##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q





(Mark One)

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

For the quarterly period ended March 31, 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  x    No   ̈

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



|                           |  |                             
|-------------------------- |  | ----------------------------
|Large Accelerated Filer   ̈ |  | Accelerated Filer  x        
|                           | 
|Non-Accelerated Filer   ̈   |  | Smaller Reporting Company   ̈

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

As of May 5, 2008, there were 26,271,771 shares of the Registrants common stock, par value $0.01 per share, outstanding.









---

##### Table of Contents

FORM 10-Q

INDEX



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                       |  | Condensed Financial Statements (Unaudited)                                            |  |   
|                              |  |                                                                                      
|                              |  | Consolidated Balance Sheets                                                           |  |   
|                              |  | (As of March 31, 2008 and September 30, 2007)                                         |  | 3 
|                              |  |                                                                                      
|                              |  | Consolidated Statements of Operations                                                 |  |   
|                              |  | (For the three months ended March 31, 2008 and 2007)                                  |  | 5 
|                              |  |                                                                                      
|                              |  | Consolidated Statements of Operations                                                 |  |   
|                              |  | (For the six months ended March 31, 2008 and 2007)                                    |  | 6 
|                              |  |                                                                                      
|                              |  | Consolidated Statements of Cash Flows                                                 |  |   
|                              |  | (For the six months ended March 31, 2008 and 2007)                                    |  | 7 
|                              |  |                                                                                      
|                              |  | Notes to Consolidated Financial Statements                                            |  | 8 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 28
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 28
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 29
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 29
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 39
|                              |  |                                                                                      
|Item 3.                       |  | Defaults upon Senior Securities                                                       |  | 39
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 39
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 39
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 39
|                              | 
|Signatures                    |  | 40                                                                                   
|                              | 
|Exhibit Index                 |  | 41                                                                                   



-2-



---

##### Table of Contents

PART I

FINANCIAL INFORMATION



|Item 1. | Condensed Financial Statements
|------- | ------------------------------

MULTIMEDIA GAMES, INC.

CONSOLIDATED BALANCE SHEETS

As of March 31, 2008 and September 30, 2007

(In thousands, except shares)

(Unaudited)



|                                                                                                                                                                     |  |               |         |                   |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                                                                                                                                     |  | March 31,2008 |         | September 30,2007
|ASSETS                                                                                                                                                              
|CURRENT ASSETS:                                                                                                                                                      |  |               |         |                   |   |        
|Cash and cash equivalents                                                                                                                                            |  | $             | 959     |                   | $ | 5,805  
|Accounts receivable, net of allowance for doubtful accounts of $1,111 and $854, respectively                                                                         |  |               | 26,555  |                   |   | 22,176 
|Inventory                                                                                                                                                            |  |               | 5,632   |                   |   | 3,602  
|Prepaid expenses and other                                                                                                                                           |  |               | 2,502   |                   |   | 2,906  
|Current portion of notes receivable, net                                                                                                                             |  |               | 11,957  |                   |   | 12,248 
|Federal and state income tax receivable                                                                                                                              |  |               | 662     |                   |   |       
|Deferred income taxes                                                                                                                                                |  |               | 2,561   |                   |   | 1,932  
|                                                                                                                                                                     |  |               |         |                   |   |        
|Total current assets                                                                                                                                                 |  |               | 50,828  |                   |   | 48,669 
|Restricted cash and long-term investments                                                                                                                            |  |               | 868     |                   |   | 928    
|Leased gaming equipment, net                                                                                                                                         |  |               | 38,869  |                   |   | 38,579 
|Property and equipment, net                                                                                                                                          |  |               | 69,633  |                   |   | 75,332 
|Long-term portion of notes receivable, net                                                                                                                           |  |               | 52,688  |                   |   | 36,797 
|Intangible assets, net                                                                                                                                               |  |               | 40,229  |                   |   | 35,884 
|Other assets                                                                                                                                                         |  |               | 5,573   |                   |   | 3,497  
|Deferred income tax                                                                                                                                                  |  |               | 17,808  |                   |   | 16,583 
|                                                                                                                                                                     |  |               |         |                   |   |        
|Total assets                                                                                                                                                         |  | $             | 276,496 |                   | $ | 256,269
|                                                                                                                                                                     |  |               |         |                   |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                
|CURRENT LIABILITIES:                                                                                                                                                 |  |               |         |                   |   |        
|Current portion of long-term debt                                                                                                                                    |  | $             | 1,335   |                   | $ | 563    
|Accounts payable and accrued expenses                                                                                                                                |  |               | 18,806  |                   |   | 22,021 
|Federal and state income tax payable                                                                                                                                 |  |               | 2,606   |                   |   | 2,444  
|Current deferred revenue                                                                                                                                             |  |               | 1,235   |                   |   | 1,020  
|                                                                                                                                                                     |  |               |         |                   |   |        
|Total current liabilities                                                                                                                                            |  |               | 23,982  |                   |   | 26,048 
|Revolving line of credit                                                                                                                                             |  |               | 30,125  |                   |   | 7,000  
|Long-term debt, less current portion                                                                                                                                 |  |               | 69,437  |                   |   | 74,484 
|Other long-term liabilities                                                                                                                                          |  |               | 1,213   |                   |   | 928    
|Deferred revenue, less current portion                                                                                                                               |  |               | 1,624   |                   |   |       
|                                                                                                                                                                     |  |               |         |                   |   |        
|Total liabilities                                                                                                                                                    |  |               | 126,381 |                   |   | 108,460
|                                                                                                                                                                     |  |               |         |                   |   |        
|Commitments and contingencies                                                                                                                                        |  |               |         |                   |   |        
|Stockholders equity:                                                                                                                                                |  |               |         |                   |   |        
|Preferred stock:                                                                                                                                                     |  |               |         |                   |   |        
|Series A, $0.01 par value, 1,800,000 shares authorized, no shares issued and outstanding                                                                             |  |               |        |                   |   |       
|Series B, $0.01 par value, 200,000 shares authorized, no shares issued and outstanding                                                                               |  |               |        |                   |   |       
|Common stock, $0.01 par value, 75,000,000 shares authorized, 32,175,188 and 32,134,614 shares issued, and 26,271,771 and 26,231,197 shares
outstanding, respectively |  |               | 322     |                   |   | 321    



-3-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

CONSOLIDATED BALANCE SHEETS  (Continued)

As of March 31, 2008 and
September 30, 2007

(In thousands, except shares)

(Unaudited)



|                                                |  |               |         |   |                   |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                |  | March 31,2008 |         |   | September 30,2007 |  
|Additional paid-in capital                      |  |               | 80,848  |   |                   |   | 80,112  |  
|Treasury stock, 5,903,417 common shares at cost |  |               | (50,128 | ) |                   |   | (50,128 | )
|Retained earnings                               |  |               | 118,860 |   |                   |   | 117,498 |  
|Accumulated other comprehensive income, net     |  |               | 213     |   |                   |   | 6       |  
|                                                |  |               |         |   |                   |   |         |  
|Total stockholders equity                      |  |               | 150,115 |   |                   |   | 147,809 |  
|                                                |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity      |  | $             | 276,496 |   |                   | $ | 256,269 |  
|                                                |  |               |         |   |                   |   |         |  

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



-4-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2008 and 2007

(In thousands, except per share data)

(Unaudited)



|                                                           |  |                             |        |   |      |   |        |  
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | Three Months EndedMarch 31, |       
|                                                           |  | 2008                        |        |   | 2007 |  
|REVENUES:                                                  |  |                             |        |   |      |   |        |  
|Gaming revenue:                                            |  |                             |        |   |      |   |        |  
|Class II                                                   |  | $                           | 7,546  |   |      | $ | 12,917 |  
|Oklahoma compact                                           |  |                             | 14,138 |   |      |   | 8,699  |  
|Charity                                                    |  |                             | 4,396  |   |      |   | 5,040  |  
|All other                                                  |  |                             | 5,262  |   |      |   | 3,045  |  
|Gaming equipment, system sale and lease revenue            |  |                             | 378    |   |      |   | 701    |  
|Other                                                      |  |                             | 482    |   |      |   | 324    |  
|                                                           |  |                             |        |   |      |   |        |  
|Total revenues                                             |  |                             | 32,202 |   |      |   | 30,726 |  
|                                                           |  |                             |        |   |      |   |        |  
|OPERATING COSTS AND EXPENSES:                              |  |                             |        |   |      |   |        |  
|Cost of gaming equipment and systems sold and royalty fees |  |                             | 414    |   |      |   | 193    |  
|Selling, general and administrative expenses               |  |                             | 16,633 |   |      |   | 16,533 |  
|Amortization and depreciation                              |  |                             | 12,433 |   |      |   | 14,961 |  
|                                                           |  |                             |        |   |      |   |        |  
|Total operating costs and expenses                         |  |                             | 29,480 |   |      |   | 31,687 |  
|                                                           |  |                             |        |   |      |   |        |  
|Operating income (loss)                                    |  |                             | 2,722  |   |      |   | (961   | )
|OTHER INCOME (EXPENSE):                                    |  |                             |        |   |      |   |        |  
|Interest income                                            |  |                             | 1,136  |   |      |   | 1,075  |  
|Interest expense                                           |  |                             | (2,491 | ) |      |   | (1,221 | )
|Other income                                               |  |                             | 872    |   |      |   | 1,111  |  
|                                                           |  |                             |        |   |      |   |        |  
|Income before income taxes                                 |  |                             | 2,239  |   |      |   | 4      |  
|Income tax expense (benefit)                               |  |                             | 981    |   |      |   | (2     | )
|                                                           |  |                             |        |   |      |   |        |  
|Net income                                                 |  | $                           | 1,258  |   |      | $ | 6      |  
|                                                           |  |                             |        |   |      |   |        |  
|Basic earnings per common share                            |  | $                           | 0.05   |   |      | $ | 0.00   |  
|                                                           |  |                             |        |   |      |   |        |  
|Diluted earnings per common share                          |  | $                           | 0.05   |   |      | $ | 0.00   |  
|                                                           |  |                             |        |   |      |   |        |  
|Shares used in earnings per common share                   |  |                             |        |   |      |   |        |  
|Basic                                                      |  |                             | 26,271 |   |      |   | 27,680 |  
|                                                           |  |                            
|Diluted                                                    |  |                             | 27,243 |   |      |   | 29,450 |  

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



-5-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months Ended March 31, 2008 and 2007

(In thousands, except per share data)

(Unaudited)



|                                                           |  |                           |        |   |      |   |        |  
|---------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | Six Months EndedMarch 31, |       
|                                                           |  | 2008                      |        |   | 2007 |  
|REVENUES:                                                  |  |                           |        |   |      |   |        |  
|Gaming revenue:                                            |  |                           |        |   |      |   |        |  
|Class II                                                   |  | $                         | 15,586 |   |      | $ | 28,230 |  
|Oklahoma compact                                           |  |                           | 25,699 |   |      |   | 14,585 |  
|Charity                                                    |  |                           | 8,253  |   |      |   | 9,202  |  
|All other                                                  |  |                           | 9,900  |   |      |   | 5,524  |  
|Gaming equipment, system sale and lease revenue            |  |                           | 2,149  |   |      |   | 1,027  |  
|Other                                                      |  |                           | 850    |   |      |   | 1,208  |  
|                                                           |  |                           |        |   |      |   |        |  
|Total revenues                                             |  |                           | 62,437 |   |      |   | 59,776 |  
|                                                           |  |                           |        |   |      |   |        |  
|OPERATING COSTS AND EXPENSES:                              |  |                           |        |   |      |   |        |  
|Cost of gaming equipment and systems sold and royalty fees |  |                           | 1,204  |   |      |   | 716    |  
|Selling, general and administrative expenses               |  |                           | 32,734 |   |      |   | 35,145 |  
|Amortization and depreciation                              |  |                           | 24,956 |   |      |   | 29,438 |  
|                                                           |  |                           |        |   |      |   |        |  
|Total operating costs and expenses                         |  |                           | 58,894 |   |      |   | 65,299 |  
|                                                           |  |                           |        |   |      |   |        |  
|Operating income (loss)                                    |  |                           | 3,543  |   |      |   | (5,523 | )
|OTHER INCOME (EXPENSE):                                    |  |                           |        |   |      |   |        |  
|Interest income                                            |  |                           | 2,270  |   |      |   | 2,649  |  
|Interest expense                                           |  |                           | (4,631 | ) |      |   | (2,531 | )
|Other income                                               |  |                           | 1,210  |   |      |   | 1,111  |  
|                                                           |  |                           |        |   |      |   |        |  
|Income (loss) before income taxes                          |  |                           | 2,392  |   |      |   | (4,294 | )
|Income tax expense (benefit)                               |  |                           | 735    |   |      |   | (1,488 | )
|                                                           |  |                           |        |   |      |   |        |  
|Net income (loss)                                          |  | $                         | 1,657  |   |      | $ | (2,806 | )
|                                                           |  |                           |        |   |      |   |        |  
|Basic earnings (loss) per common share                     |  | $                         | 0.06   |   |      | $ | (0.10  | )
|                                                           |  |                           |        |   |      |   |        |  
|Diluted earnings (loss) per common share                   |  | $                         | 0.06   |   |      | $ | (0.10  | )
|                                                           |  |                           |        |   |      |   |        |  
|Shares used in earnings per common share                   |  |                           |        |   |      |   |        |  
|Basic                                                      |  |                           | 26,234 |   |      |   | 27,607 |  
|Diluted                                                    |  |                           | 27,283 |   |      |   | 27,607 |  

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



-6-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended March 31, 2008 and 2007

(In thousands)

(Unaudited)



|                                                                                                          |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                          |  | Six Months EndedMarch 31, |        
|                                                                                                          |  | 2008                      |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                           |         |   |      |   |         |  
|Net income (loss)                                                                                         |  | $                         | 1,657   |   |      | $ | (2,806  | )
|Adjustments to reconcile net income (loss) to cash and cash equivalents provided by operating activities: |  |                           |         |   |      |   |         |  
|Amortization                                                                                              |  |                           | 2,248   |   |      |   | 3,478   |  
|Depreciation                                                                                              |  |                           | 22,708  |   |      |   | 25,960  |  
|Accretion of contract rights                                                                              |  |                           | 1,944   |   |      |   | 3,031   |  
|Provisions for inventory and long-lived assets                                                            |  |                           | 78      |   |      |   | 951     |  
|Deferred income taxes                                                                                     |  |                           | (1,854  | ) |      |   | (5,961  | )
|Share-based compensation                                                                                  |  |                           | 587     |   |      |   | 668     |  
|Provision for doubtful accounts                                                                           |  |                           | 262     |   |      |   | 487     |  
|Interest income from imputed interest on development agreements                                           |  |                           | (1,822  | ) |      |   | (1,291  | )
|Changes in operating assets and liabilities:                                                              |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                                       |  |                           | (2,480  | ) |      |   | (28     | )
|Inventory                                                                                                 |  |                           | (2,030  | ) |      |   |        |  
|Deferred contract costs                                                                                   |  |                           | 129     |   |      |   |        |  
|Prepaid expenses and other                                                                                |  |                           | 179     |   |      |   | 814     |  
|Federal and state income tax payable/receivable                                                           |  |                           | (795    | ) |      |   | (234    | )
|Notes receivable                                                                                          |  |                           | (348    | ) |      |   | 321     |  
|Accounts payable and accrued expenses                                                                     |  |                           | (3,215  | ) |      |   | (2,677  | )
|Other long-term liabilities                                                                               |  |                           | 345     |   |      |   | (36     | )
|Deferred revenue                                                                                          |  |                           | (2,154  | ) |      |   | (301    | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                 |  |                           | 15,439  |   |      |   | 22,376  |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|CASH FLOWS USED IN INVESTING ACTIVITIES:                                                                  |  |                           |         |   |      |   |         |  
|Acquisition of property and equipment and leased gaming equipment                                         |  |                           | (17,317 | ) |      |   | (32,805 | )
|Proceeds from disposal of assets                                                                          |  |                           | 323     |   |      |   | 846     |  
|Acquisition of intangible assets                                                                          |  |                           | (2,716  | ) |      |   | (2,277  | )
|Advances under development agreements                                                                     |  |                           | (35,566 | ) |      |   | (926    | )
|Repayments under development agreements                                                                   |  |                           | 16,007  |   |      |   | 21,545  |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                                     |  |                           | (39,269 | ) |      |   | (13,617 | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM /USED IN FINANCING ACTIVITIES:                                                            |  |                           |         |   |      |   |         |  
|Proceeds from exercise of stock options, warrants, and related tax benefit                                |  |                           | 150     |   |      |   | 1,560   |  
|Proceeds from long-term debt                                                                              |  |                           | 1,928   |   |      |   |        |  
|Principal payments of long-term debt and capital leases                                                   |  |                           |        |   |      |   | (3,417  | )
|Proceeds from revolving lines of credit                                                                   |  |                           | 26,512  |   |      |   | 14,500  |  
|Payments on long-term debt                                                                                |  |                           | (6,203  | ) |      |   |        |  
|Payments on revolving lines of credit                                                                     |  |                           | (3,387  | ) |      |   | (22,619 | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                                          |  |                           | 19,000  |   |      |   | (9,976  | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|EFFECT OF EXCHANGE RATES ON CASH                                                                          |  |                           | (16     | ) |      |   | (3      | )
|                                                                                                          |  |                           |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                                 |  |                           | (4,846  | ) |      |   | (1,220  | )
|Cash and cash equivalents, beginning of period                                                            |  |                           | 5,805   |   |      |   | 4,939   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                                  |  | $                         | 959     |   |      | $ | 3,719   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|SUPPLEMENTAL CASH FLOW DATA:                                                                              |  |                           |         |   |      |   |         |  
|Interest paid                                                                                             |  | $                         | 3,472   |   |      | $ | 2,486   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|Income tax paid                                                                                           |  | $                         | 3,505   |   |      | $ | 4,506   |  
|                                                                                                          |  |                           |         |   |      |   |         |  
|NON-CASH INVESTING AND FINANCING TRANSACTIONS:                                                            |  |                           |         |   |      |   |         |  
|Contract rights resulting from imputed interest on development agreement notes receivable                 |  |                           | 6,129   |   |      |   | (121    | )

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



-7-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements should be read in conjunction with the Companys consolidated financial statements and
footnotes contained within the Companys Annual Report on Form 10-K 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 March 31, 2008, and for each of the three and six months ended March 31, 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 six months ended March 31, 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.

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
| | - |  | --------------------------

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 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.

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, we apply 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: (1) each item
has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of the undelivered items; and (3) 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, we recognize 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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 service or PCS period of the contract or until
fair value can objectively be determined for any remaining undelivered units of accounting.

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
March 31, 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 collectibility. 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.

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.

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

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 $872,000 for the quarter ended March 31, 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
March 31, 2008 include the present value of investments held by the Companys prize-fulfillment firm related to outstanding MegaBingo jackpot-prize-winner annuities of $868,000.

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 March 31, 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(R), 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).

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

There were no option grants issued during the quarter ended March 31, 2008. Total pretax share-based
compensation for the quarter ended March 31, 2008 was $220,000. The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was $49,000 for the quarter ended
March 31, 2008.

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.

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

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

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

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

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.

In December 2007, the FASB issued SFAS No. 160, Non
Controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS No. 160 changes the accounting for non controlling (minority)



-8-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



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 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, the Company will receive approximately 35% of the 4,000 additional gaming units that are expected to be placed in the expanded facility in southern
Oklahoma. The Company will record all advances as a note receivable and impute interest on the interest free loan. The discount (imputed interest) will be recorded as contract rights and will be amortized over the life of the agreement. The
repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, continued with $19.4 million funded in the first quarter of 2008 and $15.4 million in the
second quarter of 2008, with the remaining $6.1 million to be funded in the third quarter of 2008. As of March 31, 2008, the Company had advanced $59.5 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 six months ending March 31, 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:



|                                                                     |  |                |        |                   |   |       
|-------------------------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                                                     |  | March 31,2008  |        | September 30,2007
|                                                                     |  | (In thousands)
|Included in:                                                         |  |                |        |                   |   |       
|Notes receivable, net                                                |  | $              | 64,645 |                   | $ | 49,045
|Property and equipment, net of accumulated depreciation              |  |                |       |                   |   | 56    
|Intangible assets  contract rights, net of accumulated amortization |  |                | 31,264 |                   |   | 27,080



-9-



---

##### Table of Contents

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:



|                                                                                     |  |                |          |   |                   |   |          |                      |  |            
|------------------------------------------------------------------------------------ |  | -------------- | -------- | - | ----------------- | - | -------- | -------------------- |  | -----------
|                                                                                     |  | March 31,2008  |          |   | September 30,2007 |   |          | EstimatedUsefulLives
|                                                                                     |  | (In thousands)
|Gaming equipment and third-party gaming content licenses available for deployment(1) |  | $              | 26,252   |   |                   | $ | 32,013   |                      |  |            
|Deployed gaming equipment                                                            |  |                | 96,835   |   |                   |   | 94,564   |                      |  | 3-5 years  
|Deployed third-party gaming content licenses                                         |  |                | 34,479   |   |                   |   | 28,366   |                      |  | 1.5-3 years
|Tribal gaming facilities and portable buildings                                      |  |                | 5,122    |   |                   |   | 5,296    |                      |  | 5-7 years  
|Third-party software costs                                                           |  |                | 8,510    |   |                   |   | 8,434    |                      |  | 3-5 years  
|Vehicles                                                                             |  |                | 3,360    |   |                   |   | 3,499    |                      |  | 3-10 years 
|Other                                                                                |  |                | 3,333    |   |                   |   | 3,263    |                      |  | 3-7 years  
|                                                                                     |  |                |          |   |                   |   |          |                      |  |            
|Total property and equipment                                                         |  |                | 177,891  |   |                   |   | 175,435  |                      |  |            
|Less accumulated depreciation and amortization                                       |  |                | (108,258 | ) |                   |   | (100,103 | )                    |  |            
|                                                                                     |  |                |          |   |                   |   |          |                      |  |            
|Total property and equipment, net                                                    |  | $              | 69,633   |   |                   | $ | 75,332   |                      |  |            
|                                                                                     |  |                |          |   |                   |   |          |                      |  |            
|Leased gaming equipment                                                              |  | $              | 162,915  |   |                   | $ | 154,769  |                      |  | 3 years    
|Less accumulated depreciation                                                        |  |                | (124,046 | ) |                   |   | (116,190 | )                    |  |            
|                                                                                     |  |                |          |   |                   |   |          |                      |  |            
|Total leased gaming equipment, net                                                   |  | $              | 38,869   |   |                   | $ | 38,579   |                      |  |            
|                                                                                     |  |                |          |   |                   |   |          |                      |  |            



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

During the three and six months ended March 31, 2008, the Company disposed of or wrote off $74,000 and $131,000, 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:



|                                             |  |                |         |   |                   |   |         |                      |  |          
|-------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -------------------- |  | ---------
|                                             |  | March 31,2008  |         |   | September 30,2007 |   |         | EstimatedUsefulLives
|                                             |  | (In thousands)
|Contract rights under development agreements |  | $              | 41,074  |   |                   | $ | 34,946  |                      |  | 5-7 years
|Internally-developed gaming software         |  |                | 25,090  |   |                   |   | 23,255  |                      |  | 1-5 years
|Patents and trademarks                       |  |                | 8,023   |   |                   |   | 7,450   |                      |  | 1-5 years
|Other                                        |  |                | 2,376   |   |                   |   | 2,376   |                      |  | 3-5 years
|                                             |  |                |         |   |                   |   |         |                      |  |          
|Total intangible assets                      |  |                | 76,563  |   |                   |   | 68,027  |                      |  |          
|Less accumulated amortization  all other    |  |                | (36,334 | ) |                   |   | (32,143 | )                    |  |          
|                                             |  |                |         |   |                   |   |         |                      |  |          
|Total intangible assets, net                 |  | $              | 40,229  |   |                   | $ | 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, $13.7 million of the $41.1 million in contract rights is not currently being amortized
pending completion of a customer facility expansion.

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



-10-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



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 March 31, 2008 and 2007, amortization
expense related to internally-developed gaming software was $753,000 and $1.1 million, respectively. For the six months ended March 31, 2008 and 2007, amortization expense related to internally-developed gaming software was
$1.5 million and $2.2 million, respectively. During the three months ended March 31, 2008, the Company wrote off $308,000 related to internally-developed gaming software, compared to a write off of $131,000 in the same
periods of 2007. For the six months ended March 31, 2008 and 2007, the Company wrote off $308,000 and $227,000, 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:



|                                                            |  |                |         |   |                   |   |         |  
|----------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                            |  | March 31,2008  |         |   | September 30,2007 |  
|                                                            |  | (In thousands) |        
|Notes receivable from development agreements                |  | $              | 77,835  |   |                   | $ | 57,929  |  
|Less imputed interest discount reclassed to contract rights |  |                | (13,190 | ) |                   |   | (8,884  | )
|                                                            |  |                |         |   |                   |   |         |  
|Notes receivable, net                                       |  |                | 64,645  |   |                   |   | 49,045  |  
|Less current portion                                        |  |                | (11,957 | ) |                   |   | (12,248 | )
|                                                            |  |                |         |   |                   |   |         |  
|Notes receivable  non-current                              |  | $              | 52,688  |   |                   | $ | 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:



|                                                        |  |                |        |   |                   |   |        |  
|------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                        |  | March 31,2008  |        |   | September 30,2007 |  
|                                                        |  | (In thousands) |       
|Long-term revolving lines of credit                     |  | $              | 30,125 |   |                   | $ | 7,000  |  
|                                                        |  |                |        |   |                   |   |        |  
|Term loan facility                                      |  | $              | 70,772 |   |                   | $ | 75,047 |  
|Less current portion                                    |  |                | (1,335 | ) |                   |   | (563   | )
|                                                        |  |                |        |   |                   |   |        |  
|Long-term debt and capital leases, less current portion |  | $              | 69,437 |   |                   | $ | 74,484 |  
|                                                        |  |                |        |   |                   |   |        |  

New 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. On 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) extends the hedging arrangement date related to a portion of the term loan to
June 1, 2008; and (ii) modifies the interest rate margin applicable to the Revolving Credit Facility and the term loan.

The new
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 (6.50% and 7.25%, respectively, as of March 31, 2008) tied to various
levels of interest pricing determined by total debt to EBITDA.



-11-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



The new 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 March 31, 2008, we are in compliance with our loan covenants. The new 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. The new Credit Facility also requires 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. As of March 31, 2008, the new Credit Facility had availability of $48.9 million.

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 new Credit Facility during April 2007.

7. EARNINGS (LOSS) PER COMMON SHARE

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



|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|------------------------------------------------------------- |  | ---------------------------- | ---------- | -------------------------- | - | ---------- |  | ---- | ---------- |  | - | ---------- | -
|                                                              |  | Three months ended March 31, |            | Six months ended March 31, |  
|                                                              |  | 2008                         |            | 2007                       |   | 2008       |  | 2007 |           
|Income (loss) available to common stockholders (in thousands) |  | $                            | 1,258      |                            | $ | 6          |  | $    | 1,657      |  | $ | (2,806     | )
|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|Weighted average common shares outstanding                    |  |                              | 26,271,074 |                            |   | 27,680,130 |  |      | 26,233,574 |  |   | 27,606,928 |  
|Effect of dilutive securities:                                |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|Options                                                       |  |                              | 972,391    |                            |   | 1,769,652  |  |      | 1,049,300  |  |   |           |  
|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|Weighted average common and potential shares outstanding      |  |                              | 27,243,465 |                            |   | 29,449,782 |  |      | 27,282,874 |  |   | 27,606,928 |  
|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|Basic earnings (loss) per share                               |  | $                            | 0.05       |                            | $ | 0.00       |  | $    | 0.06       |  | $ | (0.10      | )
|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  
|Diluted earnings (loss) per share                             |  | $                            | 0.05       |                            | $ | 0.00       |  | $    | 0.06       |  | $ | (0.10      | )
|                                                              |  |                              |            |                            |   |            |  |      |            |  |   |            |  

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 March 31, |            | Six months ended March 31,
|                        |  | 2008                         |            | 2007                       |   | 2008       |  | 2007
|Common Stock Options    |  |                              | 2,482,083  |                            |   | 951,789    |  |      | 2,437,274  |  |   | 4,843,367 
|Range of exercise price |  | $                            | 7.40-21.53 |                            | $ | 7.61-21.53 |  | $    | 7.61-21.53 |  | $ | 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 likelihood 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.



-12-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



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.

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. Given the inherent uncertainties in this litigation, the Company is unable to make any prediction as to the ultimate outcome.

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

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.



-13-



---

##### Table of Contents

MULTIMEDIA GAMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(Unaudited)



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, John Adams and Scott Henneman
for fraud, promise without intent to perform, negligent misrepresentation, breach of contract, specific performance and reformation of contract with regard to the Companys rights under the Sublicense Agreement for the 035 Patent, as
well as for non infringement and invalidity of the Patent. The court has scheduled a Markman hearing to construe the claims of the 035 Patent for September 22, 2008. No trial date has yet been set.

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 court has ordered the Company to file its renewed motion for summary judgment in light of the Federal Circuits decision by May 9, 2008. The hearing on
the motion will take place on August 1, 2008.

The District Court has scheduled pretrial deadlines including a Markman hearing to construe the
claims of the 951 Patent for September 5, 2008. A trial date of January 20, 2009 has also been set

The Company will
continue 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.

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 April 25, 2007, MegaBingo received an invoice from WMS purporting to bill the Company for approximately $7 million in alleged unpaid license and related fees. WMS later
increased its invoiced amount to approximately $12.1 million, plus interest. On September 12, 2007, after attempts to reconcile the Companys differences failed, WMS sent notices to the Company asserting that the Company was in
default under the Agreements for the reasons stated above and other alleged breaches. In an effort to resolve the dispute, WMS has granted extensions of the cure period provided in the Agreements and the Company has developed a more detailed,
historical database to provide WMS with the game theme movement and substitution information that it requested. The Company believes that this additional information enabled the parties to determine that the remaining major dispute concerning the
right to substitute game themes involves license and related fees of $3 million, rather than $12.1 million. WMS extended the cure periods to December 21, 2007, at which time 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 additional units and licenses by December 31, 2008 at previously negotiated
prices.



-14-



---

##### Table of Contents

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, we anticipate 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 customers. On January 15, 2008, the NIGC extended the comment period for the proposed Class II gaming regulations
until March 9, 2008. The NIGC is expected to make a decision on whether or not to publish any or all of its proposed standards in mid-to late summer 2008.

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.

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
our 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.



-15-



---

##### Table of Contents

|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 supplier of interactive systems, server-based
gaming systems, interactive electronic games, player terminals, stand-alone player terminals, video lottery terminals, electronic scratch ticket systems, electronic instant lottery systems, player tracking systems, casino cash management systems,
slot accounting systems, slot management systems, unified currencies and electronic and paper bingo systems for Native American, racetrack casino, casino, charity and commercial bingo, sweepstakes, lottery and video lottery markets and provide
support and services and operations support 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 and among gaming facilities. Our ongoing development and marketing efforts focus on Class II and Class III gaming systems and products for use by
Native American tribes; video lottery terminals, video lottery systems, stand-alone player terminals, electronic instant scratch systems and other products for domestic and international lotteries; products for domestic and international charity and
commercial bingo markets; and promotional, sweepstakes and amusement with prize systems.

We derive the majority of our gaming revenues from participation
agreements under which we place gaming systems, player terminals, proprietary and licensed content operated on player terminals, and back-office systems and equipment, which we collectively refer to as gaming systems. To a lesser degree, we derive
revenue from the sale of or placement of gaming systems in the Washington State Class III market under lease-purchase or participation arrangements, and from the small back-office fees generated by those video lottery systems. We also generate
gaming revenues in return for providing the central determinant system for a network of player terminals operated by the New York State Division of the Lottery. A significantly smaller portion of our revenues is generated from the sale of gaming
equipment in the Class III market in Washington State, except for a relatively few periods during which market conditions result in a temporary increase in the number of player terminals sold during the period (e.g., the opening of a new
casino, or a change in the law that allows existing casinos to increase the number of player terminals permitted under prior law). We also derive a small portion of our revenue from the sale of lottery systems and the placement of non traditional
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 two customers in Mexico and receive fees
based on the net earnings of each system. During fiscal 2008, we intend to derive revenue from the sale of stand-alone slot machines to Class III Native American markets.

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.



-16-



---

##### Table of Contents

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.

Class III 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. As of March 31, 2008, we had placed 5,119 player terminals at 36 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 during the second half of calendar 2008.

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
March 31, 2008, we had 2,384 high-speed, standard bingo games installed for the charity market in three Alabama facilities.

All Other
Gaming Markets

Class III Washington State Market. The majority
of our Class III gaming equipment in Washington State has been sold to customers outright, for a one-time purchase price, which is reported in our results of operations as Gaming equipment, system sale and lease revenue. 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



-17-



---

##### Table of Contents

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 delivered products has not been established. Because we sell new products and systems 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 March 31, 2008, we had installed 3,839 player terminals at 15 bingo parlors in Mexico under this contract with Apuestas. At
March 31, 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.

Effective September 19, 2007, we entered into a contract with Atracciones y Emociones Vallarta, S.A. de C.V., or AE Vallarta, a Mexican incorporated company, to provide traditional and electronic bingo
gaming, technical assistance, and related services for AE Vallartas locations in Mexico. As of March 31, 2008, we had installed 200 player terminals at one location in Mexico under this contract.

Promotional Sweepstakes

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

On December 1, 2006, the Alabama Supreme Court issued an opinion, finding that the promotional sweepstakes was unlawful under Alabamas gambling laws. The
promotional sweepstakes system was shut down at the Birmingham Race Course facility, and as of January 31, 2007, we had removed the sweepstakes system from the facility. We recorded a write-off of $111,000 for all unamortized
installation and software costs during the quarter ended December 31, 2006.

Revenues from the promotional sweepstakes are included in
Other revenues in statements of operations.

Development Agreements

As we seek to continue the growth in our customer base and to expand our installed base of player terminals, a key element of our strategy has become entering into development agreements with various Native American
tribes to 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.



-18-



---

##### Table of Contents

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

We have in the past and 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 35% of the 4,000 additional gaming units that are expected
to be placed in the expanded facility in southern Oklahoma. We will record all advances as a note receivable and impute interest on the interest free loan. The discount (imputed interest) will be recorded as contract rights and will be amortized
over the life of the agreement. The repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, continued with $19.4 million funded in the first quarter
of 2008 and $15.4 million in the second quarter of 2008 with the remaining $6.1 million to be funded in the third quarter of 2008. As of March 31, 2008, the Company had advanced $59.5 million toward this
commitment.

As a result the recent substantial levels of development activity in Oklahoma, we expect the future pace of development 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 March 31, 2008, we have placed 4,045 units in 10 facilities
in Oklahoma pursuant to development agreements.



-19-



---

##### Table of Contents

RESULTS OF OPERATIONS

The following tables outline our end-of-period and average installed base of player terminals for the three and six months ended March 31, 2008 and 2007.



|                                             |  |              |  |      
|-------------------------------------------- |  | ------------ |  | -----
|                                             |  | At March 31,
|                                             |  | 2008         |  | 2007 
|End-of-period installed player terminal base |  |              |  |      
|Class II player terminals                    |  |              |  |      
|New Generation systemReel Time Bingo        |  | 2,223        |  | 5,354
|Legacy system                                |  | 311          |  | 353  
|Oklahoma compacted games                     |  | 5,119        |  | 3,662
|Mexico                                       |  | 4,039        |  | 919  
|Other player terminals(1)                    |  | 2,771        |  | 2,588



|                                        |  |                             |  |                           |  |       |  |      
|--------------------------------------- |  | --------------------------- |  | ------------------------- |  | ----- |  | -----
|                                        |  | Three Months EndedMarch 31, |  | Six Months EndedMarch 31,
|                                        |  | 2008                        |  | 2007                      |  | 2008  |  | 2007 
|Average installed player terminal base: |  |                             |  |                           |  |       |  |      
|Class II player terminals               |  |                             |  |                           |  |       |  |      
|New Generation SystemReel Time Bingo   |  | 3,084                       |  | 5,598                     |  | 3,389 |  | 6,134
|Legacy system                           |  | 340                         |  | 358                       |  | 343   |  | 363  
|Oklahoma compact games                  |  | 4,564                       |  | 3,378                     |  | 4,411 |  | 3,116
|Mexico                                  |  | 3,688                       |  | 919                       |  | 3,400 |  | 848  
|Other player terminals(1)               |  | 2,774                       |  | 2,543                     |  | 2,755 |  | 2,527



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

During January 2007, as a result of the Alabama Supreme Court decision, we removed all of the sweepstakes video readers that were installed in Alabama. At March 31, 2008 and 2007, there were no sweepstakes video
readers installed, and the average installed base for the three and six months ended March 31, 2007 was 176 and 753, respectively. These sweepstakes video readers are not included in the counts above.

Three Months Ended March 31, 2008, Compared to Three Months Ended March 31, 2007

Total revenues for the three months ended March 31, 2008, were $32.2 million, compared to $30.7 million, an increase of $1.5 million, or 5% for the same period of 2007. This
increase is primarily the result of the increase in the average installed base of games in Mexico.

Gaming Revenue  Class II



| |  | Class II gaming revenue was $7.5 million in the three months ended March 31, 2008, compared to $12.9 million in the three months ended
March 31, 2007, a $5.4 million or 42% 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 $6.9 million for the quarter ended March 31, 2008, compared to $12.2 million in the quarter ended
March 31, 2007, a $5.3 million or 43% decrease. The average installed base of player terminals decreased 45%, which was partially offset by a 10% increase in the average hold per day. Accretion of contract rights related to
development agreements, which is recorded as a reduction of revenue, decreased $404,000, or 54%, to $344,000, in the three months ended March 31, 2008, compared to $748,000 in the three months ended March 31, 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. In addition, as a result of the conversion from Reel Time Bingo to games played under the compact, our revenue share percentage will decrease to the market rate for compact games.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-20-



---

##### Table of Contents

| |  | Legacy revenue decreased $109,000, or 15%, to $622,000 in the three months ended March 31, 2008, from $731,000 in the three months
ended March 31, 2007. The average installed base of Legacy player terminals decreased 5%, and the hold per day decreased 11%.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $14.1 million in the three months ended March 31, 2008, compared to $8.7 million during the same period of 2007, an increase of $5.4 million, or 63%. The average installed base of the Oklahoma
compact games increased 35%, as the conversion of Class II player terminals to compact games continues, while hold per day increased 3%. Accretion of contract rights related to development agreements, which is recorded as a reduction
of revenue, decreased $183,000, or 24%, to $581,000, in 2008, compared to $764,000 in 2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gaming Revenue 
Charity



| |  | Charity gaming revenues decreased $644,000, or 13%, to $4.4 million for the March 31, 2008 quarter, compared to $5.0 million for the same
quarter of 2007. The average installed base of charity player terminals decreased 2%, and the hold per day decreased 12%. The decrease in the hold per day is primarily attributable to competitive factors and to a lesser extent
economic factors.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gaming Revenue  All Other



| |  | Class III back-office fees decreased $54,000, or 6%, to $882,000 in the three months ended March 31, 2008, from $936,000 during the same
period of 2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenues from the New York Lottery system increased $353,000, or 26% to $1.7 million in the three months ended March 31, 2008,
from $1.3 million in the three months ended March 31, 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 $1.7 million to $2.5 million in the three months ended March 31, 2008, from $774,000 during
the same period of 2007. As of March 31, 2008, we had installed 4,039 player terminals at 16 bingo parlors in Mexico compared to 919 terminals installed at five bingo parlors at March 31, 2007. Our revenue
share is in the range of the other 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 $323,000, or 46%, to $378,000 for the quarter ended March 31, 2008,
from $701,000 for the same period of 2007. Gaming equipment and system sale revenue of $205,000 for the three months ended March 31, 2008, did not include player terminal or systems sales. Gaming equipment and system
sale of $317,000 for the three months ended March 31, 2007, included two system sales and no player terminals. In the three months ended March 31, 2007, gaming equipment sale revenue included revenues of $247,000 related to
a certain equipment sale being recognized ratably over the term of the agreement. License revenues for the three months ended March 31, 2008, were $173,000, compared to $137,000 for the three months ended
March 31, 2007, an increase of $36,000, or 26%. Total cost of sales, which includes cost of royalty fees, increased $221,000, to $414,000 in the three months ended March 31, 2008, from $193,000 in
the three months ended March 31, 2007. The increase primarily relates to connectivity fees in which our player terminals are connected to a third-party system.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Revenue



| |  | Other revenues increased $158,000, or 49%, to $482,000 for the quarter ended March 31, 2008, from $324,000 during the same period
of 2007. The increase is primarily due to a loss on the disposal of an asset in 2007.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling, General and
Administrative Expenses



| |  | Selling, general and administrative expenses increased approximately $100,000 or 1%, to $16.6 million for the three months ended
March 31, 2008, from $16.5 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 $713,000, primarily related
to the former Chief Executive Officers resignation, along with other headcount increases (at March 31, 2008, we employed 462 full-time and part-time employees, compared to 418 at March 31, 2007); (ii) an
increase in consulting and contract labor of approximately $217,000; and (iii) a decrease in legal and professional fees of $795,000, due to the resolution of several legal matters in the third and fourth quarters of fiscal 2007.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-21-



---

##### Table of Contents

Amortization and Depreciation



| |  | Amortization expense decreased $710,000, or 40%, to $1.0 million for the quarter ended March 31, 2008, compared to $1.8 million for
the same quarter of 2007. Depreciation expense decreased $1.8 million, or 14%, to $11.4 million for the three months ended March 31, 2008, from $13.2 million for the corresponding three-month period
ended March 31, 2007.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income and Expense



| |  | Interest income increased $61,000, or 6%, to $1.1 million for the three months ended March 31, 2008, from $1.1 million in the same period
of 2007. We entered into development agreements with a customer under which approximately $75.4 million has been advanced and is outstanding at March 31, 2008, for which we impute interest on these interest-free loans. For the
quarter ended March 31, 2008, we recorded imputed interest of $1.0 million relating to development agreements with an imputed interest rate range of 6% to 8.25%, compared to $639,000 at March 31, 2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense increased $1.3 million, or 104%, to $2.5 million for the three months ended March 31, 2008, from $1.2 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 Facility which replaced our previous Credit Facility in its
entirety. On October 27, 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) extends the hedging arrangement date related to a portion of the term loan to June 1, 2008; and (ii) modifies the interest rate margin applicable to the
Revolving Credit Facility and the term loan.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other income decreased $239,000, or 22%, to $872,000 for the three months ended March 31, 2008, compared to $1.1 million in the same
period of 2007. Other income consisted of distributions from a partnership interest, accounted for using the cost basis that we received during the first quarter of fiscal 2008.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income tax expense increased by $1.0 million, to $1.0 million for the three months ended March 31, 2008, from an income tax benefit
of $2,000 in the same period of 2007. These figures represent effective income tax rates of 43.8% and (50%) for the three months ended March 31, 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 charged to Retained Earnings.



-22-



---

##### Table of Contents

Six Months Ended March 31, 2008, Compared to Six Months Ended March 31, 2007

Total revenues for the six months ended March 31, 2008, were $62.4 million, compared to $59.8 million, an increase of $2.6 million,
or 4% 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 recognition of revenue from the sale of 50 player terminals in Washington State.

Gaming Revenue  Class II



| |  | Class II gaming revenue was $15.6 million in the six months ended March 31, 2008, compared to $28.2 million in the six months ended
March 31, 2007, a $12.6 million or 45% 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 $14.3 million for the six months ended March 31, 2008, compared to $26.8 million for the six months ended
March 31, 2007, a $12.5 million or 46% decrease. The average installed base of player terminals decreased 45% and the average hold per day increased 3%. Accretion of contract rights related to development agreements, which
is recorded as a reduction of revenue, decreased $1.0 million, or 59%, to $695,000 in the six months ended March 31, 2008, compared to $1.7 million in the six months ended March 31, 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. In addition, as a result of the conversion from Reel Time Bingo to games played under the compact, our revenue share percentage will decrease to the market rate for compact games.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Legacy revenue decreased $215,000, or 15%, to $1.2 million in the six months ended March 31, 2008, from $1.5 million in the
six months ended March 31, 2007. The average installed base of Legacy player terminals decreased 6%, and the hold per day decreased 9%.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $25.7 million in the six months ended March 31, 2008, compared to $14.6 million during the same period of 2007, an increase of $11.1 million, or 76%. The average installed base of the Oklahoma
compact games increased 42% as the conversion of Class II player terminals to compact games continues. Hold per day increased 7%, primarily as a result of the higher installed base of the stand-alone units, which have a higher hold
per day. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, decreased to $87,000, or 7% to $1.2 million, in the six months ended March 31, 2008, compared to
$1.3 million in the same period of 2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gaming Revenue  Charity



| |  | Charity gaming revenues decreased $949,000, or 10%, to $8.3 million for the six months ended March 31, 2008, compared to $9.2 million
for the same period of 2007. Hold per day decreased 10%, while the average installed player terminal base remained constant. The decrease in the hold per day is primarily attributable to competitive factors and to a lesser extent economic
factors.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gaming Revenue  All Other



| |  | Class III back-office fees decreased $89,000, or 5%, to $1.8 million in the six months ended March 31, 2008, from $1.9 million
during the same period of 2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenues from the New York Lottery system increased $793,000, or 32% to $3.2 million in the six months ended March 31, 2008,
from $2.4 million in the six months ended March 31, 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 $3.4 million to $4.6 million in the six months ended March 31, 2008, from $1.2 million
during the same period of 2007. As of March 31, 2008, we had installed 4,039 player terminals at 16 bingo parlors in Mexico compared to 919 terminals installed at five bingo parlors at March 31, 2007. Our
revenue share is in the range of the other markets in which we operate.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-23-



---

##### Table of Contents

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



| |  | Gaming equipment and system sale and lease revenue increased $1.1 million to $2.1 million for the six months ended March 31, 2008,
from $1.0 million for the same period of 2007. Gaming equipment and system sale revenue of $1.3 million for the six months ended March 31, 2008, included the sale of 50 player terminals and one system. Gaming
equipment and system sale of $336,000 for the six months ended March 31, 2007, included two system sales and no player terminals. In the six months ended March 31, 2008 and 2007, gaming equipment sale revenue included
revenues of $182,000 and $513,000, respectively, related to a certain equipment sale being recognized ratably over the term of the agreement. License revenues for the six months ended March 31, 2008, were $637,000, compared
to $178,000 for the six months ended March 31, 2007, an increase of $459,000, primarily related to the player terminal sale discussed above. Total cost of sales, which includes cost of royalty fees, increased $488,000,
or 68% to $1.2 million in the six months ended March 31, 2008, from $716,000 in the six months ended March 31, 2007. The increase relates to the player terminal and system sales discussed above.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Revenue



| |  | Other revenues decreased $358,000, or 30%, to $850,000 for the six months ended March 31, 2008, from $1.2 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 $2.4 million, or 7%, to $32.7 million for the six months ended
March 31, 2008, from $35.1 million in the same period of 2007. This decrease was primarily a result of (i) a decrease in legal and professional fees of $1.5 million, due to the resolution of several legal matters in the
third and fourth quarters of fiscal 2007; (ii) a $430,000 decrease in write offs of third-party gaming content licenses, installation costs and systems; and (iii) a decrease in consulting and contract labor of approximately
$413,000.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortization and Depreciation



| |  | Amortization expense decreased $1.3 million, or 35%, to $2.2 million for the six months ended March 31, 2008, compared to $3.5 million
for the same period of 2007. Depreciation expense decreased $3.3 million, or 13%, to $22.7 million for the six months ended March 31, 2008, from $26.0 million for the corresponding six-month period ended
March 31, 2007.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income and Expense



| |  | Interest income decreased $379,000 or 14%, to $2.3 million for the six months ended March 31, 2008, from $2.6 million in the same
period of 2007. We entered into development agreements with a customer under which approximately $75.4 million has been advanced and is outstanding at March 31, 2008, and for which we impute interest on these interest-free loans.
For the six months ended March 31, 2008, we recorded imputed interest of $1.8 million relating to development agreements with an imputed interest rate range of 6% to 8.25% compared to $1.3 million for the six months ended
March 31, 2007.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense increased $2.1 million, or 83%, to $4.6 million for the six months ended March 31, 2008, from $2.5 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 Facility which replaced our previous Credit Facility in its
entirety. On October 27, 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) extends the hedging arrangement date related to a portion of the term loan to June 1, 2008; and (ii) modifies the interest rate margin applicable to the
Revolving Credit Facility and the term loan.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other income decreased $99,000 or 9%, to $1.2 million for the six months ended March 31, 2008, compared to $1.1 million in the same
period of 2007. Other income consisted of distributions from a partnership interest, accounted for on the cost basis that we received during the six months ended March 31, 2008.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income tax expense increased by $2.2 million, to $735,000 for the six months ended March 31, 2008, from an income tax benefit
of $1.5 million in the same period of 2007. These figures represent effective income tax rates of 30.7% and 34.7% for the six months ended March 31, 2008 and 2007, respectively.



-24-



---

##### Table of Contents

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.

RECENT ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES 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
(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 service period of the contract.

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 service or PCS period of the
contract. The deferral of revenue under arrangements where we have determined that VSOE does not exist has resulted in $2.9 million being recorded as deferred revenue at March 31, 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 March 31, 2008.

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 3 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 March 31, 2008, a significant portion of the $12.4 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.

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 March 31, 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, Accounting for Income Taxes, 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 Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
(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 is largely dependent upon our ability to generate taxable income in the future.
Our liability for uncertain tax positions is dependent upon our judgment on the amount of financial statement benefit that an uncertain tax position will realize upon ultimate settlement and on the probabilities of the outcomes that could be
realized upon ultimate settlement of an uncertain tax position using the facts, circumstances and information available at the reporting date to establish the appropriate amount of financial statement benefit. To the extent that a valuation
allowance or uncertain tax position is established or increased or decreased during a period, we may be required to include an expense or benefit within income tax expense in the income statement.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2008, we had
$959,000 in unrestricted cash and cash equivalents, compared to $5.8 million at September 30, 2007. Our working capital at March 31, 2008 was $26.8 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 inventory, and decreases in accounts payable and accrued expenses. During the quarter ended March 31, 2008, we
used $5.0 million for capital expenditures of property and equipment, and we collected $10.3 million on development agreements, with $15.4 million advanced under development agreements. Under the new Credit Facility, our availability
as of March 31, 2008, is $48.9 million.

As of March 31, 2008, our total contractual cash obligations were as follows (in
thousands):



|                             |  |                 |        |           |   |           |  |       |         |  |   |        
|---------------------------- |  | --------------- | ------ | --------- | - | --------- |  | ----- | ------- |  | - | -------
|                             |  | Less than1 year |        | 1-3 years |   | 3-5 years |  | Total
|Revolving Credit Facility(1) |  | $               | 1,640  |           | $ | 3,937     |  | $     | 32,568  |  | $ | 38,145 
|Credit Facility Term Loan(2) |  |                 | 5,036  |           |   | 11,554    |  |       | 74,596  |  |   | 91,186 
|Operating leases(3)          |  |                 | 2,445  |           |   | 3,232     |  |       | 249     |  |   | 5,926  
|Purchase commitments(4)      |  |                 | 15,776 |           |   | 5,229     |  |       |        |  |   | 21,005 
|Development agreements(5)    |  |                 | 6,094  |           |   |          |  |       |        |  |   | 6,094  
|                             |  |                 |        |           |   |           |  |       |         |  |   |        
|Total                        |  | $               | 30,991 |           | $ | 23,952    |  | $     | 107,413 |  | $ | 162,356
|                             |  |                 |        |           |   |           |  |       |         |  |   |        



|(1) | Relating to the Revolving Credit Facility, bearing interest at the Eurodollar rate plus the applicable spread (6.50% as of March 31, 2008).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of amounts borrowed under our Credit Facility at the Eurodollar rate plus the applicable spread (7.25% as of March 31, 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.
|--- | --------------------------------------------------------------------------------------------------------------

|(5) | Consists of a commitment to fund a gaming facility expansion in Southern Oklahoma.
|--- | ----------------------------------------------------------------------------------

During the six months ended March 31, 2008, we generated $15.4 million in cash from our operations, compared to $22.4 million during the same period of 2007. This $7.0 million decrease in
cash generated from operations over the prior period was primarily due to the timing of federal and state income taxes, partially offset by the increase in earnings.

Cash used in investing activities increased to $39.3 million in the six months ended March 31, 2008, from $13.6 million in the same period of 2007. The increase was primarily the result
of a $40.2 million increase in advances, net of reimbursements, under development agreements, and was partially offset by a $15.5 million decrease in the acquisition of property and equipment and leased gaming equipment. During the six
months ended March 31, 2008, additions to property and equipment consisted of the following:



|                                    |  |                      |       
|----------------------------------- |  | -------------------- | ------
|                                    |  | Capital Expenditures
|                                    |  | (In thousands)      
|Gaming equipment                    |  | $                    | 13,558
|Third-party gaming content licenses |  |                      | 3,614 
|Other                               |  |                      | 145   
|                                    |  |                      |       
|Total                               |  | $                    | 17,317
|                                    |  |                      |       



-25-



---

##### Table of Contents

Cash provided by financing activities increased to $19.0 million in the six months ended March 31, 2008,
from a usage of $10.0 million in the same period of 2007. The increase was primarily the result of a $27.0 million increase in the net borrowings under the new Credit Facility.

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 $15.8 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 35% of the 4,000 additional gaming units that are
expected to be placed in the expanded facility in southern Oklahoma. We will record all advances as a note receivable and impute interest on the interest free loan. The discount (imputed interest) will be recorded as contract rights and will be
amortized over the life of the agreement. The repayment period of the note will be based on the performance of the facility. The funding, which commenced in the third quarter of 2007, continued with $19.4 million funded in the first
quarter of 2008 and $15.4 million in the second quarter of 2008 with the remaining $6.1 million to be funded in the third quarter of 2008. As of March 31, 2008, the Company had advanced $59.5 million toward
this commitment.

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

New 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 27, 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) extends the hedging arrangement date related to a portion of the term loan to June 1, 2008; and (ii) modifies the interest rate margin
applicable to the Revolving Credit Facility and the term loan.

The new 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 (6.50% and 7.25%, respectively, as of March 31, 2008), tied to various levels of interest pricing determined by total debt to EBITDA.



-26-



---

##### Table of Contents

The new 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 new 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, 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. The new Credit Facility also requires that we enter into hedging arrangements covering at least $50 million of the term loan for a three-year period by
June 1, 2008.

Stock Repurchase Authorizations

At March 31, 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 March 31, 2008, and March 31, 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 March 31, 2008, we had approximately 4.2 million options outstanding, with exercise prices ranging from $1.00 to $21.53 per share. At March 31, 2008, approximately
3.8 million of the outstanding options were exercisable.

During the quarter ended March 31, 2008 no stock options were granted. During the
three months ended March 31, 2008, we issued 3,074 shares of common stock as a result of stock option exercises with an average exercise price of $3.71.

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.



-27-



---

##### Table of Contents

|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 new Revolving
Credit Facility, we may currently borrow up to a total of $150 million, and our availability as of March 31, 2008, is $48.9 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 $1.0 million, based on our variable debt outstanding of $101.0 million as of March 31, 2008. The new Credit Facility also requires that we enter into hedging arrangements covering at least $50 million of
the term loan for a three-year period by June 1, 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 Interim 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 Interim 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 Interim Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2008.

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 second quarter of fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



-28-



---

##### Table of Contents

PART II

OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

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



|ITEM 1A. | RISK FACTORS
|-------- | ------------

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 109thCongress, which concluded in December 2006. To date, the
DOJs proposed bill has not been introduced in the 110thCongress.

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. The NIGC is expected to make a decision on whether or not to publish any or all of its proposed standards in mid-to late summer 2008.



-29-



---

##### Table of Contents

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.



-30-



---

##### Table of Contents

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.



-31-



---

##### Table of Contents

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 March 31, 2008, we had 2,384 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 March 31, 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.



-32-



---

##### Table of Contents

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 the six months ended March 31, 2008 and 2007, approximately 58% and 61%, respectively, of our gaming
revenues were from Native American tribes located in Oklahoma, and approximately 41% and 43%, 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 March 31, 2008, we had placed 5,119 player
terminals at 36 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



-33-



---

##### Table of Contents

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.

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. 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.

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



-34-



---

##### Table of Contents

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.

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



-35-



---

##### Table of Contents

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.

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



-36-



---

##### Table of Contents

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.

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.

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



-37-



---

##### Table of Contents

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.

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.



-38-



---

##### Table of Contents

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) | None.
|--- | -----



|(b) | None.
|--- | -----



|(c) | We did not repurchase shares of our common stock during the most recently completed quarter. As of March 31, 2008, the maximum number of common shares 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
|------- | ---------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



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

See Exhibit Index.



-39-



---

##### Table of Contents

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: May 12, 2008 |  | Multimedia Games, Inc.
|                   |  |                       
|                   |  | By:                    |  | /s/ Randy S. Cieslewicz
|                   |  |                        |  | Randy S. Cieslewicz     
|                   |  |                        |  | Chief Financial Officer 



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



-40-



---

##### Table of Contents

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)     
|            |  |                                                                                                         
|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.
|--- | ----------------------------------------------------------------------------------

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



-41-