**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





**[X]**  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)** **OF
      THE SECURITIES AND EXCHANGE ACT OF 1934**


**FOR
      THE FISCAL YEAR ENDED JUNE 30, 2006**




**[  
      ]**  **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF** **THE
      SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE TRANSITION PERIOD FROM _____ TO ______**




**COMMISSION
      FILE NUMBER: 000-32195**


**PGMI,
      INC.**


(Name
      Of
      Small Business Issuer In Its Charter)





**Utah**
              
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **87-0319410**
              (I.R.S.
                Employer
              Identification
                No.)





**5912
      Bolsa Avenue, Suite 108, Huntington Beach, California
      92649**





(Address
      Of Principal Executive Offices)




ISSUER’S
      TELEPHONE NUMBER: **(714)
      895-7772**




SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:




**TITLE
                OF****EACH
                CLASS**
            **NAME
                OF EACH EXCHANGE****ON
                WHICH REGISTERED**N/A
            N/A





SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:


**COMMON
      STOCK, NO PAR VALUE**




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. ý




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




State
      issuer’s revenues for its most recent fiscal year: $24,485,146




State
      the
      aggregate market value of voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: September 15, 2006,  Common
      stock, $0.01 par value: $5,632,576.




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 25,003,671 Shares as of voting common stock
      as of  September 15, 2006


DOCUMENTS
      INCORPORATED BY REFERENCE


None


Transitional
      Small Business Disclosure Format: Yes  o  No ý









**PGMI,
        INC.**
 **ANNUAL
        REPORT ON FORM 10-KSB**
 **FOR
        THE FISCAL YEAR ENDED JUNE 30, 2006**
  **TABLE
        OF CONTENTS**
  Page
                  Number**PART
                  I**Item
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              11Item
                  3.
              Legal
                  Proceedings
              11Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              11**PART
                  II**Item
                  5.
              Market
                  for Common Equity, Related Stockholder Matters
                and
                  Small Business Issuer Purchases of Equity
                  Securities
              12Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of
                  Operation
              14Item
                  7.
              Financial
                StatementsItem
                8
              Changes
                in and Disagreements with Accountants
                on
                  Accounting and Financial Disclosure
              17Item
                  8A.
              Controls
                  and Procedures
              17**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control
                  Persons;
                Compliance
                  with Section 16(a) of the Exchange
                  Act
              18Item
                    10.
              Executive
                  Compensation
              20Item
                  11.
              Security
                  Ownership of Certain Beneficial
                  Owners
                and
                    Management and Related Stockholder
                    Matters
              20Item
                  12.
              Certain
                  Relationships and Related
                  Transactions
              22Item
                  13.
              Exhibits
              22Item
                14.
              Principal
                  Accountant Fees and
                  Services
              22Signatures
              23







**PART
        1**
  **Forward
        Looking Statements**
 
 This
        Annual Report on Form 10-KSB of PGMI, Inc. (“PGMI” or “we”) contains
        forward-looking statements that are not based on historical facts and are
        based
        on current expectations that are subject to various risks and uncertainties,
        as
        well as assumptions that, if they do not materialize or prove incorrect,
        could
        cause our future results to differ materially from those expressed or implied
        in
        such forward looking statements. All statements other than historical facts
        are
        statements that are or could be deemed forward-looking statements, including,
        without limitation any future results of operations, plans or strategies
        or
        relating to future economic or industry conditions. Factors that might cause
        such differences include, but are not limited to, those discussed in the
        subsection entitled “Risk Factors” under Part I, page 8 or that are otherwise
        described from time to time in our reports filed with the Securities and
        Exchange Commission after this Annual Report. PGMI assumes no obligation
        to
        update any forward looking statements to reflect events that occur or
        circumstances that may arise after the date as of which they are
        made.
 
 **ITEM
        1. DESCRIPTION OF BUSINESS**
 
 **The
        Company; Corporate History**
 
 PGMI,
        Inc. (the “Company”) was organized under the laws of the State of Utah on May 9,
        1972 under the name of High-Line Investment & Development Company.  In
        1977, we changed our name to Gayle Industries, Inc.  In 1978, we merged
        into Swing Bike.  In 1979, we changed our name to Horizon Energy
        Corporation.  In 1992, we changed our name to Millennium Entertainment
        Corp.  In 1993, we changed our name to New Horizon Education, Inc.  In
        September 2002, we changed our name to American Hospital Resources, Inc.
         In May 2005, in anticipation of acquiring HAPS USA, Inc., (a Delaware
        corporation), a company which manages foreign casinos, we changed our name
        to
        HAPS USA, Inc.   In August of 2005, the plans for the acquisition were
        abandoned.
  On
        October 27, 2005, we entered into an Agreement and Plan of Reorganization
        (the “Agreement”) with PGMI, Inc., a Delaware corporation (“PGMI”) and the
        stockholders of PGMI, which provided for a tax-free share exchange under
        Section 368(a)(1)(B) of the Internal Revenue Code. Such transaction
        was accounted for as a reorganization.  The share exchange closed on
        December 9, 2005. Pursuant to the Agreement, all of the 10,000 shares of
        outstanding common stock of PGMI were acquired in exchange for 97,059,998
        shares
        of our Class E Convertible Preferred Stock.  Each share of
        Class E convertible preferred stock is convertible, commencing on the date
        which is 3 years following the closing date, into 5 shares of our common
        stock.  The outstanding shares of Class E Convertible Preferred Stock
        represent approximately 91.5% of our outstanding voting power.  We have a
        wholly-owned subsidiary, Marugin International, Inc., a corporation formed
        and existing under the laws of Japan.  Our subsidiary is an operating
        entity, which presently operates pachinko stores in Japan with in excess
        of $23
        million in gaming revenues and 1.6 million in net losses due to opening of
        its
        two largest stores during fiscal 2005.
  At
        the
        time of acquisition, HAPS had no revenues and no significant assets or
        liabilities.  It was considered a blank-check company prior to the
        acquisition.  The acquisition of PGMI by HAPS will be accounted for as a
        reverse acquisition, whereby the assets and liabilities of Exam are reported
        at
        their historical cost.  The assets and liabilities of HAPS will be recorded
        at fair value on December 9, 2005, the date of close.  The effects of
        stockholders’ equity will be reported as a recapitalization.  No goodwill
        will be recorded in connection with the reverse acquisition.  The reverse
        acquisition resulted in a change in reporting entity of HAPS for accounting
        and
        reporting purposes.  Accordingly, the financial statements reported herein
        have retroactively restated for all periods presented to report the historical
        financial position, results of operations and of cash flows of PGMI. On March
        15, 2006 we changed our name to PGMI, Inc.
 
 At
        various places in this report, we may make reference to “PGMI” or the “company”
or “us” or “we.”  When we use those terms, unless the context otherwise
        requires, we mean PGMI, Inc., a Utah Corporation and its operating subsidiary,
        Marugin International, Inc.
 
 We
        are
        traded on the NASD Over-the-Counter Bulletin Board under the ticker symbol
        PGMI.OB.
  1
  Our
        domestic headquarters are located in Huntington Beach, California. Our mailing
        address is 5912 Bolsa Avenue, Suite 108, Huntington Beach, California 92649.
        Our
        telephone number is (714) 895-7772. Our Annual Report on Form 10-KSB,
        quarterly reports on Form 10-QSB, current reports on Form 8-K, and all
        amendments to those reports filed with or furnished to the SEC are available,
        free of charge, through our website at www.pgmi-inc.com as soon
        as reasonably practicable after such reports are electronically filed with
        or
        furnished to the Securities and Exchange Commission.
  **Marugin
        International**
  Marugin
        International, Inc., (“Marugin”) was incorporated on December 22, 1972. On June
        10, 2003, Marugin formed PGMI Delaware to effect a share exchange agreement,
        whereby Marugin became a wholly-owned subsidiary of PGMI (collectively, the
        “Company”). As of June 30, 2006, the Company operated a total of thirteen stores
        which offer Pachinko (Japanese pinball) gaming entertainment. Twelve stores
        are
        located in the Nagano prefecture of Japan, and 2 stores are located in the
        Ibaraki prefecture of Japan. Our 13 stores have a combined 4,290 machines.
        In July 2004 and March 2005, we opened our 2 largest stores with 560 machines
        each. The Company receives income from cigarettes, non-alcoholic beverages,
        Aichi and sundry items, as well as one small batting cage and a bowling alley.
  We
        believe that our stores are strategically located in areas that are convenient
        and accessible to local residents. Our stores are known by our customers
        to be
        clean, attractive and comfortable. Our growth has been driven by the successful
        addition of new stores and enhancements to the operational efficiency of
        existing locations. We are led by a seasoned executive management team with
        decades of experience and accumulated industry knowledge.
 
 **PGMI’s
        Existing Pachinko Store Statistics**
 ·Average
                  gross wagers per sq. m: $20,696
                ·Average
                  gross wagers per machine: $42,651
                ·Average
                  number of machines per store: 330 machines
                ·Average
                  annual revenue per machine: $5,290
                ·Average
                  age of each store: 19 years
                ·Average
                  number of employes per store: 14
 
 **The
        Industry**
 
 **Introduction
        to Pachinko**
 
 *Pachinko* is
        believed to have originated in Japan in the 1920s based on a vertical
        pinball-like device called the Corinthian Game that was imported into Japan
        from
        the U.S. Pachinko is a game in which players shoot steel metal balls about
        3/8”
in diameter into a vertical machine that resembles a Western slot machine.
        The
        machine features pins that guide the direction of the balls into one of several
        slots in the machine. Certain slots release more balls while other slots
        capture
        the ball. The machines also have an automatic ball feeder that allows the
        player
        to quickly release balls into the machine. The player uses a round knob at
        the
        bottom of the machine, thereby adding an element of skill to the game, to
        control the speed and force of the balls as they are released into the machine.
        Pachinko machines today also feature digital displays in the background that
        resemble slot machines. The digital display is activated when the balls touch
        certain areas within the machine and allow the player to win extra balls.
        Upon
        completion of play, patrons can exchange balls for prizes, such as cigarettes,
        candy, and other merchandise, or a ‘special prize’ which can be exchanged for
        money.
 
 *Pachislo* machines,
        similar to Western slot machines, are also typically found in pachinko stores.
        The key difference between a pachislo machine and a Western slot machine
        is that
        the player controls when each individual reel stops, thereby requiring a
        certain
        degree of skill as well as chance. Another difference is that pachislo machines
        do not offer the big “jackpot” payouts paid by Western slot machines. Similar to
        the machine’s low token retention (“hold”) rate, payouts are also kept modest,
        to conform to Japan’s strict regulations regarding speculative entertainment
        activities.
  2
  **The
        Gaming Experience**
 
 A
        customer entering a modern Japanese electronic gaming store who wishes to
        play
        Pachinko or Pachislo would either approach a machine and insert cash directly
        into a computer monitored bill reader or purchase a prepaid magnetic card
        from
        one of several vending machines located around the gaming floor which is
        then
        inserted into the machine’s reader. In either instance the machine dispenses a
        specified number of balls into the machine’s loading tray or payout tray at a
        posted price per ball. The player then plays the game and, if successful,
        collects his or her winnings in plastic bins provided by the store by manually
        releasing a trap at the base of the machine’s collection tray. When he or she is
        finished gaming, the customer transfers the filled bins to ball or token
        counting machines which automatically supply the customer with a magnetic
        or
        paper receipt for the number of balls or tokens collected. The customer then
        presents the receipt at the redemption counter which offers the customer
        a
        choice of credit towards retail goods sold by the store or a ‘special prize’
that can be sold for money at a special prize exchange station located within
        close proximity to the pachinko store (see “ *The
        Tri-Party Transaction* ”
        below).
 
 **Ball/Token
        Redemption**
 
 The
        redemption price of balls or tokens is at a lower price per ball/token than
        the
        buy-in price. On average, the buy-in price for pachinko balls is 4 yen per
        ball
        while the redemption rate ranges from 2.75 to 3.75 yen per ball among some
        of
        our main competitors. Our redemption rate ranges from 2.5 to 4.0 yen per
        ball
        for our stores. Our competitors’ rates allow their stores to profit while giving
        their players a typical payout ratio of between 120% and 130%, which gives
        the
        player the feeling that he or she has had a winning session. As a result,
        the
        store’s net revenues on total gross wagers are determined by a combination of
        the *hold
        percentages* set on
        the machines and the ball/token *redemption
        ratio* .
        As in
        Western style casinos, a “looser” machine (one with a lower hold percentage)
        will increase the amount of time that a player will play without losing all
        of
        his or her investment, and result in a lower player velocity for the casino.
        In
        order to remain profitable under such a scenario, the store must modify its
        ball/token redemption ratio to offset the low hold percentage on the machines.
        Smaller stores typically employ this business model. In contrast, better
        established, dominant properties with significant customer traffic offer
        the
        player higher redemption rates on “tighter” machines (higher hold percentages).
        Under this configuration, player velocity is increased as players either
        lose
        more quickly or increase their level of wagers in order to fill the same
        amount
        of playing time. Adjusting this all-important mix correctly is of critical
        importance in maximizing profitability and is the hallmark of an experienced
        operator. The advancements in IT infrastructure for pachinko operations allow
        pachinko operators to monitor the profitability of each machine in accurate
        detail and in real-time.
 
 While
        balls and tokens can be redeemed for various prizes such as candy, cigarettes,
        consumer electronics and certain luxury items, the vast majority of the
        redemptions are for a ‘special prize’. The concept of the ‘special prize’ has
        existed for decades in the Pachinko business, although in later years it
        has
        become significantly more refined. Under Japanese law it is not permissible
        to
        exchange pachinko balls or slot machine tokens for currency, gold, or
        securities. As a result, the Japanese pachinko industry has established the *tri-party
        transaction* system
        whereby customers can exchange balls/tokens for certain objects of nominal
        value
        which acts as a mode of exchange between the store, the customer, and a
        completely unrelated business entity that will accept the object from the
        customer in exchange for cash.




**The
        Tri-Party Transaction**
 
 The
        3
        parties involved in the tri-party transaction are (i) the casino/store, (ii)
        the
        prize buyer (“Kaitori-Gyosha”), and (iii) the prize wholesaler (“Nonyu-Gyosha”).
        Each of the parties must be completely unrelated to the others, both legally
        and
        economically, in order to avoid a violation of the law.


3
 
 **Diagram
          of the Tri-Party Transaction**


Each
        pachinko store maintains an arms-length ad hoc relationship with a prize
        wholesaler, pursuant to which the prize wholesaler agrees to cause the ‘special
        prizes’ to be manufactured and sold to the store and the store agrees to
        purchase ‘special prizes’ from the prize wholesaler each day in order to
        maintain sufficient inventory. The prize wholesaler and buyer have a similar
        ad
        hoc relationship to which the store is not a party. The third component of
        the
        tri-party transaction is the relationship between the store customer and
        the
        prize buyer. The buyer maintains a freestanding or leased facility nearby
        the
        store consisting of a manned window. A customer possessing ‘special prizes’ will
        exit the store and exchange them for a like amount of cash at the prize buyer’s
        window.
 
 All
        receipts from the store are removed daily from the prepaid card vending machines
        and pachinko/pachislo machines and deposited, either directly on a normal
        business day or by lock-box if banks are closed, at the store’s bank. At the
        opening of each business day, the store wires from its account to the account
        of
        the prize wholesaler, an amount roughly aggregating the value of the ‘special
        prizes’ that the wholesaler has acquired from the prize buyer representing trade
        during the previous day plus a commission. The wholesaler uses the proceeds
        to
        purchase the ‘special prizes’ from the buyer, also with a commission agreement.
        Thus the special prizes make the triangular, and legally permissible trip
        from
        the store, to the prize buyer, to the wholesaler, who then sells an inventory
        of
        special prizes back to the store.
 
 The
        tri-party transaction is explicitly designed and regulated to be in compliance
        with Japan’s *Law
        Concerning Regulation of Businesses Affecting Public Morals* .
        Insofar
        as the store operator has no contractual relationship with the prize buyer,
        and
        is economically and legally indifferent to the buyer’s business activities, the
        store operator is effectively removed from two of the three prize exchange
        transactions and the store operator is involved only in the purchase of special
        prize inventory from the prize wholesaler. Thus, given the form of the prize
        exchange system and assuming the independence of the three parties, as both
        a
        legal and economic matter, the tri-party transaction has been designed by
        the
        industry and the regulators specifically to preclude a violation of the
        law.
  4
 
 **The
        Japanese Pachinko Industry**
 
 Pachinko,
        along with public lotteries and horse, motorboat, and cycle racing, is one
        of
        the key segments of the Japanese gaming industry. Pachinko and its variants,
        including pachislo, account for more than two-thirds of total wager volume
        in
        Japan. Generating an estimated $277 billion in gross wagers per annum and
        employing over 319,000 employees, the Japanese pachinko industry is larger
        than
        even the country’s automobile industry, and is, by far, the largest service
        industry sector in Japan. Pachinko is the most popular source of leisure
        and
        entertainment, (including dining), in Japan and a regular component of the
        Japanese lifestyle. In a country with a population of 127 million, an estimated
        40 to 50 million Japanese play pachinko while an estimated 25 million people
        play on a regular basis. While pachinko was traditionally played primarily
        by
        males of legal gambling age (18 and over), pachinko has grown to appeal to
        Japanese women as well. To cater to the significant number of female players,
        many stores now feature refrigerators in which housewives can temporarily
        place
        their purchased groceries while they play and feature prizes, like brand-name
        purses, that appeal to women.
 
 Some
        key
        statistics pertaining to the Japanese pachinko industry are listed
        below:
 
 ·
              A
                  total of approximately 6,100 operators operate approximately 16,100
                  stores
                  housing an estimated 4.9 million pachinko and pachislo machines.
                  The
                  industry generates annual gross wagers of approximately $277 billion,
                  or
                  an average of $17.2 million per store. (Source:*Tokyo-based
                  Yano Research Institute, Ltd.*)
 
 ·
              The
                  industry employs an estimated 319,000 people compared to 350,000
                  employed
                  by the entire U.S. casino industry. (Source:*Tokyo-based
                  Yano Research Institute, Ltd.*)
 
 ·
              Approximately
                  26% of adults (approximately 25 million people) in Japan are regular
                  customers of the Japanese electronic gaming industry. (Source:*The
                  Leisure and Development Center*)
 
 ·
              The
                  Japanese pachinko industry represents over one-third of all spending
                  on
                  entertainment making it one of the largest in international gaming
                  markets
                  and one of the largest sectors of the Japanese economy. (Source:*Japanese
                  Ministry of Economy, Trade and Industry*)
 
 ·
              Pachinko
                  is enjoyed by a growing number of women, who currently represent
                  over 20%
                  of all players. On average, women frequent pachinko stores three
                  times a
                  week and spend 29,000 yen per visit, about 2,000 yen more than
                  men.
                  (Source:*Tokyo-based
                  Yano Research Institute Ltd.*)
 
 Due
        to
        the importance of pachinko to Japan’s economy both as a source of employment for
        over 319,000 people and a significant contributor to the country’s annual tax
        revenues, the government of Japan has made a conscious effort to establish
        and
        enforce laws to protect consumers, rid criminal elements and raise the public
        image of the pachinko industry.
 
 Another
        characteristic of the Japanese pachinko industry that makes its attractive
        to
        both operators and investors is its relative imperviousness to economic trends.
        In fact, pachinko stores have actually been known to perform better during
        economic recessions as individuals seek ways to supplement their
        incomes.
  5
  Further **** evidence
        of the magnitude of the Japanese pachinko industry are the leading Japanese
        pachinko/pachislo machine manufacturers, including Sankyo Co., Sammy
        Corporation, Heiwa Corporation, Sigma Gaming, and Konami Co., who have grown
        to
        become some of the largest publicly listed companies in Japan.
 
 **Pachinko
        Operator Landscape**
 
 The
        Japanese pachinko industry is highly fragmented, with an estimated 6,100
        operators and 16,100 stores housing an aggregate 4.9 million pachinko and
        pachislo machines throughout the country. The largest operator is Dynam Co.,
        Ltd., which has approximately 240 stores throughout Japan, with the next
        largest
        operator being Maruhan Co., Ltd., which has approximately 165 stores. Smaller
        stores average 100 to 200 machines while larger stores, such two (2) of the
        stores belonging to PGMI, have 500 or more machines. The pachinko industry
        has
        been revolutionized over the last several years with enhancements to pachinko
        and pachislo machines and information technology that allow operators to
        capture
        comprehensive, real-time data on the performance and usage of each individual
        machine. Pachinko machines have largely been converted to a digital format
        that
        features a digital slot machine-like screen in the background that enhances
        the
        playing experience and winnings potential for the customer. These enhancements
        to machines and IT infrastructure have increased the capital expenditures
        required to establish and maintain a modern pachinko facility. As a result,
        the
        yet highly fragmented pachinko industry is experiencing a consolidation trend
        as
        smaller stores, who lack the financial resources to make such enhancements,
        are
        being put out of business by larger competitors, such as PGMI with greater
        financial, staff and other necessary resources and operational
        experience.
 
 **Regulatory
        Matters**
 
 The
        criminal law of Japan essentially prohibits gambling organized by private
        entities. However, pachinko is considered part of the leisure industry, which
        is
        exempt from the prohibition against gambling. Pachinko is regulated by the
        Japanese National Police Agency (“NPA”), through the prefectural police
        departments, which has taken the stance that pachinko is not gambling but
        simply
        a “reasonably speculative form of pastime.” Pachinko regulations fall under the *Entertainment
        Establishment Control Law* and the
        ministerial ordinances and regulations thereunder. Customers must be at least
        18
        years of age. Pachinko stores are open seven (7) days a week; however, they
        are
        not permitted to operate between the hours of 11 p.m. and 9 a.m. Also, customers
        are forbidden from taking pachinko balls from the stores and therefore ‘rent’
the balls with which they play.
 
 Most
        important of the regulations is the law forbidding pachinko stores from giving
        cash or securities as a prize or repurchasing prizes for cash or securities.
        In
        addition, there exist a number of other regulations such as requirements
        regarding qualifications to obtain pachinko store operating licenses, machine
        designs and payout ratios and regulations pertaining to the pachinko store
        facilities themselves. Although law in Japan prohibits casino gambling, a
        statutory system of laws has been established that allows pachinko operators
        to
        provide gaming services to its customers. (See “ *The
        Tri-party Transaction* ”
        above.)
 
 In
        previous years, questionable business practices, tax evasion, and crime
        associated with the electronic gaming industry gave the industry a negative
        public image. However, over the last fifteen years, the growing magnitude
        and
        importance of pachinko to the Japanese economy spurred the government and
        industry associations to step in to establish strict regulations, remove
        criminal elements and improve the public image of the pachinko industry.
        The
        regulation effort has been highly successful and has been of one the principal
        catalysts for the growth of large operators in the industry as well as the
        involvement of major companies from such traditional industries as trading,
        supermarkets and railroads. In addition, foreign corporations and investors
        have
        taken interest in Japanese pachinko operations due to the profitability and
        financial stability of their operations. For instance, in 2001, BS Group,
        a UK
        corporation, purchased a stake in leading pachinko operator, Tokyo Plaza,
        who
        runs about 20 stores in Japan, and established its own pachinko stores in
        the
        United Kingdom. Due to the success of these reform efforts during the last
        two
        decades, the Japanese pachinko industry has evolved to become an integral
        part
        of the entertainment sector of the Japanese economy and an important contributor
        to the Japanese economy.
  6
 
 Police
        involvement is especially important in the tri-party transaction system of
        the
        Japanese pachinko industry. To better regulate pachinko operators and provide
        greater protection from criminal influences, many police union retirees have
        been hired to work in the prize buying and wholesaling operations. Due to
        the
        importance of regulating this critical aspect of the Japanese electronic
        gaming
        industry as well as the significance of the commission income from these
        operations to economic well-being of such police retirees, the NPA issued
        a
        report in October 1994 officially endorsing the existing prize exchange
        mechanism and required that a portion of the proceeds from such systems be
        dedicated to social welfare programs.




**Regulatory
      Bodies Overseeing the Japanese Pachinko Industry**





**Regulatory
                Body**
            **Regulatory
                Function performed****National
                Public Safety Commission**(NPSC)**&**
              **Prefectural
                Governments**
            Granting
                licenses and permits required to operate pachinko storesThe
                NPSC regulations contain technical standards for pachinko games.
                These
                standards describe attributes of a pachinko game that are deemed
                to stir
                up the gambling spirit. Thus, they define the outer limits for how
                pachinko machines may legally operate.Supervises
                the National Police Agency (NPA) which implements the policies set
                by the
                NPSC and oversees the prefectural police agencies**Prefectural
                Public Safety Commission**(PSC)
            Hearing
                disciplinary actions against licensees and taking action against
                the
                licensees by revoking the license or suspending the pachinko license
                for
                up to six monthsInvestigating
                the suitability of applicants for pachinko licenses or other permits
                that
                may be required for a person or business entity to be associated
                with the
                pachinko industryLocal
                (prefectural) police are included in the PSC and are responsible
                for
                enforcing the laws related to pachinko operations**Prefectural
                Police & Metropolitan Police Department**(MPD)
            Enforcement
                of the pachinko operating laws and regulations through observation
                and
                investigation**NPSC
                & Security**
              **Electronics
                and Communications**
              **Technology
                Association**(SECTA)
            Examination
                and approval of electronic gaming devices**Ministry
                of Justice**
              **Law
                Department in MPD**
            Legal
                advice and services.




**Our
      Employees and Consultants**





As
      of June 30, 2006, we had 104 full-time employees and
      120 part -time
      employees. Our employees are not represented by a collective bargaining
      organization .
      We believe our relationship with our employees is good.




7




**Risk
      Factors**





***Our
      industry is subject to intense competition from a number of other store
      operators.***





There
      are a total of approximately 16,100 pachinko stores in Japan, which are run
      by
      approximately 6,100 operators. We have
      several established competitors in each of our current and target geographic
      markets. Some of these competitors have comparable or greater financial and
      other resources than we do and, therefore, they may be able better attract
      customers by updating their stores and pachinko machines, and through increased
      marketing efforts.





***Changes
      in the government regulations pertaining to the gaming and pachinko industries
      could adversely affect our business.***





The
      Japanese pachinko industry is regulated by a system of laws created and enforced
      by various national and prefectural government entities. Although casino
      gambling is legally forbidden in Japan, pachinko has been designated as a
      non-gambling form of adult entertainment. The tri-party exchange system,
      established as an indirect mechanism for providing cash prizes without
      transgressing anti-gambling regulations, is permitted but highly regulated.
      However, changing government regulations regarding the definition of pachinko
      as
      a ‘non-gambling’ activity and/or restrictions regarding the indirect awarding of
      cash or similar prizes may have a significant impact on pachinko operators
      in
      continuing normal business operations.





***We
      may not be able to obtain the capital required for us to maintain our existing
      facilities and achieve our expansion goals.***





Our
      expansion plans to open additional stores will require substantial capital
      commitments and outlays to acquire land rights, construct new buildings,
      purchase machines and related equipment, hire operational personnel and procure
      other resources associated with establishing new pachinko stores. We have
      received most of our financing to date from paid in capital from founders and
      existing shareholders, bank loans and cash flow from the operation of our
      existing business. As we expand, our capital requirements will increase. If
      for
      any reason we are unable to meet ours capital requirements, we will be unable
      to
      attain our expansion plans, which could adversely affect or ability to compete
      and our financial results.





***We
      need to enhance our internal controls in order in ensure the accuracy of our
      financial reporting.***





Our
      auditors have advised us of certain significant internal control deficiencies
      that they consider to be, in the aggregate, a material weakness, including,
      inadequate staffing and supervision leading to the untimely identification
      and
      resolution of certain accounting matters; failure to perform timely reviews,
      substantiation and evaluation of certain general ledger account balances; lack
      of procedures or expertise needed to prepare all required disclosures; and
      evidence that employees lack the qualifications and training to fulfill their
      assigned functions. Our auditors indicated that they considered these
      deficiencies to be a material weakness as that term is defined under standards
      established by the American Institute of Certified Public Accountants. We
      considered these matters in connection with the year-end closing of accounts
      and
      preparation of financial statements as and for the year ended June 30, 2006
      and
      determined that such matters did not materially affect any prior period
      financial statements.





In
      response to the observations made by our auditors we will proceed more
      expeditiously with our existing plan to enhance our internal controls and
      procedures, which we believe addresses each of the matters raised by our
      auditors.





We
      enhanced our internal control procedures by adding a part-time dedicated Chief
      Accounting Officer (“CAO”) to our principal executive offices in Huntington
      Beach, California. We are evaluating the need to supplement our CAO with
      additional assistance. Our CAO is responsible for preparing a disclosure control
      and reporting package. We need to establish a written policies and procedures
      manual over internal controls of accounting and financial reporting. We also
      need to incorporate preparation of an annual budget and report budget-to-actual
      analyses on an annual and quarterly basis.




8




***We
      have a working capital deficit and successive years of losses which raises
      doubts about our ability to continue as a going
      concern.***




At
      June
      30, 2006 we had a working capital deficit of approximately $500,000 and
      commitments to fund new store expansion. In addition, we have incurred net
      losses in each of our last two fiscal years. The report of our Independent
      Registered Public Accountants for the year ended June 30, 2006, includes an
      explanatory paragraph to their audit opinion stating that our working capital
      deficiency raises substantial doubt about our ability to continue as a going
      concern. While management has implemented a series of cost reduction measures
      to
      reduce costs, there can be no assurance that our plans will be sufficient to
      enable us to sustain our operations without raising additional debt or equity
      financing, which we may not be able to do on terms favorable to us or at
      all.




***An
      active trading market may not develop for our common stock, which makes it
      difficult for shareholders to sell their shares of our
      stock.***





Our
      shares of common stock are publicly quoted on NASD over-the-counter bulletin
      board system. Securities listed on the OTC bulletin board generally have less
      trading volume and institutional market support and therefore may be susceptible
      to greater fluctuations in price and have a lower degree of liquidity than
      shares listed on a larger exchange, such as the NASDAQ or NYSE. Ownership of
      our
      common stock is highly concentrated and the daily trading volume does not yet
      provide significant liquidity. Trading may be difficult due to the limited
      public float, narrow base of shareholders and the lack of an institutional
      market maker to provide liquidity and pricing support for the Company’s
      stock.





***Our
      common stock is subject to penny stock regulation, which may affect its
      liquidity.***





Our
      common stock is subject to regulations of the Securities and Exchange Commission
      (the “Commission”) relating to the market for penny stocks. Penny stock, as
      defined by the Penny Stock Reform Act, is any equity security not traded on
      a
      national securities exchange that has a market price of less than $5.00 per
      share. The penny stock regulations generally require that a disclosure schedule
      explaining the penny stock market and the risks associated therewith be
      delivered to purchasers of penny stocks and impose various sales practice
      requirements on broker-dealers who sell penny stocks to persons other than
      established customers and accredited investors. The broker-dealer must make
      a
      suitability determination for each purchaser and receive the purchaser’s written
      agreement prior to the sale. In addition, the broker-dealer must make certain
      mandated disclosures, including the actual sale or purchase price and actual
      bid
      offer quotations, as well as the compensation to be received by the
      broker-dealer and certain associated persons. The regulations applicable to
      penny stocks may severely affect the market liquidity for our common stock
      and
      could limit your ability to sell your securities in the secondary
      market.





***Our
      common stock may experience extreme price and volume
      fluctuations.***





Due
      to
      the limited trading volume and public float, the concentration of share
      ownership, and the lack of market makers in the Company’s stock, attempts to buy
      or sell a substantial number of shares could result in significant market price
      fluctuations.





***Our
      management controls a substantial percentage of our outstanding voting
      securities.***





Our
      management, together with family members, control approximately 91.5% of the
      outstanding voting control of our company. Consequently, it would be almost
      impossible for a third party to obtain control of our company, or influence
      our
      day-to-day operations.




9




***We
      do not have a separate standing audit committee, compensation committee or
      nominating and corporate governance committee, so the duties customarily
      delegated to those committees are performed by the board of directors as a
      whole, and no director is an “audit committee financial expert” as defined by
      the rules and regulations of the Securities and Exchange
      Commission.***




Our
      Board
      of Directors consists of four members. The Board of Directors as a whole
      performs the functions of an Audit Committee, Compensation Committee and
      Nominating and Corporate Governance Committee. None of the directors is
      considered “independent” under Rule 4200(a)(15) of the National Association
      of Securities Dealers listing standards, and neither qualifies as an audit
      committee financial expert as defined in Item 401 of Regulation S-B.
      Accordingly, we will not be able to list our common stock with a nationally
      recognized exchange until we recruit independent directors to the Board and
      restructure our Board to comply with various requirements currently in place
      by
      those self-regulating organizations, and as a result, it may be difficult for
      you to sell our common stock.




***The
      requirements of the Sarbanes-Oxley Act, including section  404, are
      burdensome, and our failure to comply with them could have a material adverse
      affect on our business and stock price*** *.*




Except
      with respect to the adoption of our Code of Ethics and our compliance with
      certain requirements specifically applicable to our Annual Report on
      Form 10-KSB and our other periodic reports, our management has not
      commenced any specific procedures to comply with the requirements of the
      Sarbanes Oxley Act of 2002, including specifically, the process necessary to
      implement the requirements of Section 404 of the Sarbanes-Oxley Act of
      2002, which requires our management to assess the effectiveness of our internal
      controls over financial reporting and include an assertion in our annual report
      as to the effectiveness of our controls.  Beginning with our Annual Report
      on Form 10-KSB for the year ended June 30, 2008, unless otherwise amended
      by the Securities and Exchange Commission, our independent registered accounting
      firm will be required to attest to whether our assessment of the effectiveness
      of our internal control over financial reporting is fairly stated in all
      material respects and separately report on whether it believes we maintained,
      in
      all material respects, effective internal controls over financial reporting
      as
      of June 30, 2008.  Because of our management’s lack of resources, and our
      limited operations, we have not commenced the process of preparing the system
      and process documentation, performing an evaluation of our internal controls
      required for our management to make this assessment and for the auditors to
      provide their attestation report, and accordingly, have not begun testing of
      the
      effectiveness of these internal controls.  We expect that this process will
      require significant amounts of management time and resources, as well as higher
      expenses in the form of higher audit and review fees, higher legal fees and
      higher internal costs to document, test and potentially remediate internal
      controls. Accordingly, with respect to Section 404 in particular, there
      exists a significant risk that we will not be able to meet all the requirements
      of Section 404 by the end of fiscal year 2008, when we are required to
      report on our internal controls and provide our auditor’s opinion thereon. 
Additionally, even in the event we attempt to comply with Section 404, in
      the course of evaluation and testing, management may identify deficiencies
      that
      will need to be addressed and remediated, which could potentially have a
      material adverse effect on our stock price and could result in significant
      additional expenditures.




10





**ITEM
      2. DESCRIPTION OF PROPERTY**




We
      sublease approximately 500 square feet in Huntington Beach, California, for
      our
      domestic executive offices.  The lease requires monthly rental payments of
      $2,000, and has a term that expires on June 30, 2007. Subject to the
      sublessor’s ability to keep the underlying lease in effect, we have an option
      for an additional year at a price to be mutually agreed upon.  Our
      sublessor under this lease is a corporation that is controlled by Mr. Haruo
      Miyano, a director of our Delaware subsidiary, PGMI, Inc.




With
      respect to our Pachinko stores, we lease the land at 4 of the locations
      upon which we constructed our stores.  We incurred the costs of the
      buildings and improvements constructed on these 4 locations.  We also
      leases land at 6 other locations for store parking lots.   With
      regard to all of the foregoing leases, the individual minimum monthly rental
      payments under these leases range from $22 to $30,712 per month, and the
      aggregate total monthly payment is $79,110 per month.  Under Japanese
      custom, if significant improvements are made to the leased land, the land leases
      are required to be extended by the lessor for as long as we are in
      operation.  We have made significant modifications to the land through
      construction of buildings and parking lots.  Thus, the terms of the land
      leases in most cases are continuous.  We lease certain land from two of our
      officers.  The combined monthly lease payments to the officers are $7,200,
      and the contracts expire on April 30, 2007 and June 30,
      2008.





The
      land
      that we own, together with all of our buildings, serve as collateral for
      multiple loans and notes payable to various commercial banks.  As of
      June 30, 2006 the aggregate outstanding principal balance of the loans and
      notes was approximately $21,745,000.  The loans and notes bear interest at
      per annum rates ranging from 2.3% to 4.00%, and mature at various dates through
      2014.





**ITEM
      3. LEGAL PROCEEDINGS**





We
      are
      not currently a party to any legal proceedings.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





None.





11




**PART
      II**





**ITEM
      5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON
      EQUITY AND OTHER STOCKHOLDER MATTERS**





**Market
      Price**





Our
      common stock is traded on the NASD Electronic Bulletin Board over-the-counter
      market, and is quoted under the symbol PGMI. The table below gives the range
      of
      high and low bid prices of our common stock for the fiscal years ended June
      30,
      2006 and June 30, 2005 based on information provided by the OTC Bulletin Board.
      Such over-the-counter market quotations reflect inter-dealer prices, without
      mark-up, mark-down or commissions and may not necessarily represent actual
      transactions or a liquid trading market.





June
                30, 2006:
            High
            Low1stQuarter
            $0.51
            $0.122ndQuarter
            $0.51
            $0.173rdQuarter
            $0.64
            $0.174thQuarter
            $0.53
            $0.21June
                30, 2005:
            High
            Low1stQuarter
            $0.26
            $0.162ndQuarter
            $0.68
            $0.173rdQuarter
            $1.15
            $0.324thQuarter
            $0.80
            $0.35





When
      the
      trading price of our common stock is below $5.00 per share, our common stock
      is
      considered to be “penny stocks” that are subject to rules promulgated by the
      Securities and Exchange Commission (Rule 15-1 through 15g-9) under the
      Securities Exchange Act of 1934. These rules impose significant requirements
      on
      brokers under these circumstances, including: (a) delivering to customers the
      Commission’s standardized risk disclosure document; (b) providing customers with
      current bid and ask prices; (c) disclosing to customers the brokers-dealer’s and
      sales representatives compensation; and (d) providing to customers monthly
      account statements.





The
      number of shareholders of record of our common stock as of September 15, 2006
      was 607.





**Description
      of Securities**





The
      Company is presently authorized under its Certificate of Incorporation to issue
      750,000,000 shares of common stock, no par value per share, and 150,000,000
      shares of preferred stock, no par value per share. As of September 15, 2006,
      the
      Company had 25,003,671 shares of common stock issued and outstanding, held
      by
      607 stockholders of record. The holders of Common Stock are entitled to one
      vote
      for each share held of record on all matters submitted to a vote of the holders
      of Common Stock. Subject to preferences applicable to any outstanding Preferred
      Stock, holders of Common Stock are entitled to receive ratably such dividends
      as
      may be declared by the Board of Directors out of funds legally available
      therefore. In the event of a liquidation, dissolution or winding up of the
      Company, the holders of Common Stock are entitled to share ratably all assets
      remaining after payment of liabilities and the liquidation preference of any
      Preferred Stock. Holders of Common Stock have no preemptive or subscription
      rights, and there are no redemption or conversion rights with respect to such
      shares. All outstanding shares of Common Stock are fully paid and
      non-assessable.




Our
      board
      of directors has the authority, without further action by the stockholders,
      to
      issue up to 150,000,000 shares of preferred stock in one or more series and
      to
      fix the rights, preferences, privileges and restrictions of these shares of
      preferred stock without any further vote or action by stockholders. These rights
      and preferences include dividend rights, conversion rights, voting rights,
      terms
      of redemption, liquidation preferences, sinking fund terms and the number of
      shares constituting any series or the designation of the series. The issuance
      of
      preferred stock could adversely affect the voting power of holders of common
      stock and the likelihood that the holders will receive dividend payments and
      payments upon liquidation and could have the effect of delaying, deferring
      or
      preventing a change in control. At September 15, 2006, we had designated four
      classes of preferred stock as follows: 6,000,000 shares designated as Class
      A
      convertible preferred stock, with 4,425,285 shares issued, or committed to
      be issued, and outstanding; 5,000,000 shares designated as Class B
      convertible preferred stock, with no shares issued and outstanding; 1,200,000
      shares designated as Class C convertible preferred stock, with no shares issued
      and outstanding; and 116,595,760 shares designated Class E convertible preferred
      stock, with 97,059,998 shares issued and outstanding. Each outstanding share
      of
      preferred stock (Classes A and E) is entitled to 5 votes per share and is
      convertible into 5 shares of common stock; provided, however, that the shares
      of
      Class E convertible preferred stock may not be converted until the date which
      is
      three years after their initial issuance, or December 9, 2008.




12




**Options**





We
      have
      no outstanding options to purchase shares of our common stock.





**Registrar
      and Transfer Agent**





Our
      registrar and transfer agent is Stalt, Inc., 671 Oak Grove Avenue, Suite C,
      Menlo Park, California 94075; telephone (650) 321-7111.





**Dividend
      Policy**





We
      have
      not adopted any policy regarding the payment of dividends on our common stock.
      We do not intend to pay any cash dividends on our common stock in the
      foreseeable future. We intend to invest all of our cash resources in developing
      our business.





**Recent
      Sales of Unregistered Securities**





None.





13


**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**Overview**
 
 Through
        our subsidiaries, we own and operate thirteen pachinko stores as of June
        30,
        2006. This is our primary operating business. We operate a total of 4,290
        Pachinko and Pachislot machines. We are constructing two new stores (Bando
        and
        Gyoda) which will be opened in October and December 2006. We expect to have
        about 600 Pachinko and Pachislot machines for each of these two new stores.
        Estimated total costs at completion for Bando and Gyoda are approximately
        $8,650,000 and $9,360,000, respectively. Construction costs incurred during
        the
        year ended June 30, 2006 for both stores in the amount of $3,790,000 were
        included in land and construction in progress. In addition to the two new
        stores
        which commenced their construction process, we are also planning three stores
        to
        be opened in 2007. These three stores are expected to operate about 700 to
        800
        Pachinko and Pachislot machines each. During the year ended June 30, 2006,
        the
        Company has incurred for these three sites $1,120,000, which is included
        in
        construction in progress. We plan to leverage our expertise and capitalize
        on
        new development opportunities to expand our operations in Japan.
  ***Cyclical
          Nature of Business***
 
 The
          Company’s primary business involves gaming entertainment. During periods of
          recession or economic downturn, consumers may reduce or eliminate spending
          on
          gaming entertainment activities. In the event that any of the Company’s
          demographic markets suffer adverse economic conditions, the Company’s revenues
          may be materially adversely affected. In addition, the operations of the
          pachinko stores are typically seasonal in nature. The sales during the
          holiday
          seasons are higher than the regular months. The biggest holiday season
          in Japan
          lies in the end of December through the beginning of January. Additionally,
          revenues can fluctuate when a new type of pachinko machine is introduced
          at the
          stores.
 
 **Results
        of Operations**
 
 **Year
        Ended June 30, 2006 Compared to Year Ended June 30, 2005**
 
 ***Operating
        Revenues and Costs***
 
 A
        summary
        of the gaming revenues for the years ended June 30, 2006 and 2005 are as
        follows:
 
 2006
              
              2005Amount
              Percentage
              Amount
              PercentagePatron
                  wagers (pay-ins)
              $
                  187,972,786
              100.0%
              $
                  187,877,668
              100.0%Patron
                  payouts
              (165,276,608)
              (87.9)
              (166,343,692)
              (88.5)Gaming
                  revenues
              $
                  22,696,178
              12.1%
              $
                  21,533,976
              11.5%
 
 Consistent
        with the gaming industry, we report our revenues as the net of wagers less
        payouts. During the year, our gaming revenues increased from $21,533,976
        in 2005
        to $22,696,178 in 2006, an increase of 5.4 %.
 
 Our
        gross
        wagers increased by $95,118 or 0.05% from the year ending June 30, 2005 to
        $187,972,786 in the year ending June 30, 2006. The new store that opened
        in
        March 2005 contributed $28,892,726 to the increase in wagers. Four stores
        increased their gross wagers to a total of $29,541,223 for the year ended
        June
        30, 2006, while nine stores decreased their gross wagers to
        $15,819,076.
 
 Our
        payouts decreased by $1,067,084 or 0.6% from the year ending June 30, 2005
        to
        $165,276,608 in the year ending June 30, 2006. Our payouts as a percentage
        of
        wagers slightly decreased from 88.5% in 2005 to 87.9% in 2006 due to a high
        payout rate campaign to promote the grand opening of two new stores in the
        year
        ended June 30, 2005, while no stores opened in the year ended June 30,
        2006.
  ***Cost
        of Revenues***
 
 Costs
        of
        revenues as a percentage of total revenues for the year ended June 30, 2006
        and
        2005 are as follows:
 
 2006
              
              2005Depreciation
              
              
              32.2
              %
              
              32.4
              %Salaries
                  & Wages
              
              
              19.6
              %
              
              21.6
              %Facilities
                  & other
              
              
              19.8
              %
              
              23.9
              %Impairment
                  of property and equipment
              
              
              4.5
              %
              
              12.4
              %Total
                  cost of revenues
              
              
              76.1
              %
              
              90.3
              %
 
 Cost
        of
        revenues for the year ended June 30, 2006 decreased by $2,327,065 or 11.1%
        from
        $20,975,811 to $18,648,746 compared to the year ended June 30, 2005. As a
        percentage of revenues, our costs in the year ended June 30, 2006 decreased
        to
        76.1% from 90.3% for the year ended June 30, 2005. The large contributors
        to
        this decrease are the facility and impairment cost in the year ended June
        30,
        2005, which included costs related to the opening of the new store in March
        2005. Depreciation expense is accelerated in the year of acquisition for
        machines acquired. In addition, we provided impairments for machines which
        were
        removed from service prior to the end of their useful lives. Machine lives
        are
        generally two to three years, depending on technologies, playing habits and
        customer preference. We are experiencing high turnover of our machines because
        of player desires.
  14
  ***Marketing
        and Advertising Expense***
 
 Marketing
        and advertising expenses decreased by $161,103 from $1,086,925 for the year
        ended June 30, 2005 to $925,822 for the year ended June 30, 2006. The decrease
        is attributable to wide advertisement of the grand opening of the new stores
        that opened in July 2006 and March 2006, which occurred in the year ended
        June
        30, 2005, while no stores opened in the year ended June 30, 2006. As a
        percentage of revenues, we spent 3.8 % and 4.7 %, in the year ended June
        30,
        2006 and 2005.
  ***General
        and Administrative Expenses***
 
 General
        and administrative expenses for the year ended June 30, 2006 increased by
        $261,545 or 9.0% to $3,173,540 from $2,911,995 for the year ended June 30,
        2005.
        General and administrative expenses for the year ended June 30, 2006 constituted
        13.0% of revenues in comparison to 12.5% for the year ended June 30, 2005.
        The
        increase in general and administrative costs from the 2005 period can be
        attributed primarily to charges for professional fees in the aggregate amount
        of
        $856,255 related to the reverse merger in 2006, compared to $360,667 in
        2005.
 
 ***Other
        Income and Expenses***
 
 Interest
        expense increased by $107,537 to $1,679,624 in the year ended June 30, 2006,
        from $1,572,087 for the year ended June 30, 2005, an increase of 6.8%. The
        increase of interest expense is attributable to the increase of long term
        loans
        and lease contracts to acquire improvements and equipments in new stores
        opened
        in the year ended June 30, 2005.
 
 ***Income
        Taxes***
 
 Provision
        for income taxes increased by $1,508,132 for the year ended June 30, 2006,
        from
        $863,331 of tax benefit to $644,801 of income tax expense. The increase in
        income tax expense was mainly attributable to the increased valuation allowance
        in the amount of $1,300,000 to offset the tax benefit of the net operating
        loss
        incurred in the United States for the year ended June 30, 2006.
 
 ***Net
        loss***
 
 We
        incurred a net loss for the year ended June 30, 2006 of $2,098,887 versus
        net
        loss of $1,625,313 for the year ended June 30, 2005. This increase in net
        loss
        can be attributed to approximately $2,333,000 of one time reverse acquisition
        fees incurred during the year June 30, 2006 and increased income tax expense
        in
        the amount of $640,000 due to increased taxable income in the Japan
        operations.
  ***Fourth
        Quarter Adjustment***
 During
          the quarterly period ended March 31, 2006, the Company inadvertently wrote
          off
          the 441 pachinko machines that were in storage, which are to be used in
          the new
          stores expected to open in fiscal 2007. In addition, the Company
          incorrectly reduced the carrying value of the pachinko machines through
          a charge
          to operations. These charges are deemed an error by management, not a change
          in
          estimate, and accordingly, a required restatement of previously reported
          amounts. During the fourth quarter ended June 30, 2006, management reversed
          the
          amounts that incorrectly reduced the carrying value of pachinko machines
          totaling $428,580.
 
 **Liquidity
        and Sources of Capital**
 
 ***Cash
        Flows***
 
 During
        the years ended June 30, 2006 and 2005, we generated $9,218,927 and $5,164,878
        respectively, of cash flows from operating activities. Our cash provided
        by
        operating activities in fiscal 2006 and 2005 included non-cash depreciation
        and
        impairment losses aggregating $9,072,272 and $10,737,480
        respectively.
 
 During
        the years ended June 30, 2006 and 2005, we used cash of $11,562,618 and
        $2,525,213 respectively on investing activities. During such periods, we
        spent
        approximately $10,764,844 and $8,309,660 respectively, for capital additions.
        The 2006 expenditures included approximately $4,96 2,524
        for
        the construction of the new stores which will be opened during the fiscal
        year
        ending June 30, 2007.
  During
        the years ended June 30, 2006, we provided cash of $2,840,349 from financing
        activities. During this period, we borrowed $12,404,435 from four banks,
        and we
        repaid debt totaling $7,644,432. We used funds for construction of new stores.
        In fiscal 2005, we used cash in our financing activities in the amount of
        $238,267. We borrowed $11,129,322 and repaid long-term debt of $9,963,608
        during
        the year ended June 30, 2005.
 
 ***Liquidity***
  The
        Company has incurred losses during the year ended June 30, 2006 totaling
        approximately $2,099,000. The Company may continue to incur losses during
        fiscal
        2007 largely due to start-up costs to be incurred with the new store expansions.
        At June 30, 2006, the Company has a working capital deficit of approximately
        $539,000. Furthermore, the Company is in the process of its store expansion,
        which it has remaining obligations under construction contracts of two new
        stores totaling $7,850,000 as of June 30, 2006. The Company requires additional
        capital lease, debt and/or equity financing of approximately $6,360,000 to
        acquire equipment and machines, as well as provide working capital to fund
        initial start-up costs associated with the two new store openings. These
        factors
        raise substantial doubt about the Company’s ability to continue as a going
        concern.
 
 We
        have
        good relations with our banks in Japan. We believe PGMI will continue its
        growth
        and generate positive cash flows from operations to fund its daily operations
        and service its debt obligations. There are no assurances that we will be
        successful in our plans. No adjustments have been made to the carrying value
        of
        assets or liabilities as a result of the uncertainty about obtaining cash
        required to pay obligations as they come due. Our independent registered
        public
        accounting firm has included an explanatory paragraph in their report regarding
        substantial doubt about our ability to continue as a going concern because
        of
        these matters as required by auditing standards generally accepted in the
        United
        States.
  15
 
 Our
        level
        of indebtedness presents other risks to investors, including the possibility
        that we may be unable to generate cash sufficient enough to pay the principal
        of
        and interest on our indebtedness when due; and that we may not be able to
        meet
        tests and covenants of such debt agreements and achieve satisfactory resolution
        of such non-compliance with the lenders. In such an event, the holders of
        our
        indebtedness may be able to declare all indebtedness owing to them to be
        due and
        payable immediately, and proceed against any collateral securing such
        indebtedness. These actions could limit our
        ability to borrow additional funds and would likely have a material adverse
        effect on our business and results of operations.
 
 **Critical
        Accounting Policies**
 
 Our
        significant accounting policies are included in Note 2 of our Consolidated
        Financial Statements included elsewhere in this Report. These policies, along
        with the underlying assumptions and judgments made by our management in their
        application, have a significant impact on our consolidated financial
        statements.
 
 ***Going
        Concern Consideration***
 
 The
        Company’s financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the settlement of liabilities
        in the normal course of business. As of June 30, 2006, the Company has a
        working
        capital deficit totaling $539,093. Management believes the Company will continue
        its growth and generate positive cash flows from operations to fund its daily
        operations and service its remaining debt obligations. There are no assurances
        that management will be successful in its plans. No adjustments have been
        made
        to the carrying value of assets or liabilities as a result of this
        uncertainty.
 
 ***Impairment
        of Long-Lived Assets and Intangibles***
 
 We
        review
        the carrying value of our long-lived assets whenever events or changes in
        circumstances indicate that such carrying values may not be recoverable
        annually. Unforeseen events and changes in circumstances and market conditions
        and material differences in estimates of future cash flows could negatively
        affect the fair value of our assets and result in an impairment charge. Fair
        value is the amount at which the asset could be bought or sold in a current
        transaction between willing parties. Fair value can be estimated utilizing
        a
        number of techniques including quoted market prices, prices for comparable
        assets, or other valuation processes involving estimates of cash flows,
        multiples of earnings or revenues. For land impairments, we have used government
        prefecture estimated fair values, which they use for assessing
        taxes.
 
 ***Income
        Taxes***
 
 We
        account for income taxes in accordance with *Statement
        of Financial Accounting Standards No. 109, Accounting for Income
        Taxes* (SFAS
        No. 109) which requires that deferred tax assets and liabilities be
        recognized using enacted tax rates for the effect of temporary differences
        between the bases used for financial reporting and income tax reporting of
        recorded assets and liabilities. SFAS No. 109 also requires that deferred
        tax assets be reduced by a valuation allowance if it is more likely than
        not
        that some portion or all of the deferred tax asset will not be realized.
        We have
        provided valuation allowances because we feel that certain deferred tax assets
        generated in the United States will not be recovered through future
        operations.
 
 ***Interest
        Rate Swap Agreements***
 
 Interest
        rate swap agreements and the hedged items are such that the hedges are
        considered effective against changes in the fair value of the debt due to
        changes in the benchmark interest rates over their terms. As a result, the
        shortcut method provided by SFAS No. 133, “Accounting for Derivative Instruments
        and Hedging Activities,” as amended by SFAS No. 149, is applied and there is no
        need to periodically reassess the effectiveness of the hedges during the
        terms
        of the swaps. Interest expense on the debt is adjusted to include net payments
        made or received under the swap agreements. The fair value of the swaps is
        carried as an asset or a liability in the consolidated balance sheet and
        the
        carrying value of the hedged debt is adjusted accordingly. The fair values
        of
        PGMI’s interest rate swaps are the estimated amounts it would receive or pay to
        terminate the agreements as of the reporting date as determined by the bank.
        As
        of June 30, 2006, the fair value of the outstanding swaps liability was $
        180,889.
  16




**ITEM
      7.** FINANCIAL
      STATEMENTS




The
      consolidated financial statements of PGMI, Inc.,
      for its fiscal year ended June 30, 2006 are provided with this form 10-KSB
      and
      are incorporated herein by reference.




**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE**





On
      February 14, 2006, the Board of Directors of the Company approved a change
      in
      its independent registered public accounting firm.  The Board of Directors
      approved the dismissal of Pritchett, Siler & Hardy, P.C. (“Pritchett”) as
      PGMI’s independent registered public accounting firm and the selection of
      McKennon, Wilson & Morgan, LLP as their replacement.




Pritchett’s
      report on the financial statements of the Company for the last two fiscal years
      ended December 31, 2004 and 2003 did not contain any adverse opinion or
      disclaimer of opinion, nor was it qualified or modified as to audit scope,
      procedure or accounting.




During
      PGMI’s two most recent fiscal years ended December 31, 2004 and the subsequent
      interim periods through February 13, 2006, there were no disagreements between
      PGMI and Pritchett on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure, which
      disagreements, if not resolved to Pritchett’s satisfaction, would have caused
      them to make reference to the subject matter of the disagreement in connection
      with its reports on PGMI’s financial statements for such years, and there were
      no reportable events as described in Item 304(a)(1)(v) of Regulation
      S-K.




In
      addition, during PGMI’s two most recent fiscal years ended December 31, 2004 and
      the subsequent interim periods through February 13, 2006, HAPS did not consult
      with McKennon, Wilson & Morgan, LLP with respect to the application of
      accounting principles to a specified transaction, either completed or proposed,
      or the type of audit opinion that might be rendered on PGMI’s financial
      statements, or any other matters or reportable events as set forth in Items
      304(a)(2)(i) and (ii) of Regulation S-K.




**ITEM
      8A. CONTROLS AND PROCEDURES**





Our
      principal executive officer and principal financial officer have evaluated
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as amended) as of the end of the period covered by this
      quarterly report on Form 10-QSB.  Based on this evaluation, our principal
      executive officer and principal financial officer concluded that these
      disclosure controls and procedures need improvement to ensure that the
      information required to be disclosed in our reports filed or submitted under
      the
      Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
      and reported within the requisite time periods.




In
      connection with its review of the our consolidated financial statements for
      the
      year ended June 30, 2005, McKennon, Wilson & Morgan LLP, the Company’s
      independent accountants, advised management of certain significant internal
      control deficiencies that they considered to be, in the aggregate, a material
      weakness, including, inadequate staffing and supervision leading to the untimely
      identification and resolution of certain accounting matters; failure to perform
      timely reviews, substantiation and evaluation of certain general ledger account
      balances; lack of procedures or expertise needed to prepare all required
      disclosures; and evidence that employees lack the qualifications and training
      to
      fulfill their assigned functions.  McKennon, Wilson & Morgan LLP
      indicated that they considered these deficiencies to be a material weakness
      as
      that term is defined under standards established by the American Institute
      of
      Certified Public Accountants.  A material weakness is a significant
      deficiency in one or more of the internal control components that alone or
      in
      the aggregate precludes our internal control from reducing to an appropriately
      low level the risk that material misstatements in our financial statements
      will
      not be prevented or detected on a timely basis. We considered these matters
      in
      connection with the quarter-end closing of accounts and preparation of financial
      statements as and for the year ended June 30, 2006 and determined that no prior
      period financial statements were materially affected by such
      matters.




In
      response to the observations made by McKennon, Wilson & Morgan LLP, we will
      proceed more expeditiously with our existing plan to enhance our internal
      controls and procedures, which we believe addresses each of the matters raised
      by, McKennon, Wilson & Morgan LLP.




17




**PART
            III**
 
 **ITEM
            9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
            PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**
 
 **Executive
            Officers and Directors**
  Our
            executive officers and directors are as follows:
  **Name
                      (1) (2)**
                  
                  **Age**
                  
                  **Position**Gakushin
                      Kanemoto
                  
                  79
                  
                  Chairman
                      of the Board, Chief Financial Officer and DirectorShinichi
                      Kanemoto
                  
                  49
                  
                  Chief
                      Executive Officer, President and DirectorEiichi
                      Kanemoto
                  
                  47
                  
                  Secretary
                      and DirectorMark
                      Buck
                  
                  61
                  
                  Director
 
 (1) 
            We presently have no executive committee, nominating committee or audit
            committee of the Board of Directors.
 (2) 
            Our officers and directors hold office until their successors are elected
            and
            qualified, or until their death, resignation or removal.
  18
  The
            background and principal occupations of each director and officer of
            PGMI are as
            follows:
  **Gakushin
            Kanemoto.** Gakushin
            Kanemoto is the founder of our business in Japan, which he founded in
            1951.  In December 1971 he established Marugin Co., Ltd., which became
            the operator of our stores. In June 2002, the name was changed to Marugin
            International, Inc.  Mr. Kanemoto currently serves as the
            Chairman and Chief Financial Officer of Marugin.  Mr. Gakushin
            Kanemoto is the father of Shinichi Kanemoto and Eiichi Kanemoto. Effective
            December 9, 2005, Mr. Gakushin Kanemoto became the Chairman of the Board,
            Chief Financial Officer, and a member of the Board of Directors of
            PGMI, Inc.
  **Shinichi
            Kanemoto.** Shinichi
            Kanemoto is the son of Mr. Gakushin Kanemoto.  He currently serves as
            the President and Chief Executive Officer of Marugin, positions he has
            held
            since 1993.  Mr. Kanemoto is also a member of the board of directors
            of Marugin.  Mr. Kanemoto originally joined Marugin in 1981, and was
            promoted to a Director in 1990, prior to being appointed to his current
            officer
            positions. Effective December 9, 2005, Mr. Shinichi Kanemoto became the
            President, Chief Executive Officer and a member of the Board of Directors
            of
            PGMI, Inc.
  **Eiichi
            Kanemoto.** Eiichi
            Kanemoto is the son of Mr. Gakushin Kanemoto.  He currently serves as
            our Executive Director, a position he was appointed to in 1993. 
Mr. Kanemoto is also a member of the board of directors of Marugin. 
Mr. Kanemoto originally joined Marugin in 1984, and was promoted to a
            Director in 1990, prior to being appointed to his current officer
            position.  Effective December 9, 2005, Mr. Eiichi Kanemoto became the
            Secretary and a member of the Board of Directors of PGMI, Inc.
  **Mark
            Buck.** Mr. Buck served as our President, Chief Executive Officer and Chief
            Financial Officer from March 2002 until December 9, 2005, and has been
            a member
            of our Board of Directors since March 2002.  Mr. Buck is also a
            commercial real estate broker specializing in sales and leasing.  He has
            worked for Commercial Real Estate Services in Honolulu, Hawaii since
            1986 as
            Vice President of Marketing and Sales.  Mr. Buck has been an owner and
            partner in three small businesses that he later sold.
  Until
            further determination by the Board, the full Board of Directors will
            undertake
            the duties of the Audit Committee, Compensation Committee and Nominating
            Committee of the Board of Directors.
  **Financial
            Expert**
  The
            Company has no audit committee financial expert, as defined under
            Section 228.401, serving on its audit committee because it has no audit
            committee and is not required to have an audit committee because it is
            not a
            listed security as defined in Section 240.10A-3.
  **Code
            of Business Conduct and Ethics**
  Our
            Board
            of Directors has approved a Code of Business Conduct and Ethics, which
            applies
            to all of our employees, directors and officers, including our principal
            executive officer, principal financial officer, principal accounting
            officer and
            controller.  The Code of Business Conduct and Ethics addresses such topics
            as protection and proper use of our assets, compliance with applicable
            laws and
            regulations, accuracy and preservation of records, accounting and financial
            reporting, conflicts of interest and insider trading.  The Code of Business
            Conduct and Ethics is available free of charge to any shareholder who
            sends a
            request for a paper copy to PGMI, Inc., 5912 Bolsa Avenue, Suite 108,
            Huntington Beach, California 92649.
  **Section
            16 Compliance**
  Section
            16(a) of the Securities Exchange Act of 1934, as amended, requires our
            directors and executive officers, and persons who beneficially own more
            than 10% of a registered class   of
            our equity securities, to file reports of beneficial
            ownership and changes in beneficial ownership of our securities with the
            SEC on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement
            of
            Changes of Beneficial Ownership   of Securities) and 5
 (Annual Statement   of Beneficial Ownership of Securities).
 Directors, executive officers and beneficial owners of
            more than 10% of our Common Stock are required by SEC regulations to
            furnish us with copies of all Section 16(a) forms
            that they file. Based solely on review of the copies of such
            forms furnished to us, or written representations that no reports were
            required, we believe that for the fiscal year ended June 30, 2006 beneficial
            owners complied
            with Section 16(a) filing requirements.
  19
  **ITEM
            10. EXECUTIVE COMPENSATION**
  The
            following table sets forth the total cash compensation, paid to or earned
            during
            each of our last three fiscal years by (i) our Chief Executive Officer and
            (ii) our other executive officer whose salary and bonus exceeded $100,000
            for the fiscal year ended June 30, 2006 (collectively referred to herein as
            the “Named Executive Officers”).
  SUMMARY
                        COMPENSATION TABLEAnnual
                        Compensation
                    Long
                        Term CompensationAwards
                    PayoutsName
                        &
                      Position
                    Fiscal
                    Salary($)
                        (1)
                    Bonus($)
                        (1)
                    OtherAnnual
                      Compensation
                      ($)
                    Restricted
                      Stock
                      Awards($)
                    Securities
                      Underlying
                      OptionsSARS
                      (#)
                    L/TIP
                      Payouts
                      ($)
                    All
                      Other
                      Compensation
                      ($)(3)Shinichi
                          Kanemoto
                    06/30/2006
                    $310,249
                    0
                    0
                    0
                    0
                    0
                    0(President
                        and CEO)
                    06/30/2005
                    $342,593
                    0
                    0
                    0
                    0
                    0
                    006/30/2004
                    $346,352
                    0
                    0
                    0
                    0
                    0
                    0Eiichi
                          Kanemoto
                    06/30/2006
                    $206,891
                    0
                    0
                    0
                    0
                    0
                    0(Secretary)
                    06/30/2005
                    $228,395
                    0
                    0
                    0
                    0
                    0
                    006/30/2004
                    $229,187
                    0
                    0
                    0
                    0
                    0
                    0
 (1)  The
            salary and bonus figures represent the compensation paid to the Named
            Officers
            by our wholly-owned operating subsidiary, Marugin International, Inc. in
            their respective capacities as officers of such subsidiary.
 (2)  We
            do not
            currently provide any contingent or deferred forms of compensation arrangements,
            annuities, pension or retirement benefits to its directors, officers
            or
            employees.
  **Director
            Compensation**
  We
            entered into an agreement with Mark Buck, our sole independent director,
            effective January 1, 2006, which continues until the last date of
            Mr. Buck's current term as a member of our Board of Directors. The
            Agreement will be automatically renewed in the event that Mr. Buck is
            reelected to our Board of Directors.
  Pursuant
            to the agreement, Mr. Buck is paid an annual retainer of $18,000 and $500
            per Board meeting attended.  The Agreement also provides that Mr. Buck
            shall receive an annual grant of stock options in an amount to be determined
            by
            the Board of Directors. No options have been granted to Mr. Buck as of
            June 30,
            2006.
  **ITEM
            11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
  The
            following table sets forth certain information known to the Company regarding
            the beneficial ownership of its capital stock as of June 30,
            2006:
  20
  •  each
            person known to beneficially own more than five percent of a class of
            capital
            stock;
 •  each
            officer and director of the Company (including proposed directors);
            and
 •  all
            directors and executive officers as a group.
  **Title
                      of Class**
                  
                  **Name
                      of Beneficial Owner**
                  
                  **Amount
                      and**
                    **Nature
                      of Beneficial Owner**
                  
                  **Percent
                      of**
                    **Class**Class E
                    Convertible
                      Preferred Stock
                  
                  Gakushin
                      Kanemoto
                  
                  1,455,900
                      shares
                    Chairman
                      CFO and
                    Director
                  
                  15
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  Shinichi
                      Kanemoto
                  
                  38,823,999
                      shares
                    President,
                      CEO and Director
                  
                  40
                  %
 
 Class E
                    Convertible
                      Preferred Stock
                  
                  Eiichi
                      Kanemoto
                  
                  38,823,999
                      shares
                    Secretary
                      and Director
                  
                  40
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  Mark
                      Buck
                  
                  No
                      shares
                    Director
                  
                  0
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  Tomiko
                      Hayakawa
                  
                  1,455,900
                      shares
                    5%
                      shareholder
                  
                  15
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  Taiki
                      Kanemoto
                  
                  8,250,100
                      shares
                    5%
                      shareholder
                  
                  8.5
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  Kousei
                      Kanemoto
                  
                  8,250,100
                      shares
                    5%
                      shareholder
                  
                  8.5
                  %Class E
                    Convertible
                      Preferred Stock
                  
                  All
                      directors and named executive officers as a group
                      (4 persons)
                  
                  79,103,898
                      shares
                  
                  81.5
                  %
 
  21
 The
            above
            shares of Class E preferred stock represent 91.5% of the total voting
            power of
            all shares of capital stock.  There are no holders of our common stock
            which own five percent (5%) or more of the outstanding shares of common
            stock on
            a fully-diluted basis.
  **ITEM
            12.CERTAIN RELATIONSHIPS AND RELATED
            TRANSACTIONS**
  We
            have
            borrowed money from certain of our major shareholders pursuant to unsecured
            promissory notes which are due June 1, 2012.  The aggregate
            outstanding principal balance as of June 30, 2006, is approximately
            $673,000.  The notes bear interest at the rate of 2% per annum, with
            interest payable month. Payments made during the years ended June 30,
            2006 and
            2005 were approximately $181,000 and $101,000, respectively. There were
            no new
            advances during these two fiscal years.
  We
            also
            lease certain land and buildings from certain of our major shareholders. 
The lease terms range from two (2) to five (5) years and expire
            through 2010.  Total payments made in connection with these leases for the
            years ended June 30, 2006 and 2005 were $102,064 and $124,120,
            respectively.  Our management believes these leases are near market
            rates.
  **ITEM
            13. EXHIBITS**
 
 31.1
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002. 31.2
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002. 32
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to 18
                    U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002. 
 **ITEM
            14.PRINCIPAL ACCOUNTANT FEES AND
            SERVICES**
 
 The
            following summarizes aggregate fees for professional audit services rendered
            by
            McKennon, Wilson & Morgan LLP during fiscal years ended May 31, 2006 and
            2005:
 
 2006
                  
                  
                  2005Audit
                      Fees
                  
                  $
                  216,100
                  
                  $
                  201,000Audit
                      Related
                  
                  
                  -
                  
                  
                  -Tax
                      Fees
                  
                  
                  -
                  
                  
                  -All
                      Other Fees
                  
                  
                  10,000
                  
                  
                  -Total
                      Fees
                  
                  $
                  226,000
                  
                  $
                  201,000
 
 Audit
            Fees pertain to the audit of our annual consolidated financial statements
            for
            fiscal year 2006 and 2005 and reviews of our quarterly consolidated financial
            statements during such fiscal years. All other fees for fiscal year 2006
            relate
            to procedures performed in connection with the Company's reverse
            acquisition.
  22
 
 **ITEM
            7. FINANCIAL STATEMENTS**
  **PGMI,
              INC. (FORMERLY HAPS USA, INC.) AND SUBSIDIARY**
 **Report
                          of Independent Registered Public Accounting
                          Firm**
                      
                      F-2**Consolidated
                          Financial Statements**Consolidated
                          Balance Sheet as of June 30,
                          2006
                      
                      F-3Consolidated
                          Statements of Operations and Comprehensive Loss for each
                          ofthe
                          two
                        years
                          in the period ended June 30, 2006
                      
                      F-4Consolidated
                          Statements of Shareholders' Equity for each of the two
                          years in the periodended
                        June
                          30, 2006
                      
                      F-5Consolidated
                          Statements of Cash Flows for each of the two
                          years in the period ended
                        June
                          30, 2006
                      
                      F-6Notes
                          to Consolidated Financial Statements
                      
                      F-7
   F-1
  **REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRM**
  Board
                  of
                  Directors
 PGMI,
                  Inc. and subsidiary
 
 We
                  have
                  audited the accompanying consolidated balance sheet of PGMI, Inc.
                  and subsidiary
                  (the "Company") as of June 30, 2006, and the related consolidated
                  statements of
                  operations and comprehensive income (loss), shareholders' equity
                  and cash flows
                  for each of the two years in the period ended June 30, 2006. These
                  consolidated
                  financial statements are the responsibility of the Company's management.
                  Our
                  responsibility is to express an opinion on these consolidated financial
                  statements based on our audits.
 
 We
                  conducted our audits in accordance with the standards of the Public
                  Company
                  Accounting Oversight Board (United States). Those standards require
                  that we plan
                  and perform the audit to obtain reasonable assurance about whether
                  the financial
                  statements are free of material misstatements. An audit includes
                  examining, on a
                  test basis, evidence supporting the amounts and disclosures in
                  the financial
                  statements. An audit also includes assessing the accounting principles
                  used and
                  significant estimates made by management, as well as evaluating
                  the overall
                  financial statement presentation. We believe that our audits provide
                  a
                  reasonable basis for our opinion.
 
 In
                  our
                  opinion, the consolidated financial statements referred to above
                  present fairly,
                  in all material respects, the consolidated financial position of
                  PGMI, Inc. and
                  subsidiary as of June 30, 2006, and the consolidated results of
                  their operations
                  and their cash flows for each of the two years in the period ended
                  June 30,
                  2006, in conformity with accounting principles generally accepted
                  in the United
                  States of America.
 
 The
                  accompanying consolidated financial statements have been prepared
                  assuming the
                  Company will continue as a going concern. As discussed in Note
                  2, the Company
                  has incurred losses, has a working capital deficiency at June 30,
                  2006 and has
                  commitments to fund new store expansions. These factors raise substantial
                  doubt
                  about its ability to continue as a going concern. Management’s plans with
                  respect to these matters are also described in Note 2. The accompanying
                  consolidated financial statements do not include any adjustments
                  that might
                  result from the outcome of this uncertainty.
 
 As
                  discussed in Note 1, PGMI, Inc. and subsidiary completed a reverse
                  acquisition
                  with HAPS USA, Inc., a blank-check company, on December 9, 2005.
                  The financial
                  statements previously reported by HAPS USA, Inc. were retroactively
                  restated for
                  all periods reported to reflect the historical consolidated financial
                  position,
                  results of operations and cash flows of PGMI, Inc. and
                  subsidiaries.
 
 
 /s/
                  McKennon, Wilson & Morgan LLP
 
 Irvine,
                  California
 September
                  25, 2006
  F-2


**PGMI,
        INC. (FORMERLY HAPS USA, INC.) AND
        SUBSIDIARY**
  **CONSOLIDATED
        BALANCE SHEET**
 **June
                    30, 2006****ASSETS
                    (Note 6)**Current
                    assets:Cash
                
                $
                8,185,205Time
                    deposit (Note 2)
                
                
                1,353,310Prizes
                
                
                870,237Cash
                    surrender value of life insurance
                
                
                659,990Deferred
                    income taxes (Note 9)
                
                
                141,231Prepaid
                    expenses and other (Note 5)
                
                
                653,118Total
                    current assets
                
                
                11,863,091Property
                    and equipment, net (Note 4)
                
                
                44,325,387Deferred
                    income taxes (Note 9)
                
                
                1,309,534Deposits
                    and other assets (Note 5)
                
                
                2,742,184Total
                    assets
                
                $
                60,240,196**LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                1,619,111Accrued
                    liabilities (Note 5)
                
                
                1,626,453Current
                    portion of long-term debt (Note 6)
                
                
                7,274,390Current
                    portion of capital lease obligations (Note 7)
                
                
                1,789,383Current
                    portion of loan payable to shareholders (Note 11)
                
                
                92,847Total
                    current liabilities
                
                
                12,402,184Long-term
                    debt, net of current portion (Note 6)
                
                
                34,322,060Capital
                    lease obligations, net of current portion (Note 7)
                
                
                3,300,189Non-current
                    accrued liabilities (Notes 4, 5 and 6)
                
                
                1,572,868Loan
                    payable to shareholders, net of current portion (Note 11)
                
                
                580,296Total
                    liabilities
                
                
                52,177,597Shareholders’
                    Equity (Note 8):Preferred
                    stock, no par value, 150,000,000 shares authorized:Class
                    A convertible preferred stock, 6,000,000 shares designated,
                  4,425,285
                    shares issued and outstanding
                
                
                2,333,683Class
                    B convertible preferred stock, 5,000,000 shares designated,
                  no
                    shares issued and outstanding
                
                
                -Class
                    C convertible preferred stock, 1,200,000 shares designated,
                  no
                    shares issued and outstanding
                
                
                -Class
                    E convertible preferred stock, 116,595,760 shares designated,
                  97,059,998
                    shares issued and outstanding
                
                
                2,115,915Common
                    stock, no par value, 750,000,000 shares authorized,
                  23,258,671
                    shares issued and outstanding
                
                
                195,892Restricted
                    retained earnings
                
                
                109,141Unrestricted
                    retained earnings
                
                
                3,089,603Accumulated
                    other comprehensive income
                
                
                218,365Total
                    shareholders’ equity
                
                
                8,062,599Total
                    liabilities and shareholders’ equity
                
                $
                60,240,196
  See
        accompanying notes to these consolidated financial statements.
  F-3
  **PGMI,
          INC. (FORMERLY HAPS USA, INC.) AND
          SUBSIDIARY**
 
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **AND
          COMPREHENSIVE LOSS**
  **Year
                    Ended**
                  **June
                    30, 2006**
                
                **Year
                    Ended**
                  **June
                    30, 2005****REVENUES
                    (Note 10):**Gaming
                
                $
                22,696,178
                
                $
                21,533,976Other
                
                
                1,788,968
                
                
                1,703,920Total
                    revenues
                
                
                24,485,146
                
                
                23,237,896**COST
                    OF REVENUES:**Salaries
                    and wages
                
                
                4,798,051
                
                
                5,014,771Depreciation
                
                
                7,891,639
                
                
                7,530,845Facilities
                    and other
                
                
                4,854,019
                
                
                5,553,971Impairments
                    of property and equipment
                
                
                1,105,037
                
                
                2,876,224Total
                    cost of revenues
                
                
                18,648,746
                
                
                20,975,811Gross
                    profit
                
                
                5,836,400
                
                
                2,262,085**OPERATING
                    EXPENSES:**Marketing
                    and advertising
                
                
                925,822
                
                
                1,086,925General
                    and administrative
                
                
                3,173,540
                
                
                2,911,995Total
                    operating expenses
                
                
                4,099,362
                
                
                3,998,920Operating
                    income (loss)
                
                
                1,737,038
                
                
                (1,736,835
                )**OTHER
                    INCOME (EXPENSE):**Reverse
                    acquisition fees (Notes 1 and 8)
                
                
                (2,333,683
                )
                
                -Interest
                    income
                
                
                731
                
                
                1,948Interest
                    expense
                
                
                (1,679,624
                )
                
                (1,572,087
                )Other
                    income (Notes 2 and 6)
                
                
                822,914
                
                
                895,058Other
                    expense
                
                
                (1,462
                )
                
                (76,728
                )Total
                    other expense
                
                
                (3,191,124
                )
                
                (751,809
                )Loss
                    before provision for income taxes
                
                
                (1,454,086
                )
                
                (2,488,644
                )Provision
                    (benefit) for income taxes
                
                
                644,801
                
                
                (863,331
                )**NET
                    LOSS**
                
                $
                (2,098,887
                )
                $
                (1,625,313
                )Change
                    in foreign currency translation
                
                
                (450,626
                )
                
                (128,942
                )**TOTAL
                    COMPREHENSIVE LOSS**
                
                $
                (2,549,513
                )
                $
                (1,754,255
                )Basic
                    and dilutive loss per common share:Weighted
                    average number of common shares
                  Outstanding
                
                
                11,380,773
                
                
                N/ABasic
                    and dilutive net loss per common share
                
                $
                (0.18
                )
                
                N/A
  See
          accompanying notes to these consolidated financial statements.
 F-4
 **PGMI,
          INC. (FORMERLY HAPS USA, INC.) AND
          SUBSIDIARY**
 
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY**
 Class
                    A Convertible Preferred Stock
                
                Class
                    E Convertible
                  Preferred
                    Stock
                
                Common
                    Stock
                
                Restricted
                  Retained
                
                Unrestricted
                  Retained
                
                Accumulated
                    Other ComprehensiveShares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Earnings
                
                Earnings
                
                Income
                    (loss)
                
                TotalsBeginning
                    balances, as restated,
                  as
                    of July 1, 2004,
                  for
                    Class E Preferred
                  shares
                    issued to PGMI, Inc.
                  shareholders
                    in reverse acquisition and
                  change
                    in reporting entity (Note 1)
                
                
                -
                
                $
                -
                
                
                97,059,998
                
                $
                2,115,915
                
                
                -
                
                $
                -
                
                $
                102,290
                
                $
                6,926,546
                
                $
                797,933
                
                $
                9,942,684Foreign
                    currency
                  translation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (128,942
                )
                
                (128,942
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,625,313
                )
                
                -
                
                
                (1,625,313
                )Legal
                    appropriations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,676
                
                
                (4,676
                )
                
                -
                
                
                -Balances
                    June 30, 2005
                
                
                -
                
                
                -
                
                
                97,059,998
                
                
                2,115,915
                
                
                -
                
                
                -
                
                
                106,966
                
                
                5,296,557
                
                
                668,991
                
                
                8,188,429Shares
                    retained by
                  existing
                    shareholders after reverse
                  acquisition
                
                
                3,018,760
                
                
                -
                
                
                -
                
                
                -
                
                
                18,848,746
                
                
                -
                
                
                -
                
                
                (105,892
                )
                
                -
                
                
                (105,892
                )Class
                    A Convertible Preferred
                  shares
                    issued for reverse acquisition
                  transaction
                    fee
                
                
                2,121,530
                
                
                2,333,683
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,333,683Conversion
                    of Class A Convertible
                  Preferred
                    shares into common stock
                
                
                (715,005
                )
                
                -
                
                
                -
                
                
                -
                
                
                3,575,025
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Common
                    stock issued for
                  settlements
                    of accounts
                  payable
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                534,900
                
                
                105,892
                
                
                -
                
                
                -
                
                
                -
                
                
                105,892Stock
                    issued for future services
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                300,000
                
                
                90,000
                
                
                -
                
                
                -
                
                
                -
                
                
                90,000Foreign
                    currency
                  translation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (450,626
                )
                
                (450,626
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,098,887
                )
                
                -
                
                
                (2,098,887
                )Legal
                    appropriations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,175
                
                
                (2,175
                )
                
                -
                
                
                -Balances
                    June 30, 2006 (Note 8)
                
                
                4,425,285
                
                $
                2,333,683
                
                
                97,059,998
                
                $
                2,115,915
                
                
                23,258,671
                
                $
                195,892
                
                $
                109,141
                
                $
                3,089,603
                
                $
                218,365
                
                $
                8,062,599
 See
          accompanying notes to these consolidated financial
          statements.
  F-5
  **PGMI,
          INC. (FORMERLY HAPS USA, INC.) AND
          SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **Year
                    Ended**
                  **June
                    30, 2006**
                
                **Year
                    Ended**
                  **June
                    30, 2005****Cash
                    flows from operating activities:**Net
                  loss
                
                $
                (2,098,887
                )
                $
                (1,625,313
                )Adjustments
                    to reconcile net loss to net cash provided by operating
                    activities:Depreciation,
                    amortization and accretion expense
                
                
                7,967,235
                
                
                7,861,256Impairment
                    of property and equipment (Note 4)
                
                
                1,105,037
                
                
                2,876,224Stock
                    compensation (Note 8)
                
                
                2,333,683Gain
                    on sale of investment (Note 1)
                
                
                -
                
                
                (497,680
                )Gain
                    on interest swap contracts (Note 6)
                
                
                (650,235
                )
                
                (173,565
                )Changes
                    in operating assets and liabilities:Prizes
                
                
                (312,728
                )
                
                (141,822
                )Deferred
                    income taxes
                
                
                354,872
                
                
                (911,571
                )Prepaid
                    expenses and other
                
                
                226,827
                
                
                119,157Accounts
                    payable
                
                
                (362,511
                )
                
                (3,080,114
                )Accrued
                    liabilities
                
                
                655,634
                
                
                738,306Net
                    cash provided by operating activities
                
                
                9,218,927
                
                
                5,164,878**Cash
                    flows from investing activities:**Capital
                    expenditures
                
                
                (10,764,844
                )
                
                (8,309,660
                )Time
                    deposits and restricted cash
                
                
                (536,238
                )
                
                6,177,823Proceeds
                    from liquidation of investment
                
                
                -
                
                
                566,705Other
                    assets
                
                
                (261,536
                )
                
                (960,081
                )Net
                    cash used in investing activities
                
                
                (11,562,618
                )
                
                (2,525,213
                )**Cash
                    flows from financing activities:**Payments
                    on capital lease obligations
                
                
                (1,738,690
                )
                
                (1,302,971
                )Borrowings
                    of long-term debt
                
                
                12,404,435
                
                
                11,129,322Payments
                    on long-term debt
                
                
                (7,644,432
                )
                
                (9,963,608
                )Payments
                    on loan payable to shareholders
                
                
                (180,964
                )
                
                (101,010
                )Net
                    cash provided by (used in ) financing activities
                
                
                2,840,349
                
                
                (238,267
                )Foreign
                    currency effect on cash
                
                
                (268,448
                )
                
                (607,499
                )**Net
                    increase in cash**
                
                
                228,210
                
                
                1,793,899Cash,
                    beginning of year
                
                
                7,956,995
                
                
                6,163,096Cash,
                    end of year
                
                $
                8,815,205
                
                $
                7,956,995**Non-cash
                    investing and financing transactions:**Allocation
                    to restricted retained earnings
                  under
                    legal requirements
                
                $
                2,175
                
                $
                4,676Purchases
                    of equipment under capital
                  leases
                
                
                201,931
                
                
                5,520,048Increase
                    in property and equipment due to
                  asset
                    retirement obligations
                
                
                -
                
                
                800,472Common
                    stock issued for future services
                
                
                90,000
                
                
                -**Cash
                    paid for :**Interest
                
                $
                1,685,394
                
                $
                2,007,184Income
                    taxes
                
                
                16,550
                
                
                -
  See
        accompanying notes to these consolidated financial
        statements.
  F-6
  **PGMI,
          INC. (FORMERLY HAPS USA, INC.) AND
          SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
          1 - ORGANIZATION AND BUSINESS**
 
 MARUGIN
          International, Inc., (“MARUGIN”), a Japanese corporation, was incorporated on
          December 22, 1972. On June 10, 2003, MARUGIN established PGMI, Inc. (“PGMI”), a
          Delaware corporation, to effect a share-exchange agreement with MARUGIN,
          whereby
          MARUGIN became a wholly-owned subsidiary of PGMI (collectively, the “Company”).
          The Company operated thirteen (13) stores and 4.290 machines as of June
          30,
          2006, which offers Pachinko (Japanese pinball) gaming entertainment, all
          of
          which except two are located in Nagano prefecture. In July 2004 and March
          2005,
          the Company opened its two largest stores with 560 machines, each. In July
          2005,
          the Company closed its smallest store which operated 138 machines. The
          Company
          receives income from cigarettes, non-alcoholic beverages and sundry items,
          as
          well as one small batting cage and a bowling alley. Japanese law regulates
          Pachinko gaming and the local police enforce laws. Pachinko gaming is one
          of the
          largest business segments in Japan.
 
 *Acquisition*
  On
          December 9, 2005, pursuant to an Agreement and Plan of Reorganization dated
          October 27, 2005 (the “Agreement”) by and among HAPS USA, Inc.
          (“HAPS”), PGMI, Inc., a Delaware corporation (“PGMI”) and all of the
          stockholders of PGMI, HAPS acquired all of the issued and outstanding shares
          of
          PGMI in exchange for an aggregate of 97,059,998 shares of the Company’s
          Class E Preferred Stock, or approximately 91.5% of the voting stock on a
          fully-diluted basis (see Note 8 for designations).  The Company incurred a
          2% merger fee in the form of Class A Preferred Stock (Note 8) with a value
          of $2,333,683 in connection with this transaction, which was charged to
          expense.
  At
          the
          time of acquisition, HAPS had no revenues and no significant assets or
          liabilities.  It was considered a blank-check company prior to the
          acquisition.  The acquisition of PGMI by HAPS was accounted for as a
          reverse acquisition, whereby the assets and liabilities of PGMI were reported
          at
          their historical cost.  The net liabilities of HAPS were recorded at fair
          value on December 9, 2005, the date of close, totaling approximately
          $105,892.  The effects of stockholders’ equity will be reported as a
          recapitalization.  No goodwill will be recorded in connection with the
          reverse acquisition.  The reverse acquisition resulted in a change in
          reporting entity of HAPS for accounting and reporting purposes. 
Accordingly, the financial statements reported herein have retroactively
          restated for all periods presented to report the historical financial position,
          results of operations and of cash flows of PGMI.
  The
          unaudited pro forma balance sheet data are not significant because of the
          lack
          of operating assets and liabilities of HAPS. The pro forma results of
          operations, assuming the acquisition was completed at the beginning of
          the
          reporting period, would have caused our net losses to increase, but not
          materially, because of the limited operating losses reported by HAPS.
 
 **NOTE
          2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Acquisition
          of Entity Under Common Control and Principles of Consolidation*
 
 The
          acquisition of MARUGIN by PGMI was accounted for at historical cost because
          the
          entities are under common control. The consolidated results of operations
          for
          the periods reported herein include the historical results of operations
          of
          MARUGIN and PGMI since June 10, 2003. All share data have been retroactively
          restated to reflect that of PGMI. All significant inter-company transactions
          have been eliminated in consolidation.
  F-7
  *Management’s
        Plans*
 The
          Company has incurred losses during the year ended June 30, 2006 totaling
          approximately $2,099,000. The Company may continue to incur losses during
          fiscal
          2007 largely due to start-up costs to be incurred with the new store expansions.
          At June 30, 2006, the Company has a working capital deficit of approximately
          $539,000. Furthermore, the Company is in the process of its store expansion,
          which it has remaining obligations under construction contracts of two
          new
          stores totaling $7,850,000 as of June 30, 2006. The Company requires additional
          capital lease, debt and/or equity financing of approximately $6,360,000
          to
          acquire equipment and machines, as well as provide working capital to fund
          initial start-up costs associated with the two new store openings. These
          factors
          raise substantial doubt about the Company’s ability to continue as a going
          concern. Management has historically had good relations with its banks
          and
          management believes that certain notes payable will be refinanced in the
          normal
          course of business based on historical actions. Management is seeking equity
          financing of approximately $5,000,000. Management has historically had
          good
          relations with its financing sources and they have been successful in obtaining
          financing from traditional sources in Japan at historically low interest
          rates.
          There are no absolute assurances that management will continue to be successful
          in refinancing the notes or raising additional capital. The accompanying
          consolidated financial statements do not include any adjustments that might
          result from the outcome of this uncertainty.
 
 *Use
          of Estimates*
 
 The
          preparation of 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 amounts reported in the consolidated
          financial statements and accompanying notes. Actual results could differ
          from
          those estimates. Significant estimates made by management include the evaluation
          of impairment of property and equipment, cost of swap contracts, valuation
          of
          series A convertible preferred stock, and valuation allowances for deferred
          tax
          assets. Management believes that their estimates are reasonable.
 
 *Fair
          Value of Financial Instruments*
 
 Financial
          instruments consist of cash, time deposits, accounts payable, short and
          long-term debt. ** The fair
          value of financial instruments approximated their carrying values at June
          30,
          2006.
 
 *Cash
          Equivalents*
 
 The
          Company considers highly liquid investments with an original maturity of
          90 days
          or less from the purchase date to be cash equivalents. During the periods
          presented, there were no cash equivalents outstanding.
 
 The
          Company maintains deposits in the United States and Japanese banks which
          are not
          federally insured.
 
 *Time
          Deposits*
 
 The
          Company invests in time deposits with original maturities of one to three
          years.
          Time deposits maturing in excess of one year from the balance sheet date
          are
          classified as long-term time deposits. At June 30, 2006 interest rates
          on
          certificates of deposits were 0.03% to 0.07%. Time deposits are carried
          at cost.
 
 *Prizes*
 
 Prizes
          consist of gaming prizes and sundry items and are stated at cost.
  F-8
 
  *Property
              and Equipment*
 
 Property
              and equipment is stated at cost, less accumulated depreciation. Interest
              costs
              related to construction projects is capitalized. Major betterments
              are
              capitalized, while routine repairs and maintenance are charged to expense
              when
              incurred. Depreciation, which includes assets under capital leases,
              is computed
              using the straight-line method or an accelerated method over the following
              estimated
 useful
              lives:
 Buildings
                    and improvements
                  3 to 28
                    yearsPachinko
                    machines and equipment
                  2
                    to 10 yearsLeasehold
                    improvements
                  Estimated
                    life of asset or term of lease, whichever is
                    shorter
  When
              purchased new, pachinko machines generally have a useful life of two
              (2) to
              three (3) years; however, technology changes and changes in patron
              playing
              habits may cause pachinko machines to become underutilized. Management
              evaluates
              utilization of machines daily. In the event certain machines become
              underutilized, management must sell or dispose of the assets, and replace
              these
              as determined economical by management. Historically, sales proceeds
              from
              machines have been minimal.
 
 Statement
              of Financial Accounting Standards (“SFAS”) No. 143 “Accounting for Asset
              Retirement Obligations,” requires that a liability for the fair value of an
              asset retirement obligation be recognized in the period which it is
              incurred,
              with the offsetting associated asset retirement cost capitalized as
              part of the
              carrying amount of the long-lived asset. The Company adopted SFAS No.
              143 for
              all periods presented, the effects of which are discussed in Note
              4.
  SFAS
              No.
              144, “Accounting for Impairment or Disposal of Long-Lived Assets,” requires that
              long-lived assets, such as property and equipment and purchased intangibles
              subject to amortization, be reviewed for impairment whenever events
              or changes
              in circumstances indicate that the carrying amount of an asset may
              not be
              recoverable, or at least annually. Recoverability of the asset is measured
              by
              comparison of its carrying amount to undiscounted future net cash flows
              the
              asset is expected to generate. Specifically, management projects undiscounted
              cash flows expected over the period to be benefited. If such assets
              are
              considered to be impaired, the impairment to be recognized is measured
              as the
              amount by which the carrying amount of the asset exceeds its fair market
              value.
              Estimates of expected future cash flows represent management’s best estimate
              based on currently available information and reasonable and supportable
              assumptions. Any impairment recognized in accordance with SFAS No.
              144 is
              permanent and may not be restored. See Note 4 for discussion of impairments
              of
              property and equipment.
 
 *Lease
              Accounting*
 
 The
              Company lease land and certain equipment used in its operations. Some
              land lease
              have definite terms specified under the agreements, which is generally
              twenty
              (20) years, and some lease have no specified term or no written contract,
              whereby the lessee has rights to use the land indefinitely, so long
              as rental
              payments are made timely. All land leases are accounted for as operating
              lease
              as defined under SFAS No. 13 “Accounting for Leases”. Equipment leases generally
              have terms of four (4) to five (5) years, which generally represent
              to life of
              the assets. Accordingly, all significant leases are accounted for as
              capital
              leases. Buildings and improvements on leased land are generally amortized
              over
              the term of lease of twenty (20) years, unless the life of the assets
              is less.
              Buildings and improvements on leased land whereby there is no specified
              term are
              generally depreciated over the estimated life of the asset.
 
 *Investment*
 
 On
              October 1, 2004, an investment partnership was terminated and Marugin
              received
              $566,705 resulting in a gain from this investment in the amount of
              $497,680
              during the year ended June 30, 2005, which is included in other income
              in the
              accompanying consolidated statement of operations and comprehensive
              loss.
  F-9
  *Use
              Taxes*
 
 Japanese
              use taxes are imposed on all revenue and purchase transactions at 5%.
              The
              Company records use taxes payable based on wagers. In addition, the
              Company
              records a receivable for use taxes based on purchases. At each reporting
              date,
              the Company records an offset to the use taxes payable. The Company
              may have a
              use tax payable or receivable at its reporting dates. The Company records
              use
              taxes on a net, not gross basis.
 
 *Debt
              Issue and Interest Swap Costs*
 
 Costs
              paid in connection with borrowings are capitalized and amortized over
              the term
              of the debt using the effective interest method.
 
 Costs
              of
              interest swap agreements are capitalized and amortized over the terms
              of the
              interest swap agreements (see Note 6).
 
 *Interest
              Rate Swap Agreements*
  Interest
              rate swap agreements (see Note 6) are considered ineffective against
              changes in
              the fair value of the debt due to changes in the benchmark interest
              rates over
              their terms. As a result, as provided by SFAS No. 133, “Accounting for
              Derivative Instruments and Hedging Activities,” as amended by SFAS No. 149,
              changes in fair value of these derivative instruments are recorded
              as gains and
              losses in the accompanying consolidated statements of operations and
              comprehensive loss as other income (expense). The fair value of the
              swaps is
              carried as an asset or a liability in the consolidated balance sheet
              and the
              carrying value of the hedged debt is adjusted accordingly.  The fair values
              of the Company’s interest rate swaps are the estimated amounts it would receive
              or pay to terminate the agreements as of the reporting date.
 
 *Revenue
              Recognition*
 
 Revenues
              from pachinko and pachislot games represent the gross pay-ins, less
              payouts to
              customers.  Revenues are recorded when cash is received for game balls or
              game tokens when rented to the patrons.
 
 Payouts
              are recorded when the token prizes are purchased back from the exchangers. 
Other revenues for beverage are recognized at the time of sale.  Deferred
              revenues consist of payments received by the Company related to the
              exclusive
              rights for beverage and food vending machines to third-party vendors,
              and
              unredeemed prizes as well as, unused prepaid cards. The revenues of
              the
              exclusive rights are recognized either over the term of the contract
              or based
              upon an agreed upon percentage of disbursements from the vending
              machines.
  *Advertising*
  Advertising
              costs are expensed as incurred. Advertising expenses for the years
              ended June
              30, 2006 and 2005 were $925,761 and $725,043, respectively.
 
 *Foreign
              Currency*
 
 The
              functional currency of the Company is the Japanese Yen. The financial
              statements
              of the Company are translated into United States Dollars (the reporting
              currency) at year-end exchange rates for assets and liabilities, and
              weighted-average exchange rate for revenues and expenses. The resulting
              translation adjustments are recorded as a component of other comprehensive
              loss
              reflected on the consolidated statements of operations and comprehensive
              loss,
              and the consolidated statements of shareholders’ equity. Transaction gains and
              losses, if any, in foreign currencies are reflected in operations.
              During the
              years ended June 30, 2006 and 2005, there were no foreign currency
              transaction
              gains or losses.
 
 F-10
  *Income
              Taxes*
 
 The
              Company accounts for its income taxes in accordance with SFAS No. 109,
              “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and
              liabilities are determined based on temporary differences between bases
              used for
              financial reporting and income tax reporting purposes. Income taxes
              are provided
              based on the enacted tax rates in effect at the time such temporary
              differences
              are expected to reverse. A valuation allowance is provided for certain
              deferred
              tax assets if it is more likely than not that the Company will not
              realize tax
              assets through future operations. The Company and its subsidiaries
              file separate
              national and local income tax returns in Japan and the United States
              of
              America.
 
 *Comprehensive
              Loss*
 
 Comprehensive
              loss is defined as the change in equity of a business enterprise during
              a period
              from transactions, and other events and circumstances from non-owner
              sources,
              including foreign currency translation adjustments. Accumulated other comprehensive loss at June 30, 2006, consisted of
              cumulative
              foreign currency translation gains of $218,365, a decrease of $450,626
              during
              the year ended June 30, 2006.
 
 *Per
              Share information*
 
 The
              Company presents basic earnings per share ("EPS") and diluted EPS on
              the face of
              all statements of operations. Basic EPS is computed as net loss divided
              by the
              weighted average number of common shares outstanding for the period.
              Diluted EPS
              reflects the potential dilution that could occur from common shares
              issue able
              through stock options, warrants, and other convertible securities that
              are
              exercisable during or after the reporting period. In the event of a
              net loss,
              such incremental shares are not included in EPS since their effects
              are
              anti-dilutive.
 
 The
              following is a table of common stock equivalents for the years ended
              June 30,
              2006 and 2005, which were not considered in the calculation of diluted
              net loss
              per share as the effects would have been anti-dilutive:
 
 2006
                    
                    2005Shares
                        used in the
                      calculation
                        of basic
                      EPS,
                        as reported
                    
                    11,380,773
                    
                    -Effects
                        of series A
                      convertible
                      preferred
                    
                    22,126,425
                    
                    -Effects
                        of series E
                      convertible
                      preferred
                    
                    485,299,990
                    
                    485,299,990Shares
                        used in the
                      calculation
                        of
                      diluted
                        EPS
                    
                    518,807,188
                    
                    485,299,990
 
 *Recent
              Accounting Pronouncements*
 
 In
              December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
              revises SFAS No. 123. SFAS No. 123(R) is effective for annual periods
              that begin
              after June 15, 2005 and requires companies to expense the fair value
              of employee
              stock options and other forms of stock-based compensation. This expense
              will be
              recognized over the period during which an employee is required to
              provide
              services in exchange for the award. Currently, the Company does not
              have any
              outstanding stock options, and as such, SFAS No. 123(R) will not have
              an impact
              on the consolidated financial statements.
  F-11
  In
              May 2005 the FASB issued SFAS No. 154, “Accounting Changes and Error
              Corrections,” which becomes effective for annual periods beginning after
              December 15, 2005, our fiscal 2007. This Statement requires that a
              voluntary change in accounting principle be retrospectively applied
              to prior
              period’s financial statements unless it is impractible to do so. Our financial
              statements will be affected by SFAS No. 154 only if we voluntarily change
              an accounting principle or correct an error in previously issued statements.
 
 In
              June 2006 the FASB issued Interpretation No. 48, “Accounting for
              Uncertainty in Income Taxes,” (“FIN No. 48”) which becomes effective for
              fiscal years beginning after December 15, 2006. While we have not fully
              assessed the potential impact on our financial statements of adopting
              the
              interpretation in fiscal 2008, we do not believe the impact will be
              material.
              FIN No. 48 clarifies the accounting in accordance with SFAS No. 109,
“Accounting for Income Taxes,” by prescribing a recognition threshold and
              measurement attribute for the financial statement recognition and measurement
              of
              a tax position taken or to be taken in a tax return. It also provides
              guidance
              on derecognition, classification, interest and penalties, accounting
              in interim
              periods, disclosure, and transition.
 
 **NOTE
              3 - RISKS AND UNCERTAINTIES**
  *Innovations
              in Technologies*
 
 The
              Company’s gaming machines are subject to new innovations and changes in
              entertainment experiences. Pachinko machines vary widely in price and
              expected
              life. Rapid changes in demand will render a machine under-producing
              and
              potentially obsolete.
 
 *Cyclical
              Nature of Business*
 
 The
              Company’s primary business involves gaming entertainment. During periods of
              recession or economic downturn, consumers may reduce or eliminate spending
              on
              gaming entertainment activities. In the event that any of the Company’s
              demographic markets suffer adverse economic conditions, the Company’s revenues
              may be materially adversely affected. In addition, the operations of
              the
              pachinko stores are typically seasonal in nature. The sales during
              the holiday
              seasons are higher than the regular months. The biggest holiday season
              in Japan
              lies in the end of December through the beginning of January. Additionally,
              revenues can fluctuate when a new type of pachinko machine is introduced
              at the
              stores.
 
 *Japanese
              Gaming Regulation*
 
 The
              Company’s business is regulated. The Entertainment Establishment Control Law
              (“EECL”) governs a variety
              of entertainment establishments, including pachinko and pachislot stores.
              The
              National Public Safety Commission (“NPSC”) sets out the general standard of the
              pachinko stores within the scope of EECL. The ability of the Company
              to remain
              in business and to operate profitably depends upon the Company’s ability to
              satisfy all applicable NPSC gaming laws and regulations governed by
              EECL.
 
 *Political
              Climate*
 
 The
              Company’s ability to remain in the gaming business depends on the continued
              political acceptability of pachinko gaming activities to both the public
              and
              governmental officials. In addition, the gaming laws regulate payout
              rates
              which, if altered, may diminish the Company’s profitability. Management is aware
              of nothing to indicate that NPSC officials will change its policies
              toward
              gaming activities in general; however, there are no assurances that
              such
              policies will not be changed. Any substantial, unfavorable change in
              the
              enabling laws or tax rates on gaming revenues could make the Company’s business
              substantially more onerous, less profitable or illegal, which would
              have a
              material adverse effect on the Company’s business.
  F-12
  *Competition*
 
 The
              Company faces substantial competition in each of the markets in which
              its gaming
              facilities are located. Some of the competitors have significantly
              greater name
              recognition and financial and marketing resources than the Company.
              Such
              competition results, in part, from the geographic concentration of
              competitors.
              All of the Company’s gaming operations primarily compete with other gaming
              operations in their geographic areas. New expansion and development
              activity is
              occurring in each of the relevant markets, which may be expected to
              intensify
              competitive pressures.
 
 *Foreign
              Currency*
 
 Since
              the
              local currency is the Japanese Yen, the Company may experience significant
              fluctuations in the value of reported assets and liabilities in United
              States
              Dollars. The exchange rate on June 30, 2006 used for translation of
              assets and
              liabilities was 116.32. The average rates during the years ended June
              30, 2006
              and 2005, used to translate income and expense accounts, were 114.94
              and 106.92,
              respectively. As of September 25, 2006, the exchange rate was
              116.60.
 **NOTE
                4 - PROPERTY AND EQUIPMENT**
  At
                June 30, 2006, property and equipment consisted of the following:
 
 Land
                      
                      $
                      15,985,199Buildings
                          and improvements
                      
                      
                      25,427,940Leasehold
                          improvements
                      
                      
                      12,384,405Pachinko
                          machines and computer equipment
                      
                      
                      28,077,514Construction
                          in progress
                      
                      
                      3,350,16685,225,224Less
                          accumulated depreciation and impairments
                      
                      
                      (40,899,837
                      )$
                      44,325,387
 
 *Land
                Acquisitions*
 
 During
                the year ended June 30, 2006, the Company acquired several parcels
                of land for
                use in the construction of one new store. The aggregate purchase
                price was
                $1,612,358, including commissions of $302,911.
 
 *Construction
                in Progress*
 
 From
                time
                to time, the Company enters into contracts for design, construction
                and exterior
                finishing of its stores. During the year ended June 30, 2006, management
                entered
                into contracts for the design and construction of two new stores
                aggregating
                approximately $11,650,000. Management commenced planning of Bando
                store in
                February 2006 and they expect to open the store in October 2006.
                Management
                commenced planning of Gyoda store in November 2005 and they expect
                to open this
                store in December 2006. Additionally, the Company acquired land and
                land lease
                rights for its Bando location *.* During
                the year ended June 30, 2006, the Company has incurred construction
                costs
                including the acquisition of the land for Bando and Gyoda amounting
                to
                approximately $1,640,000 and $2,150,000, respectively. Total estimated
                costs at
                completion for Bando and Gyoda are approximately $8,650,000 and $9,360,000,
                respectively.
 
 The
                Company commenced planning of three other stores, Toyota, Tenri,
                and Hikone
                during the fiscal year ended June 30, 2006. The Company paid monies
                for land
                deposits and commissions to intermediaries related to the sites.
                In addition,
                the Company entered into contracts for the construction of the sites;
                however,
                the contracts are not final unless certain conditions such as the
                permits to
                develop are granted. During the year ended June 30, 2006, the Company
                incurred
                costs related to these three sites amounting to approximately
                $1,120,000.
  F-13
  *Impairment
          of long- Lived Assets*
 
 No
          impairments of land and buildings were recorded by management during the
          year
          ended June 30, 2006. During the year ended June 30, 2005, the Company impaired
          land and building at two stores resulting in loss of $738,871, because
          of
          declining estimated cash flows.
 
 *Other
          Impairments*
 
 As
          discussed in Note 2, pachinko machines that are under utilized because
          of change
          in players’ habits are generally retired before the end of the machine lives.
          During the years ended June 30, 2006 and 2005, the Company impaired and
          retired
          pachinko and pachislot machines prior to the end of their useful lives
          resulting
          in losses of $1,105,037 and $2,137,353, respectively. The machine impairments
          in
          fiscal 2005 primarily related to the early disposition of newly acquired
          machines to open the two new stores which commenced in July 2004 and March
          2005.
 
 *Asset
          Retirement Obligations*
 
 The
          Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,”
during fiscal year 2003 and applied this change retroactively to all previous
          years effected. The statement requires that a liability for the fair value
          of an
          asset retirement obligation be recognized in the period which it is incurred,
          with the offsetting associated asset retirement cost capitalized as part
          of the
          carrying amount of the long-lived asset. The asset retirement cost is
          subsequently allocated to expense using a systematic and rational method
          over
          the useful life of the related asset. Changes in the asset retirement obligation
          resulting from the passage of time are recognized as an increase in the
          carrying
          amount of the liability and as an accretion expense. Under certain lease
          agreements in which the Company leases land, while owning the building
          and/or
          parking lot located on that land, the Company is required to return the
          land to
          its original condition at the end of the land lease term. The lessor has
          the
          option to require the Company to return the land to its original condition.
          It
          has been determined that in all cases the lessors will require the Company
          to
          restore the land. The Company used an average risk free rate of 2.25% to
          discount the estimated obligations and a 20-year useful life for their
          retired
          assets in computing the net retirement obligations as of June 30, 2006.
 
 SFAS
          No.
          143 has resulted in the establishment of $1,092,185 of costs to long-lived
          assets under leasehold improvements. Accretion expense for the years ended
          June
          30, 2006 and 2005, were $26,770 and $14,933, respectively. At June 30,
          2006, the
          Company has aggregate non-current accrued liabilities amounting to
          $1,202,072.
 
 The
          reconciliation of the asset retirement obligation for the year ended June
          30,
          2006 is as follows:
 
 Balance,
                    July 1, 2005 - foreign currency effected
                
                $
                1,175,302Liability
                    accrued
                
                
                -Accretion
                    expense
                
                
                26,770Balance,
                    June 30, 2006
                
                $
                1,202,072
 
 *Depreciation*
 
 Depreciation
          expense charged to operations related to property and equipment during
          the years
          ended June 30, 2006 and 2005 was $7,891,639 and $7,720,727, respectively.
 
 F-14
  **NOTE
          5 - BALANCE SHEET DATA**
 
 At
          June
          30, 2006, prepaid expenses and other consisted of the following:
  Prepaid
                  interest-current
                
                $
                335,591Prepaid
                  rent
                
                
                169,473Professional
                    fees
                
                
                115,000Other
                
                
                33,054$
                653,118
 At
          June
          30, 2006, deposits and other assets consisted of the following:
  Deposits
                
                $
                1,040,552Unamortized
                    interest swap cost
                
                
                692,065Debt
                    issue costs
                
                
                660,574Long-term
                    savings account
                
                
                165,741Prepaid
                    interest non-current
                
                
                153,488Other
                
                
                29,764$
                2,742,184
 
 At
          June
          30, 2006, accrued liabilities consisted of the following:
 
 Use
                    taxes payable
                
                $
                342,753Income
                    taxes payable
                
                
                268,853Professional
                    fees
                
                
                293,105Deferred
                    revenue
                
                
                243,849Salaries
                    and related benefits
                
                
                146,631Reserve
                    for bonuses
                
                
                101,711Utilities
                
                
                80,717Property
                    tax
                
                
                75,533Other
                
                
                73,301$
                1,626,453
 
 At
          June
          30, 2006, non-current accrued liabilities consisted of the
          following:
 
 Asset
                    retirement obligations
                
                $
                1,202,072Interest
                    swap liability
                
                
                180,889Benefit
                    plan obligation
                
                
                189,907$
                1,572,868
 
 **NOTE
          6 - LONG-TERM DEBT**
 
 *Long-Term
          Debt*
 
 Long-term
          debt at June 30, 2006 、 consisted of the following:
 
 Loans
                    payable to commercial bank, payable monthly in principal and
                    interest
                    installments ranging from $7,170 to $17,916, interest at 3.175%-3.425%
                    per
                    annum, due 2006 through 2014, secured by land and buildings,
                    guaranteed by
                    officers
                
                $
                3,135,781
 
 F-15
  Loans
                    payable to commercial bank, payable monthly in principal and
                    interest
                    installments ranging from $3,078 to $71,699, interest at 2.375%-3.375%
                    per
                    annum, due 2006 through 2012, secured by land and buildings,
                    guaranteed by
                    officers
                
                
                5,266,781Loans
                    (two) payable to finance company, payable monthly in principal
                    and
                    interest installments of $27,591 and $45,725, interest at 2.47%
                    and 4.0%
                    per annum, due 2006 through 2012, secured by real property, guaranteed
                    by
                    officers
                
                
                3,490,318Notes
                    payable to commercial bank, principal due in January 2008, interest
                    at
                    2.5% per annum, secured by land and buildings, guaranteed by
                    officers
                
                
                9,852,132Bond
                    payable to commercial bank, payable semiannually in principal
                    of $429,849,
                    coupon interest at 0.9% per annum, guarantee fee at 1.4%, due
                    2006 through
                    2011, with a lump-sum payment of $859,698 in March 2011, unsecured.
                    See
                    interest swap agreements discussed below
                
                
                4,728,336Bond
                    payable to commercial bank, payable semiannually in principal
                    of $322,387,
                    initially coupon interest at 0.21% per annum, thereafter variable
                    (Nikkei
                    Quick DM131) plus 0.1% per annum at thereafter, guarantee fee
                    at 1.1%, due
                    2006 through 2012, with a lump-sum payment of $107,462 in December
                    2012
                
                
                3,976,100Loans
                    payable to commercial bank, payable monthly in principal and
                    interest
                    installments from $4,298 to $28,628, interest at 2.5% and 3.75%
                    per annum,
                    due 2006 through 2012, unsecured, guaranteed by officers
                
                
                2,813,970Loan
                    payable to commercial bank, payable monthly in principal and
                    interest
                    installments of $4,986, interest at 4.5% per annum, due 2006
                    through 2008,
                    unsecured, guaranteed by officers
                
                
                111,419Loan
                    payable to commercial bank, payable monthly in principal and
                    interest
                    installment of $28,654, interest at 3.5% per annum, due 2006
                    through 2010,
                    unsecured, guaranteed by officers
                
                
                1,318,243Loan
                    payable to commercial bank, monthly in principal and interest
                    installment
                    of $25,791, interest at 2.425% per annum, due 2006 through 2007
                    with a
                    lump-sum payment of $42,985 in November 2007, unsecured, guaranteed
                    by
                    officers
                
                
                455,640
 Bond
                    payable to commercial bank, payable semiannually in principal
                    of $483,580,
                    coupon interest at 1.54% guarantee fee at 1.65% per annum, due
                    2006
                    through 2013, with a lump-sum payment of $644,773 in March 2013,
                    unsecured. See interest swap agreements discussed below
                
                
                6,447,730Total
                    long-term debt
                
                
                41,596,450Less
                    current portion
                
                
                (7,274,390
                )Long-term
                    debt, net of current portion
                
                $
                34,322,060
   F-16
  *Bond
            Payable*
 
 On
            March
            24, 2004, MARUGIN issued a bond payable in the amount of approximately
            $6,500,000 (¥700,000,000), which bears a coupon rate of 0.9% and matures on
            March 24, 2011. In connection with the above obligations, the Company
            was
            required to enter into three (3) interest swap arrangements (see next
            paragraph). In addition, it was required to pay debt issue costs of
            approximately $280,000. The unamortized cost was $157,707 as of June
            30, 2006.
            The effective interest rate is 4.49%. The bonds are
            unsecured.
 On
            December 30, 2005, the Company issued a bond payable in the amount of
            approximately $4,300,000 (¥500,000,000), which bears initially a coupon rate of
            0.21%, thereafter variable (Nikkei Quick DM 131) + 0.1%, and guarantee
            fee at
            1.1% per annum and matures December 25, 2012. In addition, it was required
            to
            pay bond issue cost of $242,606. The unamortized cost was $212,281 as
            of June
            30, 2006. The effective interest rate is 3.59%. The bonds are
            unsecured.
 
 On
            March
            31, 2006, the Company issued a bond payable in the amount of approximately
            $6,500,000 (¥750,000,000), which bears a coupon rate of 1.54% and guarantee fee
            at 1.65% per annum and matures on March 24, 2011. In addition, it was
            required
            to pay bond issue cost of $309,957. The unamortized cost was $290,584
            as of June
            30, 2006. The effective interest rate is 3.79%. The bonds are
            unsecured.
  *Interest
            Swap Agreements*
  MARUGIN
            entered into two interest rate swap
            agreements in 2003 and an interest rate swap agreement in 2004 with a
            commercial
            bank. First, MARUGIN entered into an agreement in the face amount of
¥1,100,000,000
            (approximately $10,150,000), which expires on July 20, 2010. In connection
            therewith, MARUGIN agreed to pay interest at 1.555%, per annum on the
            face
            amount, offset by the receipt of interest at the 3-month TIBOR ("Tokyo
            Interbank
            Offered Rate") (0.12% per annum at June 30, 2006). Interest payments
            commenced
            on October 20, 2004 and are payable every three (3) months thereafter
            until
            expiration. The notional amount does not decline over the term of the
            agreement.
  Secondly,
            MARUGIN entered into an agreement in the
            face amount of ¥200,000,000
            (approximately $1,840,000), which expires on September 27, 2010. In connection
            therewith, MARUGIN agreed to a contract to pay interest at 1.97% per
            annum on
            the face amount, offset by the receipt of interest at the 3-month TIBOR.
            Interest payments commenced on December 25, 2003 and are payable every
            three (3)
            months thereafter until expiration. The notional amount does not decline
            over
            the term of the agreement.
  Lastly,
            MARUGIN entered into an interest rate swap
            agreement in the face amount of ¥350,000,000
            (approximately $3,230,000), which expires on June 24, 2011. In connection
            therewith, MARUGIN agreed to a contract to pay interest at 2.275%, per
            annum on
            the face amount, offset by the receipt of interest at the 3-month TIBOR.
            Interest payments will commence on September 24, 2005 and are payable
            every
            three (3) months thereafter until expiration. the notional amount declines
            over
            the term of the agreement.
  The
            Company entered into the interest swap contracts to obtain financing,
            and
            therefore, effectively a cost of the borrowings.  On the date the contracts
            were executed, the fair value of the contract was a cost and liability
            in the
            amount of approximately $1,031,000.  The fair values of MARUGIN’s interest
            rate swaps are the estimated amounts it would receive or pay to terminate
            the
            agreements as of the reporting dates as determined by the bank.  As of June
            30, 2006, the fair value of the outstanding interest swaps was a liability
            in
            the amount of $180,889.   During the years ended June 30, 2006 and
            2005, the Company recorded an unrealized gain totaling $650,244 and $173,565.
            Unamortized cost is $692,065 at June 30, 2006, and amortization in 2006
            and
            2005 was approximately $152,000 and $145,000 respectively. The
            effective interest cost of the related debt, after considering the costs
            of the
            interest swaps and debt issue costs is approximately
            6.72%


Future
        annual minimum principal payments under long-term debt contracts as of June
        30,
        2006 are as follows:





Years
                ending June 30,2007
            
            $
            7,274,3902008
            
            
            15,891,3942009
            
            
            4,775,9712010
            
            
            4,575,3952011
            
            
            3,996,106Thereafter
            
            
            5,083,194Total
                long-term debt
            
            $
            41,596,450




F-17


**NOTE
        7 - COMMITMENTS AND CONTINGENCIES**
 
 *Guarantees*
  During
        the normal course of business, the Company’s shareholders and officers have made
        certain guarantees under which it may be required to make payments in relation
        to certain Company transactions. The Company indemnifies its directors,
        officers, employees and agents to the maximum extent permitted under the
        laws of
        the State of California and Japan. Historically, the Company nor its
        shareholders and officers have been obligated to make significant payments
        for
        these obligations and no liabilities have been recorded for these indemnities
        and guarantees in the accompanying consolidated balance sheet.
  *Benefit
        Plan Obligation*
 
 The
        Company’s benefit plan was terminated during the fiscal year 2005 as the size of
        the Company grew and it was no longer eligible to participate in the small
        business plan. Participant accounts were deposited with the Company, as trustee,
        until it sponsors a new plan. The participants’ assets were deposited into a
        time deposit, earning interest and the benefit obligation in reflected as
        a
        non-current liability (Note 5). No contributions were made during the years
        presented.
 
 *Consulting
        Agreement*
 
 On
        June
        1, 2002, MARUGIN entered into an annual agreement with a company which requires
        payments of approximately $11,000 per month. The contract will be renewed
        annually and currently expires on
 June
        1,
        2005. The Company provides information technology and management consulting
        to
        MARUGIN. During the years ended June 30, 2006 and 2005, the Company incurred
        expenses of $125,283 and $123,924, respectively.
 
 *Directors
        Agreement*
 
 On
        January, 1, 2006, management entered into a director agreement for a period
        of
        one year, renewable annually by mutual consent if the director is re-elected.
        In
        connection therewith, the Company will pay the director a retainer of $1,500
        per
        month plus $500 per meeting attended and reimbursement of out of pocket
        expenses.
  On
          June
          17, 2003, the Company retained one outside director for a US subsidiary.
           The agreement provided for an annual payment of $150,000, plus
          reimbursement of reasonable expenses. The agreement expired on June 16,
          2004.
 Another agreement was executed which paid $10,000, and had contingent
          consideration which was not met; the agreement was cancelled. On March
          1, 2005,
          a new agreement was executed with this director, as well as one other director,
          which provide for annual compensation of $100,000, plus reasonable expenses.
          During the year ended June 30, 2005, the Company paid and incurred $50,000
          to
          one director. During the year ended June 30, 2006, the Company paid and
          incurred
          an aggregate of $220,000 to these two directors.
 
 *Capital
        Leases*
 
 The
        Company leases equipment under leases that qualify as capital leases. These
        leases are for a term of five years and expire in March 2009. Future annual
        minimum lease payments for equipment accounted for as capital leases as of
        June
        30, 2006 are as follows:
 
 Years
                  ending June 30,2007
              
              $
              1,965,4562008
              
              
              1,734,5102009
              
              
              1,453,3102010
              
              
              268,513Total
                  minimum lease payments
              
              
              5,421,789Less
                  amounts representing interest
              
              
              (332,217
              )Present
                  value of future minimum lease payments
              
              
              5,089,572Less
                  current portion of capital lease obligations
              
              
              (1,789,383
              )Capital
                  lease obligations, net of current portion
              
              $
              3,300,189
  F-18




Interest
        expense related to capital lease obligations amounted to $246,206 and $245,226
        during the years ended June 30, 2006 and 2005, respectively.
 
 Property
        and equipment at June 30, 2006, include the following amounts for capitalized
        leases:
 
 Equipment
                  under capital leases
              
              $7,123,594Less
                  accumulated depreciation
              
              
              (2,846,702
              )Equipment
                  under capital leases, net
              
              $
              4,276,892
  *Operating
        Leases*
 
 The
        Company leases land for four (4) of its existing stores, whereby it has incurred
        the costs of the buildings and improvements. The Company also leases land
        at six
        (6) other existing locations for store parking lots. Minimum monthly rental
        payments under these leases range from $22 to $30,712 per month, aggregating
        total payments of $79,110 per month. Under Japanese custom, if significant
        improvements are made to the leased land, the land leases are required to
        be
        extended by the lessor for as long as the Company is in operation. The Company
        has made significant modifications to the land through construction of buildings
        and parking lots. Thus, the terms of the land leases in most cases are
        continuous; however, certain leases, in fact, specify land lease terms from
        1
        year to 30 years. The Company also leases land from two of its officers.
        The
        monthly lease payments to the officers are $8,505 and the contracts expire
        on
        April 30, 2007 and June 30, 2008 (Note 11). For the years ended June 30,
        2006
        and 2005, total rental expense under all land leases was approximately
        $1,141,492 and $1,000,657, respectively.
 
 Future
        annual minimum payments under non-cancelable operating leases as of June
        30,
        2006, are as follows:
 
 Years
                  ending June 30,2007
              
              $
              861,9012008
              
              
              824,7422009
              
              
              771,5822010
              
              
              768,7432011
              
              
              768,657Thereafter
              
              
              10,377,664Total
                  future annual minimum lease payments
              
              $
              14,373,289
 
 **NOTE
        8 - SHAREHOLDERS' EQUITY**
  *Restricted
        Retained Earnings*
  As
        required under Japanese laws, the Company must accumulate 10% of dividends
        paid
        until restricted retained earnings amounts to 25% of common stock. As of
        June
        30, 2006, the Company was in satisfaction of this requirement.
 
 *Class
        A Convertible Preferred Stock*
 
 Each
        share of Class A convertible preferred stock is convertible into five
        shares of common stock.  In addition, each share of Class A
        convertible preferred stock is entitled to five votes. 2,121,530 shares of
        Class A convertible preferred stock were issued to a placement agent in
        connection with the reverse acquisition. The shares were valued at $2,333,683
        based on the average closing price of the Company’s common stock for a period of
        time before and after the merger, including a 10% discount. No liquidation
        preference exists and no dividends shall accrue under the Class A convertible
        preferred stock.




F-19
 
  During
          the year ended June 30, 2006, the holders of the Class A convertible preferred
          stock converted 715,005 shares of Class A convertible preferred stock into
          3,575,025 shares of common stock.
 
 *Class
          E Convertible Preferred Stock*
 
 Each
          share of Class E convertible preferred stock is convertible into five
          shares of common stock, commencing on December 9, 2008.  As a result
          of this transaction, PGMI is now wholly-owned subsidiary, and the PGMI
          Stockholders own approximately 91.5% of the Company’s voting stock, on a
          fully-diluted basis.  In addition, each share of Class E convertible
          preferred stock is entitled to five (5) votes.  No liquidation preference
          exists and no dividends shall accrue under the Class E convertible preferred
          stock.
 
 *Dividends*
 
 During
          the years ended June 30, 2006 and 2005, the Company did not pay cash
          dividends.
 
 *Common
          Stock*
 
 During
          the year ended June 30, 2006, the Company issued 300,000 share of common
          stock
          for future services related to investor relations on behalf of the Company.
          The
          services commenced in July 2006. Accordingly, the estimated fair value
          of the
          common stock of $90,000 or $0.30 per share based on the closing price on
          the
          date of issuance and has been reflected in prepaids and other current assets
          as
          of June 30, 2006. See Note 12 for issuance of additional stock to the investor
          relations company subsequent to year end.
 
 **NOTE
          9 - INCOME TAXES**
 
 The
          following summarizes the provision (benefit) for income taxes for the years
          ended June 30, 2006 and 2005:
 
 **2006**
                
                **2005**Current
                    -Foreign
                
                $
                289,929
                
                $
                48,240Deferred
                    -Foreign
                
                
                354,872
                
                
                (911,571
                )Provision
                    (benefit) for income taxes
                
                $
                644,801
                
                $
                (
                    863,331
                )
  A
          reconciliation of the expected statutory national income tax provision
          to the
          provision (benefit) for income taxes for the years ended June 30, 2006
          and 2005,
          is as follows:
 
 **2006**
                
                **2005**Provision
                    for income taxes at a federal statutory rate
                
                
                30.0
                %
                
                30.0
                %Increase
                    (reduction) in income taxes resulting from:Local
                    income taxes, net of national benefit
                
                
                9.6
                %
                
                9.0
                %Permanent
                    items not deductible for income tax purposes
                
                
                6.0
                %
                
                (0.9
                %)Increase
                    in valuation allowance
                
                
                (89.9
                %)
                
                (4.5
                %)Provision
                    (benefit) for income taxes
                
                
                (44.3
                %)
                
                (33.6
                %)
  F-20
  At
          June
          30, 2006 significant components of the Company's net deferred taxes are
          as
          follows:
 
 **2006**Deferred
                    tax assets (liabilities)-Current
                    assets - accrued liabilities and deferred revenue
                
                $
                141,231Noncurrent
                    assets:Impairment
                    charges
                
                
                1,293,481Depreciation
                    and other
                
                
                568,832Net
                    operating loss carryforward - United States
                
                
                1,901,339Less
                    - valuation allowance
                
                
                (1,901,339
                )Total
                    noncurrent deferred tax assets
                
                
                1,862,313Noncurrent
                    liabilities:Interest
                    swap liability
                
                
                (274,058
                )Other
                
                
                (278,721
                )Total
                    noncurrent deferred tax liabilities
                
                
                (552,779
                )Net
                    noncurrent deferred tax assets
                
                $
                1,309,534
  Management
          increased its valuation allowance by $1,307,224 and $112,291 during the
          years
          ended June 30, 2006 and 2005, respectively, for certain expenses paid in
          the
          United States that will not be deductible in Japan. At the present time,
          management cannot determine if there will be income in the United States
          to
          offset such expenses, which will be carried forward as net operating losses.
          As
          of June 30, 2006, the net operating losses begin to expire in eighteen
          years for
          United States federal tax purposes and three years for the State of California
          tax purposes. Prior year net operating loss carryforward in Japan in the
          amount
          of $1,789,765 was fully utilized in June 30, 2006.
 
 **NOTE
          10 - GAMING OPERATIONS**
 
 The
          Company derives revenue primarily from the operation of pachinko and pachislot
          games. The Company is subject to annual licensing requirements established
          by
          the Prefectural Public Safety Commission. The Company must renew this license
          yearly to operate. The Company pays sales taxes of 5% of net revenues.
          A summary
          of gross wagers, less winning patron payouts, for the years ended June
          30, 2006
          and 2005, are as follows:
 
 **2006**
                
                **2005**Gross
                    Wagers
                
                $
                187,972,786
                
                $
                187,877,668Patron
                    Payouts
                
                $
                (165,276,608
                )
                $
                (166,343,692
                )Gaming
                    Revenues
                
                $
                22,696,178
                
                $
                21,533,976
 
 **NOTE
          11 - RELATED PARTY TRANSACTIONS**
 
 *Loans
          Payable to Shareholders*
 
 Loans
          payable to shareholders consisted of three (3) notes which are due June
          1, 2012,
          interest is due monthly at 2% per annum, unsecured, in the amount of $673,143.
          Payments made during the years ended June 30, 2006 and 2005 were
          $180,964 and $101,010, respectively.  There were no new advances during the
          periods presented.




F-21




*Leases
        with Shareholders*
 
 The
        Company leases certain land and buildings from certain of its
        shareholders.  The terms range from two (2) to five (5) years, expiring at
        times ranging from 2007 to 2010.  Total payments made in connection with
        these leases for the year ended June 30, 2006 and for the year ended June
        30,
        2005 were $102,064 and $124,120, respectively.  Management believes these
        leases are near market rates.
  *Fourth
          Quarter Adjustment*
 
 During
          the quarterly period ended March 31, 2006, the Company inadvertently wrote
          off
          the 441 pachinko machines that were in storage, which are to be used in
          the new
          stores expected to open in fiscal 2007. In addition, the Company
          incorrectly reduced the carrying value of the pachinko machines through
          a charge
          to operations. These charges are deemed an error by management, not a change
          in
          estimate, and accordingly, a required restatement of previously reported
          amounts. During the fourth quarter ended June 30, 2006, management reversed
          the
          amounts that incorrectly reduced the carrying value of pachinko machines
          totaling $428,580. Accordingly, the Company restated its net income during
          the
          quarterly period ended March 31, 2006, as follows:
 
 UnauditedFor
                    the Three Months EndedMarch,
                    31, 2006
                
                
                
                March,
                    31, 2006(as
                    reported)
                
                Adjustments
                
                (as
                    adjusted)Net
                    Income
                
                $
                161,858
                
                $
                428,580
                
                $
                590,438Basic
                    net income per
                  share
                
                $
                0.01
                
                
                
                
                $
                0.03Dilutive
                    net income
                  per
                    share
                
                $
                0.00
                
                
                
                
                $
                0.00
 
 **NOTE
        12 - SUBSEQUENT EVENTS**
 
 *Short-term
        Debt*
 
 In
        July
        and August 2006, the Company entered into two additional short-term debt
        agreements with two commercial banks totaling approximately $860,000. The
        loans
        are primarily used for paying income taxes and new store construction. The
        loans
        bear interest rates of 2.625% and 2.9% per annum and are due in six months
        and
        one year.
 
 *Issuance
        of Common Stock*
 
 On
        August
        15, 2005, the Company issued 1,700,000 shares of common stock to the investor
        relation company noted at Note 8. The estimated fair value of the common
        stock
        of $459,000 or $0.27 per share was based on the closing price of the Company’ s
        common stock on the date of issuance and will be expensed over the period
        of
        services provided.




F-22




SIGNATURES




Pursuant
      to the requirements of Section 13 or 15(d) 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.




**PGMI,
                INC.**Date: September
              28, 2006
            By:
            /s/ Shinichi
                Kanemoto**Shinichi
                  Kanemoto**
              **Chief
                Executive Officer**
              **(Principal
                Executive Officer)**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in their
      capacities and on the dates indicated.




**Signature**
              **Capacity**
              **Date**/s/ Shinichi
                  Kanemoto
              Chief
                  Executive Officer, Principal
              September
                  28,
                  2006**Shinichi
                  Kanemoto**
              Executive
                  Officer and Director






/s/ Gakushin
                Kanemoto
            Chief
                  Financial and Principal
            September
                28,
                2006**Gakushin
                Kanemoto**
            Accounting
                Officer and Director






/s/ Eiichi
                Kanemoto
            Secretary
                  and Director
            September
                28,
                2006**Eiichi
                Kanemoto**






/s/ Mark
                  Buck
              Director
              September
                  28,
                  2006**Mark
                  Buck**
  23