decrease primarily
                relates to the decrease in cost of sales associated with the revenue
                discussed above.




***Other
      Revenue***




§
            Other
                revenues decreased$154,000,
                or 31%, to$338,000for
                the quarter ended June 30, 2008, from $492,000 during the
                same period of 2007. The decrease is primarily due to reduced
                maintenance income in the three months ended
                June 2008.




***Selling,
      General and Administrative Expenses***




§
            Selling,
                general and administrative expenses, or SG&A, increased approximately$726,000or 5%,
                to$16.1million
                for the three months ended June 30, 2008, from
                $15.4 million in the same period of 2007. This increase was
                primarily a result of (i) an increase in salaries and wages and the
                related employee benefits of approximately$1.0 million,
                primarily related to costs of $675,000 associated with the
                resignation of a former Chief Executive Officer, along with other
                headcount increases (at June 30, 2008, we employed
                475 full-time and part-time employees, compared to 404 at
                June 30, 2007); (ii)an
                increase in projects, patents and write offs of approximately
                $134,000;and(iii)an
                increase in consulting and contract labor of
                approximately$120,000.
                These increases were partially offset by a decrease inlegal
                and professional fees of$519,000,
                due to the resolution of several legal matters in the third and fourth
                quarters of fiscal 2007. We expect SG&A to increase in the fourth
                quarter of fiscal 2008 over third quarter fiscal 2008 levels as
                a result of additional personnel and higher stock compensation expense
                associated with recent stock option
                grants.


-26-




***Amortization
      and Depreciation***




§
            Amortization
                expense decreased$296,000,
                or 20%, to$1.2million
                for the quarter ended June 30, 2008, compared to
                $1.5 million for the same quarter of 2007. Depreciation expense
                decreased$870,000,
                or 7%, to$12.4million
                for the three months ended June 30, 2008,
                from $13.3 million for the corresponding three-month period
                ended June 30, 2007, primarily as a result of player terminals
                continuing in service beyond their estimated useful
                life.




***Other
      Income and Expense***




§
            Interest
                income increased$418,000,
                or 45%, to$1.3million
                for the three months ended June 30, 2008, from $924,000  in
                the same period of 2007. We entered into development agreements with
                a customer under which approximately$78.4million
                has been advanced and is outstanding at June 30, 2008, and for
                which we impute interest on these interest-free loans. For the quarter
                ended June 30, 2008, we recorded imputed interest of$1.2million
                relating to development agreements with an imputed interest rate
                range of
                6.00% to 9.00%, compared to $554,000 at
                June 30, 2007.




§
            Interest
                expense increased$1.0million
                to$2.0million
                for the three months ended June 30, 2008, from $1.0 million
                in the same period of 2007, due primarily to an increase in amounts
                outstanding under our Credit Facility. During April 2007, we entered
                into a $150 million Revolving Credit Facilitywhich
                replaced our previous Credit Facility in its entirety. On
                October 26, 2007 we amended the Revolving Credit Facility,transferring
                $75 million of the revolving credit commitment to a fully funded
                $75 million term loan. We entered into a second amendment to the
                Revolving Credit facility on December 20, 2007. The second
                amendment (i) extended the hedging arrangement date related to a
                portion of the term loan to June 1, 2008; and (ii) modified
                the interest rate margin applicable to the Revolving Credit Facility
                and
                the term loan.




§
            Other
                income decreased$779,000,
                or 48%, to$828,000for
                the three months ended June 30, 2008, compared to
                $1.6 million in the same period of 2007. Other income primarily
                decreased due to the write off of an intangible asset and related
                liability due to the termination of a non compete agreement with
                a former
                Chief Executive Officer.




Income
      tax expense decreased by $ 387,000,
      to $ 184,000
      for the three months ended June 30, 2008, from $571,000 in the
      same period of 2007. These figures represent effective income tax rates
      of 52.9% and 45.5% for the three months ended June 30, 2008
      and 2007, respectively. The effective tax rate has been impacted by the tax
      treatment of stock compensation expense. To the extent that the Company
      experiences volatility in stock compensation expense, there will remain
      volatility in the effective tax rate.




On
      July 13, 2006, the Financial Accounting Standards Board, or FASB,
      issued FASB Interpretation No. 48, or FIN 48, “Accounting for
      Uncertainty in Income Taxes,” an interpretation of SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with SFAS No. 109. FIN 48 also prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition, and for the measurement of a tax position taken or expected to
      be
      taken in a tax return. The new FASB standard also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Company adopted FIN 48 in the
      first quarter of fiscal 2008 and recorded a reserve of $295,000 (in
      the first quarter of fiscal 2008) related to uncertain tax positions. This
      reserve was charged to Retained Earnings.




**Nine
      Months Ended June 30, 2008, Compared to Nine Months Ended
      June 30, 2007**




Total
      revenues for the nine months ended June 30, 2008, were $92.7 million,
      compared to $90.7 million, an increase of $2.0 million,
      or 2% for the same period of 2007. This increase is primarily the
      result of the increase in the average installed base of games in Mexico and
      the
      increase in Oklahoma compact revenue. These increases are offset by the decrease
      in Class II revenue due to the continued conversion of Reel Time Bingo
      player terminals to games played under the compact and to a decrease in revenue
      from our charity bingo market.


-27-




***Gaming
      Revenue***–***Class II***




§
            Class II
                gaming revenue was$21.8million
                in the nine months endedJune 30, 2008,
                compared to $38.5 million in the nine months endedJune 30, 2007,
                a$16.7million
                or 43% decrease.We
                expect the number of Class II terminals to continue to decrease as
                they are replaced with higher-earning Oklahoma compact player
                terminals.




§
            Reel
                Time Bingo revenue was$20.0million
                for the nine months endedJune 30, 2008,
                compared to $36.3 million for the nine months endedJune 30, 2007,
                a$16.3million
                or 45% decrease. The average installed base of player terminals
                decreased 48% and the average hold per day increased 13%.
                Accretion of contract rights related to development agreements, which
                is
                recorded as a reduction of revenue, decreased$1.3million,
                or 60%, to$890,000in
                the nine months endedJune 30, 2008,
                compared to $2.2 million in the nine months endedJune 30, 2007.The
                reduction in accretion of contract rights is the result of allocating
                the
                total accretion rights across all product lines with the majority
                being
                allocated against Oklahoma compact revenue.During
                fiscal 2008, we will continue to convert Reel Time Bingo player
                terminals to games played under the compact, which are included in
“Gaming
                revenue - Oklahoma compact,” and we expect this trend to continue in the
                future as Reel Time Bingo competes with the higher hold per day of
                compact
                games.




§
            Legacy
                revenue decreased$343,000,
                or 16%, to$1.8million
                in the nine months endedJune 30, 2008,
                from $2.2 million in the nine months endedJune 30, 2007.
                The average installed base of Legacy player terminals
                decreased 8%, and the hold per day
                decreased 6%.




***Gaming
      Revenue***–***Oklahoma
      Compact***




§
            In
                March 2005, we began converting Reel Time Bingo player terminals to
                games that could be played under the Oklahoma compact. The Oklahoma
                compact games generated revenue of$40.3million
                in the nine months endedJune 30, 2008,
                compared to $25.5 million during the same period of 2007, an
                increase of$14.8million,
                or 58%. The average installed base of the Oklahoma compact games
                increased 40%, as the conversion of Class II player terminals to
                compact games continues, while hold per day increased 3%. We expect
                the rate of conversion from Class II to compact games to decline in
                the future, as over 80% of the Oklahoma installed base at
                June 30, 2008, consisted of Oklahoma compact units.Accretion
                of contract rights related to development agreements, which is recorded
                as
                a reduction of revenue, decreased $108,000, or 5%
                to$2.0million,in
                the nine months ended June 30, 2008, compared to$2.1 millionin
                the same period of2007.




***Gaming
      Revenue***–***Charity***




§
            Charity
                gaming revenues decreased$2.0 million,
                or 15%, to$11.6million
                for the nine months endedJune 30, 2008,
                compared to $13.6 million for the same period of 2007. Hold per
                day decreased 15%, and the average installed player terminal base
                decreased  2%. The decrease in the hold per day is primarily
                attributable to competitive factors and to a lesser extent, economic
                factors. Competitive factors would include, but not limited to, a
                significant increase of competitor units added to the gaming floor
                of our
                largest charity operation, players reward programs not offered on
                our
                player terminals and location of our player terminals on the gaming
                floor.




***Gaming
      Revenue***–***All Other***




§
            Class III
                back-office fees decreased$41,000,
                or 2%, to$2.7million
                in the nine months endedJune 30, 2008,
                from $2.8 million during the same period
                of 2007.




§
            Revenues
                from the New York Lottery system increased$1.1 million,
                or 27%, to$5.1million
                in the nine months endedJune 30, 2008,
                from $4.0 million in the nine months endedJune 30, 2007.
                Currently, eight of the nine planned racetrack casinos are operating,
                with
                approximately 13,000 total terminals. At the current placement
                levels, we have obtained near break-even operations for the New York
                Lottery system and expect to achieve profitable operations after
                all of
                the facilities are operating.




§
            Revenues
                from the Mexico bingo market increased $4.6 million to
                $7.0millionin
                the nine months ended June 30, 2008, from $2.4 million
                during the same period of2007.As
                ofJune 30, 2008,
                we had installed 4,294 player terminals at 19 bingo parlors in
                Mexico compared to 2,426 terminals installed at eight bingo parlors
                atJune 30, 2007.
                Our revenue share is in the range of the other electronic bingo markets
                in
                which we operate.


-28-




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




§
            Gaming
                equipment and system sale and lease revenue increased$255,000,
                or 12%, to $2.5millionfor the nine months endedJune 30, 2008,
                from$2.2million
                for the same period of 2007. Gaming equipment and system sale revenue
                of$1.4million
                for the nine months endedJune 30, 2008,
                included the sale of 50 player terminals and one system. Gaming
                equipment and system sale of$1.0 millionfor the nine months endedJune 30, 2007,
                included two system sales and no player terminals. In the nine months
                endedJune 30, 2008
                and2007,
                gaming equipment sale revenue included revenues of$182,000and $787,000, respectively, related to a certain equipment sale being
                recognized ratably over the term of the agreement. License revenues
                for
                the nine months endedJune 30, 2008,
                were$862,000,
                compared to$391,000for the nine months endedJune 30, 2007,
                an increase of$471,000,
                relating to the player terminal sale discussed above. Total cost
                of sales,
                which includes cost of royalty fees, decreased$199,000,
                or 11% to$1.5million
                in the nine months endedJune 30, 2008,
                from$1.7million
                in the nine months endedJune 30, 2007.
                The decrease primarily relates to a reduction in royalty
                fees.




***Other
      Revenue***




§
            Other
                revenues decreased$512,000,
                or 30%, to$1.2 millionfor
                the nine months endedJune 30, 2008,
                from $1.7 million during the same period of 2007. The
                decrease is primarily due to discontinuation of the promotional
                sweepstakes system in
                January 2007.




***Selling,
      General and Administrative Expenses***




§
            Selling,
                general and administrative expenses decreased approximately$1.7million,
                or 3%, to$48.8million
                for the nine months endedJune 30, 2008,
                from$50.5million
                in the same period of 2007. This decrease was primarily a result of(i) a
                decrease in legal and professional fees of$2.1million,
                due to the resolution of several legal matters in the third and fourth
                quarters of fiscal 2007; (ii) a$296,000decrease
                in write offs of third-party gaming content licenses, installation
                costs
                and systems; and (iii) a decrease in repairs and maintenance,
                transportation and related costs of $220,000. These decreases are
                partially offset by (i) an increase in salaries and wages and the
                related employee benefits of approximately $898,000, primarily
                related to costs of $675,000 associated with the resignation of a
                former Chief Executive Officer, along with other headcount increases
                (at
                June 30, 2008, we employed 475 full-time and part-time
                employees, compared to 404 at June 30, 2007) and
                (ii) and an increase in travel and entertainment of $340,000. We
                expect SG&A to increase in the fourth quarter of fiscal 2008 over
                third quarter fiscal 2008 levels as a result of additional personnel
                and higher stock compensation expense associated with recent stock
                option
                grants.




***Amortization
      and Depreciation***




§
            Amortization
                expense decreased$1.5million,
                or 31%, to$3.5million
                for the nine months endedJune 30, 2008,
                compared to $5.0 million for the same period of 2007.
                Depreciation expense decreased$4.1million,
                or 11%, to$35.1million
                for the nine months endedJune 30, 2008,
                from $39.2 million for the corresponding nine-month period endedJune 30, 2007,primarily
                as a result of player terminals continuing in service beyond their
                estimated useful life.




***Other
      Income and Expense***




§
            Interest
                income increased$39,000or 1%, to$3.6million
                for the nine months endedJune 30, 2008,
                from $3.6 million in the same period of 2007. We entered into
                development agreements with a customer under which approximately$78.4million
                has been advanced and is outstanding at June 30, 2008, and for
                which we impute interest on these interest-free loans. For the nine
                months
                endedJune 30, 2008,
                we recorded imputed interest of$3.1million
                relating to development agreements with an imputed interest rate
                range of
                6.00% to 9.00% compared to $1.8 million for the nine months
                ended June 30, 2007.




§
            Interest
                expense increased$3.2million,
                or 89%, to$6.7million
                for the nine months endedJune 30, 2008,
                from $3.5 million in the same period of 2007, due primarily to
                an increase in amounts outstanding under our Credit Facility. During
                April 2007, we entered into a $150 million Revolving Credit
                Facilitywhich
                replaced our previous Credit Facility in its entirety. On
                October 26, 2007, we amended the Revolving Credit Facility,transferring
                $75 million of the revolving credit commitment to a fully funded
                $75 million term loan. We entered into a second amendment to the
                Revolving Credit facility on December 20, 2007. The second
                amendment (i) extended the hedging arrangement date related to a
                portion of the term loan to June 1, 2008; and (ii) modified
                the interest rate margin applicable to the Revolving Credit Facility
                and
                the term loan.




§
            Other
                income decreased$680,000or 25%, to$2.0million
                for the nine months endedJune 30, 2008,
                compared to $2.7 million in the same period of 2007. Other
                income fully consisted of distributions from a partnership interest,
                accounted for on the cost basis that we received during the nine
                months
                ended June 30, 2008. In addition, we had the write off of an
                intangible asset and related liability due to the termination of
                a non
                compete agreement with a former Chief Executive Officer as of April
                2007.


-29-




Income
      tax expense increased by $1.8 million,
      to $919,000 for
      the nine months ended June 30, 2008 ,
      from an
      income tax benefit of $917,000 million in the same period
      of 2007. These figures represent effective income tax rates of 33.5%
      and 30.2% for the nine months ended June 30, 2008 and 2007, respectively.




On
      July 13, 2006, the FASB issued FIN 48, an interpretation of
      SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109. FIN 48 also prescribes a recognition threshold
      and measurement attribute for the financial statement recognition, and for
      the
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      new FASB standard also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. The Company adopted FIN 48 in the first quarter of
      fiscal 2008 and recorded a reserve of $295,000 (in the first quarter
      of fiscal 2008) related to uncertain tax positions. This reserve was
      recorded directly to Retained Earnings. There have been no additional reserves
      booked in fiscal 2008 related to FIN 48.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**




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




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




We
      prepare our consolidated financial statements in conformity with accounting
      principles generally accepted in the United States. As such, we are required
      to
      make certain estimates, judgments and assumptions that we believe are reasonable
      based on the information available. These estimates and assumptions affect
      the
      reported amounts of assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the periods
      presented. There can be no assurance that actual results will not differ from
      those estimates. We believe the following represent our most critical accounting
      policies.




Management
      considers an accounting estimate to be critical if:




§
            It
                requires assumptions to be made that were uncertain at the time the
                estimate was made, and




§
            Changes
                in the estimate or different estimates that could have been selected
                could
                have a material impact on our consolidated results of operation or
                financial condition.




***Revenue
      Recognition.*** As
      further discussed in the discussion of our Revenue Recognition policy in
      Note 1 of our consolidated financial statements, revenue from the sale of
      software is accounted for under Statement of Position 97-2, “Software
      Revenue Recognition,” or SOP 97-2, and its various interpretations. If
      Vendor-Specific Objective Evidence, or VSOE, of fair value does not exist,
      the
      revenue is deferred until such time that all elements have been delivered or
      services have been performed. If any element is determined to be essential
      to
      the function of the other, revenues are generally recognized over the term
      of
      the services that are rendered. In those limited situations where VSOE does
      not
      exist for any undelivered elements of a multiple element arrangement, then
      the
      aggregate value of the arrangement, including the value of products and services
      delivered or performed, is initially deferred until all products or services
      are
      delivered, and then is recognized ratably over the period of the last
      deliverable, generally the service period of the contract. Depending upon the
      elements and the terms of the arrangement, the Company recognizes certain
      revenues under the residual method. Under the residual method, revenue is
      recognized when VSOE of fair value exists for all of the undelivered
      elements in the arrangement, but does not exist for one or more of the delivered
      elements in the arrangement. Under the residual method, the Company defers
      the
      fair value of undelivered elements, and the remainder of the arrangement fee
      is
      then allocated to the delivered elements and is recognized as revenue, assuming
      the other revenue recognition criteria are met.




*Assumptions/Approach
      Used:* The
      determination whether all elements of sale have VSOE is a subjective measure,
      where we have made determinations about our ability to price certain aspects
      of
      transactions.




*Effect
      if Different Assumptions Used* :
      When we
      have determined that VSOE does not exist for any undelivered elements of an
      arrangement, then the aggregate value of the arrangement, including the value
      of
      products and services delivered or performed, is initially deferred until all
      products or services are delivered, and then is recognized ratably over the
      period of the last deliverable, generally the service period of the contract.
      The deferral of revenue under arrangements where we have determined that VSOE
      does not exist has resulted in $6.3 million
      being recorded as deferred revenue at June 30, 2008. If we had made
      alternative assessments as to the existence of VSOE in these arrangements,
      some
      or all of these amounts could have been recognized as revenue prior to
      June 30, 2008.


-30-




***Property
      and Equipment and Leased Gaming Equipment.*** ****** Property
      and equipment and leased gaming equipment is stated at cost. The cost of
      property and equipment and leased gaming equipment is depreciated over their
      estimated useful lives, generally using the straight-line method for financial
      reporting, and regulatory acceptable methods for tax reporting purposes. Player
      terminals placed with customers under participation arrangements are included
      in
      leased gaming equipment. Leased gaming equipment includes a “pool” of rental
      terminals, i.e., the “rental pool.” Rental pool units are those units that have
      previously been placed in the field under participation arrangements, but are
      currently back with us being refurbished and/or awaiting redeployment. Routine
      maintenance of property and equipment and leased gaming equipment is expensed
      in
      the period incurred, while major component upgrades are capitalized and
      depreciated over the estimated useful life (Critical Assumption #1) of the
      component. Sales and retirements of depreciable property are recorded by
      removing the related cost and accumulated depreciation from the accounts. Gains
      or losses on sales and retirements of property are reflected in our results
      of
      operations.




Management
      reviews long-lived asset classes for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. (Critical Assumption #2)




*Assumptions/Approach
      used for Critical Assumption #1* :
      The
      carrying value of the asset is determined based upon management’s assumptions as
      to the useful life of the asset, where the assets are depreciated over the
      estimated life on a straight line basis, where the useful life of items in
      the
      rental pool has been determined by management to be
      three years.




*Effect
      if different assumptions used for Critical Assumption #1:* While we
      believe that the useful lives that have been determined for our fixed assets
      are
      reasonable, different assumptions could materially affect the carrying value
      of
      the assets, as well as the depreciation expense recorded in each respective
      period related to those assets. During the quarter ended
      June 30, 2008, a significant portion of the $13.6 million
      of depreciation and amortization expense related to assets in the rental pool.
      If the depreciable life of assets in our rental pool were changed from three
      years to another period of time, we could incur a materially different amount
      of
      depreciation expense during the period.




*Assumptions/Approach
      used for Critical Assumption #2:* Recoverability of assets to be held and used is measured through considerations
      of the future undiscounted cash flows expected to be generated by the assets
      as
      a group, as opposed to analysis by individual asset, or assets in place at
      a
      specific location. If such assets are considered to be impaired, the impairment
      recognized is measured by the amount by which the carrying amount of the assets
      exceeds their fair value. Assets to be disposed of are reported at the lower
      of
      the carrying amount or the fair value less costs of disposal. The carrying
      value
      of the asset is determined based upon management’s assumptions as to the useful
      life of the asset, where the assets are depreciated over the estimated life
      on a
      straight-line basis.




*Effect
      if different assumptions used for Critical Assumption #2:* Impairment testing requires judgment, including estimations of useful lives
      of
      the assets, estimated cash flows, and determinations of fair value. While we
      believe our estimates of useful lives and cash flows are reasonable, different
      assumptions could materially affect the measurement of useful lives,
      recoverability and fair value. If actual cash flows fall below initial
      forecasts, we may need to record additional amortization and/or impairment
      charges. Additionally, while we believe that analysis of the recoverability
      of
      assets in our rental pool is accurately assessed from a homogenous level due
      to
      the interchangeability of player stations and parts, if these assets were to
      be
      reviewed for impairment using another approach, there could be different
      outcomes to any impairment analysis performed.




***Development
      Agreements.*** We enter
      into development agreements to provide financing for new gaming facilities
      or
      for the expansion of existing facilities. In return, the facility dedicates
      a
      percentage of its floor space to exclusive placement of our player terminals,
      and we receive a fixed percentage of those player terminals’ hold per day over
      the term of the agreement. Certain of the agreements contain player terminal
      performance standards that could allow the facility to reduce a portion of
      our
      guaranteed floor space. In addition, certain development agreements allow the
      facilities to buy out floor space after advances that are subject to repayment
      have been repaid. The agreements typically provide for a portion of the amounts
      retained by the gaming facility for their share of the hold to be used to repay
      some or all of the advances recorded as notes receivable. Amounts advanced
      in
      excess of those to be reimbursed by the customer for real property and land
      improvements are allocated to intangible assets and are generally amortized
      over
      the life of the contract, using the straight-line method of amortization
      (Critical Assumption #1), which is recorded as a reduction of revenue
      generated from the gaming facility. In the past and in the future, we may by
      mutual agreement and for consideration, amend these contracts to reduce our
      floor space at the facilities. Any proceeds received for the reduction of floor
      space is first applied against the intangible asset recovered for that
      particular development agreement, if any.


-31-




Management
      reviews intangible assets related to development agreements for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable (Critical Assumption #2). For the quarter
      ended June 30, 2008, there was no impairment to the assets’ carrying
      values.




*Assumptions/Approach
      used for Critical Assumption #1* *:* Amounts
      advanced in excess of those to be reimbursed by the customer for real property
      and land improvements are allocated to intangible assets and are generally
      amortized over the life of the contract, using the straight-line method of
      amortization, which is recorded as a reduction of revenue generated from the
      gaming facility. The Company uses a straight-line amortization method, as a
      pattern of future benefits can not be readily determined.




*Effect
      if Different Assumptions used for Critical Assumption #1* *:* While
      we
      believe that the use of the straight-line method of amortization is the best
      way
      to account for the costs associated with the costs of acquiring exclusive floor
      space rights at our customers facilities, the use of an alternative method
      could
      have a material effect on the amount recorded as a reduction to revenue in
      the
      current reporting period.




*Assumptions/Approach
      used for Critical Assumption #2* :
      We
      estimate cash flows directly associated with the used of the intangible assets
      to test recoverability and remaining useful lives based upon the forecasted
      utilization of the asset and expected product revenues. In developing estimated
      cash flows, we incorporate assumptions regarding future performance, including
      estimations of hold per day and estimated units. When the carrying amount
      exceeds the undiscounted cash flows expected to result from the use and eventual
      disposition of the asset, we then compare the carrying amount to its current
      fair value. We recognize an impairment loss if the carrying amount is not
      recoverable and exceeds its fair value.




*Effect
      if Different Assumptions used for Critical Assumption #2* *:* Impairment
      testing requires judgment, including estimations of cash flows, and
      determinations of fair value. While we believe our estimates of future revenues
      and cash flows are reasonable, different assumptions could materially affect
      the
      measurement of useful lives, recoverability and fair value. If actual cash
      flows
      fall below initial forecasts, we may need to record additional amortization
      and/or impairment charges.




***Income
      Taxes.*** In
      accordance with SFAS, No. 109, we have recorded a deferred tax assets
      and liabilities to account for the expected future tax benefits and consequences
      of events that have been recognized in our financial statements and our tax
      returns. There are several items that result in deferred tax asset and liability
      impact to the balance sheet. If we conclude that it is more likely than not
      that
      some portion or all of the deferred tax assets will not be realized under
      accounting standards, it is reduced by a valuation allowance to remove the
      benefit of recovering those deferred tax assets from our financial statements.
      Additionally, in accordance with FIN 48, we have recorded a liability of
      $295,000 associated with uncertain tax positions. FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. We are required to determine whether it is more likely than not
      (a
      likelihood of more than 50 percent) that a tax position will be sustained
      upon examination, including resolution of any related appeals or litigation
      processes, based on the technical merits of the position in order to record
      any
      financial statement benefit. If that step is satisfied, then we must measure
      the
      tax position to determine the amount of benefit to recognize in the financial
      statements. The tax position is measured at the largest amount of benefit that
      is greater than 50 percent likely of being realized upon ultimate
      settlement.




*Assumptions/Approach
      Used* *:* Numerous
      judgments and assumptions are inherent in the determination of future taxable
      income and tax return filing positions that we take, including factors such
      as
      future operating conditions.




*Effect
      if Different Assumptions Used* *:* Management,
      along with consultation from an independent public accounting firm used in
      tax
      consultation, continually evaluate complicated tax law requirements and their
      effect on our current and future tax liability and our tax filing positions.
      Despite our attempt to make an accurate estimate, the ultimate utilization
      of
      our deferred tax assets associated with the tax basis of our leased gaming
      equipment and property and equipment of $18.2 million is largely dependent
      upon our ability to generate taxable income in the future. Our liability for
      uncertain tax positions is dependent upon our judgment on the amount of
      financial statement benefit that an uncertain tax position will realize upon
      ultimate settlement and on the probabilities of the outcomes that could be
      realized upon ultimate settlement of an uncertain tax position using the facts,
      circumstances and information available at the reporting date to establish
      the
      appropriate amount of financial statement benefit. To the extent that a
      valuation allowance or uncertain tax position is established or increased or
      decreased during a period, we may be required to include an expense or benefit
      within income tax expense in the income statement.


-32-


**LIQUIDITY
      AND CAPITAL RESOURCES**




At June 30, 2008 ,
      we had $4.2 million in
      unrestricted cash and cash equivalents, compared to $5.8 million at
      September 30, 2007. Our working capital at June 30, 2008 was $32.3 million,
      compared to a working capital of $22.6 million at
      September 30, 2007. The increase in working capital was primarily the
      result of increases in accounts receivable and notes receivable, and decreases
      in accounts payable and accrued expenses. During the quarter ended June 30, 2008 ,
      we used $13.4 million
      for capital expenditures of property and equipment, and we collected $3.1 million
      on development agreements, with $6.1 million
      advanced under development agreements. Under the Credit Facility, our
      availability as of June 30, 2008 ,
      is $40.2 million,
      subject to covenant restrictions.




As
      of June 30, 2008 ,
      our
      total contractual cash obligations were as follows (in thousands):




**Less
                  than**
                **1
                  year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **Total**Revolving
                  Credit Facility(1)
              
              $
              1,860
              
              $
              4,466
              
              $
              36,383
              
              $
              42,709Credit
                  Facility Term Loan(2)
              
              
              4,785
              
              
              11,554
              
              
              73,369
              
              
              89,708Operating
                  leases(3)
              
              
              2,503
              
              
              2,712
              
              
              150
              
              
              5,365Purchase
                  commitments(4)
              
              
              10,347
              
              
              13,473
              
              
              —
              
              
              23,820**Total**
              
              **$**
              **19,495**
              
              **$**
              **32,205**
              
              **$**
              **109,902**
              
              **$**
              **161,602**





(1)
            Relating
                to the Revolving Credit Facility, bearing interest at the Eurodollar
                rate
                plus the applicable spread (6.25%
                as ofJune 30, 2008).


(2)
            Consists
                of amounts borrowed under our Credit Facility at the Eurodollar rate
                plus
                the applicable spread (7.00% as ofJune 30, 2008).


(3)
            Consists
                of operating leases for our facilities and office equipment that
                expire at
                various times through 2011.


(4)
            Consists
                of commitments to order third-party gaming content licenses and for
                the
                purchase of player terminals.




During
      the nine months ended June 30, 2008, we generated $31.1 million
      in cash from our operations, compared to $27.0 million during the same
      period of 2007. This $4.1 million
      increase in cash generated from operations over the prior period was primarily
      due to the increase in earnings in fiscal 2008.




Cash
      used
      in investing activities increased to $56.8 million
      in the nine months ended June 30, 2008, from $15.6 million
      in the same period of 2007. The increase was primarily the result of a $51.6 million
      increase in advances, net of reimbursements and floor space buybacks, under
      development agreements. During the nine months ended June 30, 2008,
      additions to property and equipment consisted of the following:




**Capital Expenditures**(In
                thousands)Gaming
                equipment
            
            $
            24,889Third-party
                gaming content licenses
            
            
            5,609Other
            
            
            200**Total**
            
            **$**
            **30,698**




Cash
      provided by financing activities increased to $24.1 million
      in the nine months ended June 30, 2008, from a usage of
      $14.2 million in the same period of 2007. The increase was primarily
      the result of a $40.6 million
      increase in the net borrowings under the Credit Facility offset by a
      $3.5 million decrease in options, warrants and tax benefit.




Our
      capital expenditures for the next twelve months will depend upon the number
      of
      new player terminals that we are able to place into service at new or existing
      facilities and the actual number of repairs and equipment upgrades to the player
      terminals that are currently in the field. As a result of the earnings potential
      of compact games in the Oklahoma market, it is our strategy to either place
      compact games or to convert our Oklahoma Class II games to the compact
      games. As part of our strategy, we will offer compact games developed by us,
      as
      well as games from two other gaming suppliers. As a result, we have entered
      into
      purchase commitments for future purchases of player stations and licenses
      totaling $10.3 million.




We
      have
      committed to a significant, existing tribal customer to provide
      approximately 43.8%, or $65.6 million, of the total funding for a
      facility expansion. In return for this commitment to fund the expansion, we
      will
      receive approximately 39% of the 3,600 additional gaming units that
      are expected to be placed in the expanded facility in southern Oklahoma. We
      recorded all advances as a note receivable and imputed interest on the interest
      free loan. The discount (imputed interest) was recorded as contract rights
      and
      will be amortized over the life of the agreement. The repayment period of the
      note will be based on the performance of the facility. The funding, which
      commenced in the third quarter of 2007, continued with $19.4 million
      funded in the first quarter of 2008, $15.4 million in the second
      quarter of 2008, and the remaining $6.1 million was funded in the
      third quarter of 2008. As of June 30, 2008 ,
      the
      Company had advanced $65.6 million toward this commitment.


-33-




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.. 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. Sources of additional financing might include additional bank debt
      or
      the public or private sale of equity or debt securities. However, sufficient
      funds may not be available, on terms acceptable to us or at all, from these
      sources or any others to enable us to make necessary capital expenditures and
      to
      make discretionary investments in the future.




***Credit
      Facility***




On
      April 27, 2007, we entered into a $150 million Revolving Credit
      Facility which replaced our previous Credit Facility in its entirety. On
      October 26, 2007, we amended the Revolving Credit Facility, transferring $75 million
      of the revolving credit commitment to a fully funded $75 million term loan
      due April 27, 2012. We
      entered into a second amendment to the Revolving Credit facility on
      December 20, 2007. The second amendment (i) extended the hedging
      arrangement date related to a portion of the term loan to
      June 1, 2008; and (ii) modified the interest rate margin
      applicable to the Revolving Credit Facility and the term loan.




The
      Credit Facility provides the ability to finance development agreements and
      acquisitions and working capital for general corporate purposes. Amounts under
      the $75 million revolving credit commitment and the $75 million term
      loan mature in five years, and advances under the term loan and revolving credit
      commitment bear interest at the Eurodollar rate plus the applicable spread
      (6.25% and 7.00%, respectively, as of June 30, 2008 ),
      tied
      to various levels of interest pricing determined by total debt to
      EBITDA.




T he
      Credit
      Facility is collateralized by substantially all of our assets ,
      and
      also contains financial covenants as defined in the agreement.  These
      covenants include (i) a minimum fixed-charge coverage-ratio of not less
      than 1.50 : 1.0; (ii) a maximum total debt to EBITDA ratio
      of not more than 2.25 : 1.00 through June 30, 2008,
      and 1.75 : 1.00 from September 30, 2008 thereafter; and
      (iii) a minimum trailing twelve-month EBITDA of not less
      than $ 57 million
      for the quarter ended September 30, 2007,
      and $ 60 million
      for each quarter thereafter. The Credit Facility requires certain mandatory
      prepayments be made on the term loan from the net cash proceeds of certain
      asset
      sales and condemnation proceedings (in each case to the extent not reinvested,
      within certain specified time periods, in the replacement or acquisition of
      property to be used in our businesses). In the second quarter of 2008, we
      made a mandatory prepayment of the term loan in the amount of $4.5 million
      due to an early prepayment of a development agreement note receivable. As
      ofJune 30, 2008,
      the
      Credit Facility had availability of$40.2million,
      subject to covenant restrictions.


The
      Credit Facility also required that we enter into hedging arrangements covering
      at least $50 million of the term loan for a three-year period by
      June 1, 2008; therefore,
      on May 29, 2008, the Company purchased, for $390,000, an interest rate
      cap (5% cap rate) covering $50 million of the term loan.The
      Company accounts for this hedge in accordance with FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” which requires
      entities to recognize all derivative instruments as either assets or liabilities
      in the balance sheet, at their respective fair values. We record changes on
      a
      mark to market basis reflecting these changes through interest expense in the
      statement of operations.




***Stock
      Repurchase Authorizations***




At
      June 30, 2008, there were approximately 887,000 shares of common
      stock authorized for repurchase under repurchase plans approved by our Board
      of
      Directors. The timing and total number of shares repurchased will depend upon
      available cash, prevailing market conditions, other investment opportunities,
      capital commitments and credit facility covenants.




We
      repurchased no shares of our common stock during the quarters ended
      June 30, 2008, and June 30, 2007. During the fiscal year
      ended September 30, 2007, we repurchased 1,992,032 shares of our
      common stock with cash, at an average cost
      of $12.74 per share.




***Stock-Based
      Compensation***




At
      June 30, 2008, we had approximately 5.4 million options
      outstanding, with exercise prices ranging from $1.00 to $21.53 per
      share. At June 30, 2008, approximately 3.8 million of the
      outstanding options were exercisable.


-34-


During
      the quarter ended June 30, 2008, options to purchase 1.3 million
      shares of common stock were granted and we issued 66,050 shares of common
      stock as a result of stock option exercises with an average exercise price
      of $1.88.




**SEASONALITY**




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




**CONTINGENCIES**




For
      information regarding contingencies, see “Item 1. Condensed Financial
      Statements **–** Note 8 **–**
      Commitments and Contingencies” and “PART II **–** Item 1.
      Legal Proceedings.”




**INFLATION
      AND OTHER COST FACTORS**




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




**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




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




Our
      Credit Facility provides us with additional liquidity to meet our short-term
      financing needs, as further described under “Item 1. Condensed Financial
      Statements - Note 6 **–**Credit Facility, Long-Term Debt and
      Capital Leases.” Pursuant to our Revolving Credit Facility, we may currently
      borrow up to a total of $145.0 million, and our availability as of
      June 30, 2008, is $40.2 million.




In
      connection with the development agreements we enter into with many of our Native
      American tribal customers, we are required to advance funds to the tribes for
      the construction and development of tribal gaming facilities, some of which
      are
      required to be repaid. As a result of our adjustable-interest-rate notes payable
      and fixed-interest-rate-notes receivable described in “Item 1. Condensed
      Financial Statements **–** Note 5 **–**
      Notes Receivable and Note 6 **–** Credit Facility,
      Long-Term Debt and Capital Leases,” we are subject to market risk with respect
      to interest rate fluctuations. Any material increase in prevailing interest
      rates could cause us to incur significantly higher interest
      expense.




We
      estimate that a hypothetical increase of 100 basis points in interest rates
      would increase our annual interest expense by
      approximately $1.1 million, based on our variable debt outstanding of
      $104.7 million as of June 30, 2008.




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




**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**




***Evaluation
      of Disclosure Controls and Procedures*** ***.*** ** As
      of the
      end of the period covered by this report, an evaluation was carried out under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and our Chief Financial Officer, of the effectiveness
      of
      the design and operation of management’s disclosure controls and procedures (as
      defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of 1934) to ensure information required to be disclosed in our filings under
      the
      Securities Exchange Act of 1934, is (i) recorded, processed, summarized and
      reported within the time periods specified in the SEC rules and forms; and
      (ii) accumulated and communicated to our management, including our Chief
      Executive Officer and our Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure. Management recognizes that
      any
      controls and procedures, no matter how well designed and operated, can only
      provide reasonable assurance of achieving desired control objectives, and
      management is necessarily required to apply its judgment when evaluating the
      cost-benefit relationship of potential controls and procedures. Based upon
      the
      evaluation, the Chief Executive Officer and our Chief Financial Officer
      concluded that the design and operation of these disclosure controls and
      procedures were effective as of June 30, 2008 .


-35-


***Changes
      in Internal Control over Financial Reporting*** ***.*** There
      were no changes in our internal control over financial reporting identified
      in
      management’s evaluation during the third quarter of fiscal 2008 that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.




**ITEM
      1.**   **LEGAL
      PROCEEDINGS**




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




**ITEM
      1A.**   **RISK
      FACTORS**




The
      following risk factors should be carefully considered in connection with the
      other information and financial statements contained in this Quarterly Report,
      including “PART I **–** Item 2. Management’s Discussion
      and Analysis of Financial Condition and Results of Operations.” If any of these
      risks actually occur, our business, financial condition and results of
      operations could be seriously and materially harmed, and the trading price
      of
      our common stock could decline.




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




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




Significantly,
      in October 2005, the Department of Justice, or DOJ, made available to the
      public proposed legislation the agency has drafted amending the Gambling Devices
      Act, 15 U.S.C. § 1171, *et
      seq* .
      (commonly referred to as the Johnson Act). The proposed legislation, if enacted,
      could materially and adversely affect our Class II gaming market. The
      proposed legislation would classify electronic technologic aids used by Native
      American tribes in Class II games, such as bingo, as gambling devices, and
      would authorize the use of such Class II devices by Native American tribes
      only if such devices are certified by the NIGC as Class II technologic
      aids. The proposed legislation authorizes the NIGC to promulgate regulations
      regarding the use of technologic aids. The NIGC regulations must maintain a
      distinction between Class II technologic aids and Class III gambling
      devices based upon the internal and external characteristics of the gambling
      devices and the manner in which the games using gambling devices are played. The
      DOJ
      was unable to find congressional sponsors for its proposed bill during
      the 109 th Congress,
      which concluded in December 2006. To date, the DOJ’s proposed bill has not
      been introduced in the 110 th Congress.




On
      October 24, 2007, the NIGC published in the Federal Register, four
      proposed rules concerning classification standards to distinguish between
      Class II games played with technologic aids and Class III facsimiles
      of games of chance, a revision of the definition of “electronic or
      electromechanical facsimile,” technical standards for Class II gaming and
      Class II minimum internal control standards. If the Classification
      Standards and the revised definition of “electronic or electromechanical
      facsimile” become final regulations, they will have a material and adverse
      economic impact on the Class II gaming market by limiting the use of
      Class II electronic technology and severely restricting the manner in which
      bingo may be played thereby making Class II games less attractive to the
      customer. On January 15, 2008, the NIGC extended the comment period
      for the proposed Class II gaming regulations until March 9, 2008.
      At a Senate Committee on Indian Affairs oversight hearing held on
      April 17, 2008, the Chairman of the NIGC testified that he was
      determined to finalize the Class II gaming regulations despite widespread
      tribal opposition. However, in May 2008, the
      Chairman of the NIGC announced that the NIGC would not move forward with its
      plans to publish final regulations revising the definition of “electronic or
      electromechanical facsimile” and implementing new Class II gaming
      classification standards.  The
      NIGC
      still plans to publish two other sets of regulations establishing technical
      standards for Class II electronic gaming and Class II minimum internal
      control standards.




-36-




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




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




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




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




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




In
      addition to the risks described above, regulatory uncertainty increases our
      cost
      of doing business. We dedicate significant time to and incur significant expense
      for new game development, without any assurance that the NIGC, the DOJ, or
      other
      federal, state or local agencies or Native American gaming commissions will
      agree that our games meet applicable regulatory requirements. We also regularly
      invest in the development of new games, which may become irrelevant or 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 United States Senate committee that his
      office was in the process of completing an inquiry into techniques used by
      certain tribes of acquiring land in trust for non-gaming purposes but
      subsequently opening a gaming facility on such trust land. Recently, the Acting
      General Counsel for the NIGC testified before the Senate Indian Affairs
      Committee that, as a result of the Inspector General’s inquiry, the NIGC was
      conducting its own investigation into the practice of certain tribes conducting
      gaming on land originally acquired in trust for non-gaming purposes. Unless
      the
      land qualifies under one of the exceptions contained in the IGRA, thereby
      authorizing gaming to be conducted on such land, it could lose its “Indian
      lands” status under IGRA.




-37-




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




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




On
      July 8, 2005, the NIGC issued a Warning Notice to certain tribes for,
      among other things, non compliance with the recordkeeping requirements
      applicable to account access cards. According to the Warning Notice, the
      cashiers were not obtaining signatures from the customers on our receipts when
      cashing out. The NIGC is also of the opinion that the Bank Secrecy Act
      recordkeeping requirements apply to account access cards. The Minimum Internal
      Control Standards (25 C.F.R. § 542.3(c)(2)) require compliance
      with the Bank Secrecy Act. Because the IRS is conducting a Bank Secrecy Act
      audit at one of the tribal casinos, the NIGC has deferred a determination of
      whether the tribal gaming operations are in compliance with
      (25 C.F.R. § 542.3(c)(2) until the IRS audit is
      completed.




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




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




**We
      believe diversification from Class II 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 and Class III 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 will continue to 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, but also into
      new
      jurisdictions authorizing video lottery systems. These and other
      non-Native-American gaming opportunities are not currently subject to a
      nationwide regulatory system such as the one created by IGRA to regulate Native
      American gaming, so regulation is on a state-by-state, and sometimes a
      county-by-county basis. In addition, federal laws relating to gaming, such
      as
      the Johnson Act, which regulates slot machines and similar gambling devices,
      apply to new video lottery jurisdictions, absent authorized state law
      exemptions.




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




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




-38-




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




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




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




§
            Whether
                we have enough experience to accurately predict revenues and expenses
                in
                these new 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.




We
      have
      only recently begun to develop international business, and we realized revenue
      from the sale of an Electronic Instant Lottery System to the Israel National
      Lottery during fiscal 2006 and currently realize revenue from contracts to
      supply Electronic Bingo Terminals to bingo parlors in Mexico. To date, there
      are
      not as many permanent facilities opened in Mexico as we originally projected,
      and the hold per day in certain of the open facilities in Mexico has not met
      our
      original expectations. There can be no assurances that our games will gain
      market acceptance in Mexico, additional facilities will open in Mexico, or
      that
      the hold per day will increase in those facilities in Mexico currently not
      meeting our expectations. International transactions are subject to various
      risks, including:




§
            Currency
                fluctuations;




§
            Higher
                operating costs due to local laws or
                regulations;




§
            Unexpected
                changes in regulatory requirements;




§
            Costs
                and risks of localizing products for foreign
                countries;




§
            Difficulties
                in staffing and managing geographically disparate
                operations;




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




§
            Challenges
                negotiating and enforcing contractual
                provisions;




§
            Repatriation
                of earnings; and




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




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




We
      provide linked interactive electronic bingo systems and player terminals to
      charitable bingo operations in Alabama. As of June 30, 2008 ,
      we had 2,290 player
      terminals at three facilities in Alabama. The Attorney General of Alabama has
      recently completed a review of the gaming within the state. He concluded that
      the games that we were operating in Alabama were a legal form of bingo. He
      also
      concluded that two of the facilities are operating under a valid constitutional
      amendment authorizing the facilities the ability to play electronic bingo.
      The
      municipal and county authorities who regulate gaming in Alabama look to the
      NIGC
      and Class II regulations for guidance in adopting, interpreting and
      enforcing the municipal and county regulations permitting the operation of
      our
      machines in such counties and municipalities. To the extent these authorities
      rely on the NIGC’s standards, any determinations by the NIGC or developments in
      Class II regulations which negatively impact our games and systems may,
      therefore, be adopted by the counties and municipalities and negatively impact
      the operation of our business in Alabama.




We
      have
      excess player stations not deployed at June 30, 2008 ,
      which
      were intended to be deployed at facilities in Mexico. If the opening of
      facilities is altered negatively, either by significant delay, or by
      cancellation, the realizable value of these assets could be reduced. In such
      instances we may be required to recognize increased expense on our income
      statement related to the impairment of these assets.




-39-


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




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




If
      we are
      unable, for technological, regulatory, political, financial, marketing or other
      reasons, to develop and introduce new gaming systems and to enhance existing
      products in a timely manner in response to changing regulatory, legal or market
      conditions or customer requirements, or if new products or new versions of
      existing products do not achieve market acceptance, or if uneven enforcement
      policies cause us to continue facing competition from 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
      each
      of the nine months ended June 30, 2008 and 2007, approximately 60 %
      of our
      gaming revenues were from Native American tribes located in Oklahoma, and
      approximately 41% and 42%, respectively, of our gaming revenues were
      from one tribe in that state. The significant concentration of our customers
      in
      Oklahoma means that local economic changes may adversely affect our customers,
      and therefore our business, disproportionately to changes in national economic
      conditions, including more sudden adverse economic declines or slower economic
      recovery from prior declines. The loss of any of our Oklahoma tribes as
      customers would have a material and adverse effect upon our financial condition
      and results of operations. In addition, the legislation allowing tribal-state
      compacts in Oklahoma has resulted in increased competition from other vendors,
      who we believe have avoided entry into the Oklahoma market due to its uncertain
      and ambiguous legal environment. The legislation allows for other types of
      gaming, both at tribal gaming facilities and at Oklahoma racetracks. The loss
      of
      significant market share to these new gaming opportunities or our competitors’
products in Oklahoma could also have a material adverse effect upon our
      financial condition and results of operations.




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




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




In
      May 2004, the Oklahoma Legislature passed legislation authorizing certain
      forms of gaming at racetracks, and additional types of games at tribal gaming
      facilities, pursuant to a tribal-state compact. The Oklahoma gaming legislation
      allows the tribes to sign a compact with the State of Oklahoma to operate an
      unlimited number of electronic instant bingo games, electronic bonanza-style
      bingo games, electronic amusement games, and non-house-banked tournament card
      games. In addition, certain horse tracks in Oklahoma will be allowed to operate
      a limited number of instant and bonanza-style bingo games and electronic
      amusement games. As of June 30, 2008 ,
      we had
      placed 5,325 player
      terminals at 41 facilities that are operating under the Oklahoma
      compact. All vendors placing games at any of the racetracks under the compact
      will ultimately be required to be licensed by the State of Oklahoma. Pursuant
      to
      the compacts, vendors placing games at tribal facilities will have to be
      licensed by each tribe. All electronic games placed under the compact have
      to be
      certified by independent testing laboratories to meet technical specifications.
      These technical specifications were published by the Oklahoma Horse Racing
      Commission and the individual tribal gaming authorities in the first calendar
      quarter of 2005. To date, independent testing labs have given wide latitude
      as to what constitutes a compliant game.




We
      believe the Oklahoma legislation significantly clarifies and expands the types
      of gaming permitted by Native American tribes in Oklahoma. We currently expect
      continued intensified competition from vendors currently operating in Oklahoma
      as well as from new market entrants. As a result, we anticipate further pressure
      on our market and revenue share percentages in Oklahoma or the market could
      shift from revenue share arrangements to a “for sale” model. We believe the
      introduction of more aggressive instant bingo machines, with characteristics
      of
      traditional slot machines, into the Oklahoma market, has adversely affected
      our
      operating results and market position in that state and may continue to do
      so in
      the future.




-40-




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




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




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




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




We
      may
      continue to seek to enter into strategic relationships to provide financing
      for
      new or expanded gaming and related facilities for our customers. However, we
      may
      not realize the anticipated benefits of any of these strategic relationships
      or
      financing. Currently,
      we anticipate placing approximately 1,400 machines in the expanded facility
      of a significant customer in Oklahoma that is scheduled to open in
      September 2008. If the expansion of this facility is delayed or has an
      unsuccessful opening for any reason, including but not limited to, technical
      or
      operating difficulties, regulatory issues, or macroeconomic conditions, our
      operating results will be adversely affected. In
      connection with one or more of these transactions, and to obtain the necessary
      development funds, we may: issue additional equity securities which would dilute
      existing stockholders; extend secured and unsecured credit to potential or
      existing tribal customers which may not be repaid; incur debt on terms
      unfavorable to us or that we are unable to repay; and incur contingent
      liabilities.




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




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




In
      addition, certain of the agreements contain performance standards for our player
      terminals that could allow the facility to reduce a portion of our player
      terminals.




In
      the
      past we have, and in the future we expect to, reduce our floor space in certain
      of our Class II facilities as a result of ongoing competitive pressures
      faced by our customers from alternative gaming facilities and faced by our
      machines from competitors’ products. In addition, future NIGC decisions could
      affect our ability to place our games with these tribes. See “Risk Factors -
      Changes in regulation or regulatory interpretations could require us to modify
      the terms of our contracts with customers.”




-41-


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




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




We
      expect
      to face increased competition as we attempt to enter new markets and new
      geographical locations. We are also increasingly competing against larger
      manufacturers of gaming equipment in our charity, lottery, and international
      bingo markets. We believe the increased competition will intensify pressure
      on
      our pricing model. 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.




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 Iowa and New York. In Minnesota, we are
      licensed by the state as a linked bingo prize provider. The Louisiana Department
      of Revenue and the Mississippi Gaming Commission have also issued licenses
      to
      us, and we have received licenses from all applicable Native American gaming
      commissions. We may require new licenses, permits and approvals in the future,
      and such licenses, permits or approvals may not be granted to us. The
      suspension, revocation, non renewal or limitation of any of our licenses would
      have a material adverse effect on our business, financial condition and results
      of operations.




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




We
      rely
      upon patent, copyright, trademark and trade secret laws, license agreements
      and
      employee nondisclosure agreements to protect our proprietary rights and
      technology, but these laws and contractual provisions provide only limited
      protection. We rely to a greater extent upon proprietary know-how and continuing
      technological innovation to maintain our competitive position. Insofar as we
      rely on trade secrets, unpatented know-how and innovation, others may be able
      to
      independently develop similar technology, or our secrecy could be breached.
      The
      issuance of a patent to us does not necessarily mean that our technology does
      not infringe upon the intellectual property rights of others. As we enter into
      new markets by leveraging our existing technology, it becomes more and more
      likely that we will become subject to infringement claims from other parties.
      We
      are currently involved in several patent disputes (see “PART I –
Item 1. Condensed Financial Statements - Note 8 – Commitments and
      Contingencies.” Problems with patents or other rights could increase the cost of
      our products, or delay or preclude new product development and
      commercialization. If infringement claims against us are valid, we may seek
      licenses that might not be available to us on acceptable terms or at all.
      Litigation would be costly and time consuming, but may become necessary to
      protect our proprietary rights or to defend against infringement claims. We
      could incur substantial costs and diversion of management resources in the
      defense of any claims relating to the proprietary rights of others or in
      asserting claims against others.




-42-




**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 non renewal, and, if not renewed, would materially and
      adversely affect our earnings and financial condition.




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




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




On
      July 8, 2005, the NIGC issued a Warning Notice to certain tribes for,
      among other things, non compliance with the recordkeeping requirements
      applicable to account access cards. According to the Warning Notice, the
      cashiers were not obtaining signatures from the customers on our receipts when
      cashing out. The NIGC is also of the opinion that the Bank Secrecy Act
      recordkeeping requirements apply to account access cards. The Minimum Internal
      Control Standards (25 C.F.R. § 542.3(c)(2)) require compliance
      with the Bank Secrecy Act. Because the IRS is conducting a Bank Secrecy Act
      audit at one of the tribal casinos, the NIGC has deferred a determination of
      whether the tribal gaming operations are in compliance
      with 25 C.F.R. § 542.3(c)(2) until the IRS audit is
      completed.




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




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




-43-




In 2004,
      we received a letter from the Acting General Counsel of the NIGC, dated
      November 30, 2004, advising us that our agreements with a certain
      customer may evidence a proprietary interest by us in a tribe’s gaming
      activities, in violation of IGRA and the tribe’s gaming ordinances. The NIGC
      invited us and the tribe to submit any explanation or information that would
      establish that the agreements’ terms do not violate the requirement that tribes
      maintain sole proprietary interest in their own gaming operations.




In
      a
      letter dated November 8, 2007, the Acting General Counsel of the NIGC
      reiterated the statements made in her November 30, 2004 letter, that
      the NIGC did not then conclude that the agreements with the tribe that it
      reviewed constituted management agreements, but that the NIGC was concerned
      that, taken together, the agreements demonstrated a proprietary interest, by
      us,
      in the tribe’s gaming activity that may be contrary to law. Although
      we believe
      that we responded to the NIGC in 2004, explaining why the agreements did
      not violate the sole proprietary interest prohibition of IGRA and did not
      constitute a management agreement, the November 8, 2007 letter
      indicated that the NIGC did not receive the written explanation or further
      information and is now requesting an explanation. On
      December 17, 2007, we responded in writing to the NIGC, correcting the
      misstatements contained in the NIGC’s 2004 letter. To date, the Company has
      received no further communication from the NIGC on this issue.




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




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




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




**Our
      business is dependent on contract rights.**




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




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




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




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




Our
      contracts with some Native American customers include a limited waiver of each
      tribe’s sovereign immunity, and generally provide that any dispute regarding
      interpretation, performance or enforcement shall be submitted to, and resolved
      by, arbitration in accordance with the Commercial Arbitration Rules of the
      American Arbitration Association, and that any award, determination, order
      or
      relief resulting from such arbitration is binding and may be entered in any
      court having jurisdiction. However, in some instance, there is no limited waiver
      of sovereign immunity. Our largest customer, who accounts for over 40% of
      our revenue, has not given us a limited waiver of sovereign immunity. In the
      instances where tribes have not waived sovereign immunity, or in the event
      that
      a limited waiver of sovereign immunity is held to be ineffective, we could
      be
      precluded from judicially enforcing any rights or remedies against a tribe.
      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.




-44-




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




***Contracts
      with Suppliers and Customers.***  In
      the
      ordinary course of our business, we enter into contracts with our suppliers
      and
      customers. Certain of these contracts relate to our operations in important
      markets. We may from time to time have disagreements with suppliers or with
      our
      customers. In the event any such disagreement escalates to a dispute that is
      ultimately resolved against us, our earnings and financial condition could
      be
      adversely affected.




**We
      may incur prize payouts in excess of game revenues.**




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




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




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




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




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




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




-45-




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




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




**Worsening
      economic conditions may adversely affect our business.**




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




**Our
      internal controls and procedures may not be adequate to prevent or detect
      misstatements or errors.**




A
      control
      system, no matter how well conceived or operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Our
      management does not expect that our internal controls and procedures will
      prevent all errors and all fraud, if any, because, in addition to resource
      constraints, there are inherent limitations of all control systems, including
      the realities that judgments in decision-making can be faulty, and that the
      breakdowns can occur because of simple error or mistake. Additionally, controls
      and procedures can be circumvented by the individual acts of some persons,
      by
      collusion of two or more people, or by management override of a control or
      procedure. The design of any system of controls and procedures is also based
      in
      part on certain assumptions about the likelihood of future conditions. Because
      of the inherent limitations in a control system, misstatements due to error
      or
      fraud may occur and not be detected. In such event, we may not be able to
      recognize revenue we expected to recognize; we may not be able to meet our
      forecasts or industry analysts’ projections; or we may be the subject of
      litigation, each of which would likely harm our financial results and may result
      in a decline in the price of our common stock.




**ITEM
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS**
  (a)
                As
                    previously disclosed on our Form 8-K, as filed with the SEC on
                    June 18, 2008, on June 15, 2008, the Company issued
                    250,000 shares of common stock to our new President and Chief
                    Executive Officer, Anthony Sanfilippo, pursuant to a Stock Purchase
                    Agreement, for $4.68 per share, which was the fair market value of
                    the common stock on that date. On June 15, 2008, the Company
                    also granted Mr. Sanfilippo an option to purchase
                    1,300,000 shares of common stock. The option is effective as of
                    June 15, 2008, with an exercise price of $4.68, which was
                    the fair market value of the common stock on the date of the
                    grant.
  (b)
                The
                    issuance of the common stock and the option were made in reliance
                    on theexemption
                    from registration provided by Section 4(2) of the Securities Act
                    of 1933. No commissions were paid in connection with the issuance
                    of
                    the stock.  (c)
                We did not repurchase shares
                    of our common
                    stock during the most recently completed quarter. As of
                    June 30, 2008, the maximum number of commonshares
                    that may be repurchased under the plans approved by our Board
                    of directors
                    was approximately 887,000. For a description of our authorized stock
                    repurchase plans, see “PART I - Item 2.Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations.”


**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**




None.




**ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
  The Annual Meeting
        of Shareholders, or the Annual Meeting, of the Company was held on May 29,
        2008.
        The Company had 24,398,396 shares of common stock (of 26,271,074 total
        shares outstanding on the record date) present at the meeting or represented
        by
        proxies. The following sets forth a brief description of each matter voted
        upon
        at the Annual Meeting and the results of the voting on each such
        matter:
   (1) For
        the elections of the nominee directors that will hold office until the annual
        meeting of shareholders in 2009:
  **Withheld
                  Authority****For**
              **or
                  Against**Michael
                  J. Maples, Sr.
              23,044,788
              1,353,608Robert
                  D. Repass
              23,048,368
              1,350,028John
                  M. Winkelman
              23,050,168
              1,348,228Emanuel
                  R. Pearlman
              23,046,842
              1,351,554Neil
                  E. Jenkins
              23,046,752
              1,351,644
  Our
        Board
        of Directors is comprised of the individuals elected at the Annual Meeting
        this
        year. In addition, on June 15, 2008, Mr. Sanfilippo was appointed
        to serve on the Board of Directors until the next annual meeting of shareholders
        by the Company’s Board of Directors.
   (2) To
        ratify the selection of BDO Seidman, LLP by the Audit Committee of our Board
        of
        Directors to continue as the Company’s independent auditors for the fiscal year
        ending September 30, 2008.
  FOR
              AGAINST
              ABSTAIN23,977,332
              166,881
              254,18**3**


**ITEM
                5.**
            **OTHER
                INFORMATION**




None.




**ITEM
              6.**
            **EXHIBITS**




(a)  Exhibits




See
      Exhibit Index.


-46-




**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 8, 2008
            Multimedia
                Games, Inc.By:
            /s/
                Randy S. Cieslewicz†Randy
                S. CieslewiczChief
                Financial Officer




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


-47-


**EXHIBIT
      INDEX**




**EXHIBIT NO.**
            
            **TITLE**
            
            **LOCATION**3.1
            
            Amended
                and Restated Articles of Incorporation
            
            (1)3.2
            
            Amendment
                to Articles of Incorporation
            
            (2)3.3
            
            Second
                Amended and Restated Bylaws
            
            (3)10.1
            
            Form
                of Indemnification Agreement
            
            (4)10.2
            
            Loebig
                Employment Agreement
            
            (5)10.3
            
            Sanfilippo
                Employment Agreement
            
            (6)10.4
            
            Stock
                Purchase Agreement
            
            (7)31.1
            
            Certification
                of Principal Executive Officer, pursuant to Section 302 of the Sarbanes
                Oxley Act of 2002
            
            (*)31.2
            
            Certification
                of Principal Accounting Officer, pursuant to Section 302 of the Sarbanes
                Oxley Act of 2002
            
            (*)32.1
            
            Certification
                as required by Section 906 of the Sarbanes Oxley Act of
                2002
            
            (*)







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


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


(3)
            Incorporated
                by reference to our Form 8-K filed with the SEC on
                December 13, 2007.


(4)
            Incorporated
                by reference to our Form 8-K filed with the SEC on June 4,
                2008.


(5)
            Incorporated
                by reference to our Form 8-K filed with the SEC on
                June 4, 2008.


(6)
            Incorporated
                by reference to our Form 8-K filed with the SEC on
                June 18, 2008.


(7)
            Incorporated
                by reference to our Form 8-K filed with the SEC on
                June 18, 2008.


(*)
            Filed
                herewith.


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