UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549




Form
10-K


(Mark
One)


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




For the fiscal year endedSeptember 30, 2008




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




For the transition period from
___________ to ___________




Commission
file number 000-28318




Multimedia
Games, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Texas
                74-2611034(State
      or Other Jurisdiction of Incorporation or Organization)
                (IRS
      Employer Identification No.)206
      Wild Basin Road, Building B, Fourth Floor
                  Austin,
      Texas
                78746(Address
      of Principal Executive Offices)
                (Zip
      Code)




Registrant’s
Telephone Number, Including Area Code:(512)
334-7500




Registrant’s website:www.multimediagames.com




Securities
Registered Pursuant to Section 12(b) of the Act:


None




Securities
Registered Pursuant to Section 12(g) of the Act:


Common
Stock, $0.01 par value


Preferred
Share Purchase Rights




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes   ̈    No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.  Yes   ̈    No  x




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.  ̈




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




Large Accelerated Filer  ̈                                                   Accelerated
Filer ý




Non Accelerated Filer  ̈                                                   Smaller
reporting company  ̈




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




The
aggregate market value of voting and non-voting common equity held by
nonaffiliates of the registrant computed by reference to the price at which
common equity was last sold as of the last business day of the registrant’s most
recently completed second fiscal quarter (March 31, 2008) was $121,717,728
(assuming, for this purpose, that only directors and officers are deemed
affiliates.)




As of
December 8, 2008, the registrant had 26,628,571 outstanding shares of
common stock.









DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the Proxy Statement for the registrant’s 2009 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form
10-K.




This Annual Report on Form 10-K
contains forward-looking statements reflecting Multimedia Games’ current
forecast of certain aspects of our future. It is based on current information
that we have assessed but which by its nature is dynamic and subject to rapid
and even abrupt changes. Forward-looking statements include statements regarding
future operating results, liquidity, capital expenditures, product development
and enhancements, numbers of personnel, customer and strategic relationships
with third parties, our strategy, the ability of the new management team to
further develop, implement, and execute on any newly identified strategic plan,
legal and regulatory uncertainties, including outcomes of litigation, the
effects of such outcomes upon our business, changes in existing laws and
regulations or in the interpretation of such laws and regulations, the effects
of competition in the Class II market from games that we believe are
non-Class II games, and the effects of uneven enforcement policies by the
National Indian Gaming Commission in challenging such non-Class II games.
The forward-looking statements are generally accompanied by words such as“plan,”“estimate,”“expect,”“intend,”“believe,”“should,”“would,”“could,”“anticipate,”or other words that convey the
uncertainty of future events or outcomes. Our actual results could differ
materially from those stated or implied by our forward-looking statements, due
to risks and uncertainties associated with our business. These risks are
described throughout this Annual Report on Form 10-K, which you should read
carefully. We particularly refer you to the section under the heading“Risk
Factors”for an
extended discussion of certain of the risks confronting our business. The
forward-looking statements in this Annual Report on Form 10-K should be
considered in the context of these risk factors. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.




PART
I




ITEM 1.  Business




General




We are a
supplier of interactive systems, server-based gaming systems, interactive
electronic games, player terminals, stand-alone player terminals, video lottery
terminals, electronic scratch ticket systems, electronic instant lottery
systems, player tracking systems, casino cash management systems, slot
accounting systems, slot management systems, unified currencies and electronic
and paper bingo systems for Native American, racetrack casino, casino, charity
and commercial bingo, sweepstakes, lottery and video lottery markets and provide
support and services and operations support for our customers and products. We
design and develop networks, software and content that provide our customers
with, among other things, comprehensive gaming systems, some of which are
delivered through a telecommunications network that links our player terminals
with one another, both within and among gaming facilities. Our ongoing
development and marketing efforts focus on Class II and Class III
gaming systems and products for use by Native American tribes; video lottery
terminals, video lottery systems, stand-alone player terminals, electronic
instant scratch systems and other products for domestic and international
lotteries; products for domestic and international charity and commercial bingo
markets; and promotional, sweepstakes and amusement with prize
systems.




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




-2-




The
gaming industry is highly regulated, and we may be affected by expected and/or
unforeseen judicial rulings or changes in applicable laws, or other changes in
dynamic political, regulatory, socioeconomic, competitive and technological
environments.




We
specialize in server-based gaming systems commonly known as central determinant
and downloadable systems. We provide these systems for use by Native American
gaming operators in both Class II and Class III facilities, to
racetrack casinos and commercial casinos, to operators of charity and commercial
bingo gaming facilities, and for use in domestic and international lottery
jurisdictions. We also provide player terminals for bingo systems and
central-determinant video lottery systems.




We
provide proprietary content that has been designed and developed by us for our
gaming systems. We also implement game themes for and on our systems that we
have licensed from others.




We market
gaming support products such as back-office systems, player tracking systems,
slot accounting systems, slot management systems, and slot monitoring systems
both to gaming operators and to domestic and international lotteries. In
addition, we market certain proprietary and nonproprietary hardware products
that are used in conjunction with our systems and occasionally “broker” gaming
products made by other game suppliers.




Our
gaming systems typically operate across proprietary local-area and wide-area
broadband networks. We provide linked interactive Class II gaming to our
tribal customers via nationwide, broadband telecommunications network. Player
terminals in the Class II market are typically interconnected within a
gaming facility and to other facilities via fiber optic and telephonic networks,
thereby enabling players to simultaneously participate in the same game and to
compete against one another to win pooled prizes. In the charity bingo market,
player terminals are typically only interconnected within the gaming facility
where the terminals are located.




Our
gaming systems are typically provided to customers under revenue-sharing
arrangements, although sales models are common in some markets. For example, in
the Native American Class III market in Washington State, player terminals
and other products are typically sold for an up-front purchase price.
Historically, we have focused our development and marketing efforts on
Class II gaming systems for use by Native American tribes throughout the
United States, and Class III gaming systems for use by Native American
tribes under compact with the states of Washington and Oklahoma. We also focus
our marketing efforts on the emerging charity markets in the United States,
domestic and international video lottery markets, and international commercial
bingo markets.




In
addition, we have developed our proprietary MGAMe® casino
data management system technology solution, which features a suite of tools that
help operators manage their gaming facilities. The MGAMe system uses
active-player-database management to analyze and optimize the effectiveness of
slot floor placements, to track and audit monetary transactions, and to manage
marketing programs, thereby allowing the operator to configure the casino floor
to optimize profitability. We now have components of the MGAMe casino data management
system deployed in multiple gaming jurisdictions, including Native American
Class II and Class III markets, the New York video lottery market, the
Mexico electronic bingo market and the Alabama charity electronic bingo
market.




Native American
Gaming. Native American gaming is governed by the Indian Gaming
Regulatory Act of 1988, or IGRA; IGRA established the National Indian Gaming
Commission, or NIGC, and it granted the NIGC regulatory powers over certain
aspects of Native American gaming. IGRA classifies games that may be played on
Native American lands into three categories, each of which is subject to
different regulations, as follows:




§
            Class I
      Gaming. Class I gaming includes traditional Native American
      social and ceremonial games. Class I gaming is regulated exclusively
      at the Native American tribal
level.




§
            Class II
      Gaming. Class II gaming includes bingo, and if played at the
      same location where bingo is offered, pull tabs and other games similar to
      bingo. Class II gaming is regulated by individual Native American
      tribes, with the NIGC having oversight of the tribal regulatory process.
      States that allow bingo and games similar to bingo to be conducted by any
      other entity or for any other purpose, such as bingo at charities or
      schools, may not regulate Class II gaming, and therefore receive no
      tax revenues from income the tribes derive from Class II
      gaming.




§
            Class III
      Gaming. Class III gaming includes all other forms of gaming
      that are not included in either Class I or Class II, including
      slot machines and most table games. Class III gaming may be conducted
      only pursuant to contracts called “compacts,” which are negotiated between
      individual states and individual Native American tribes located within
      that state, and subsequently approved by the U.S. Bureau of Indian
      Affairs. The compacts typically include provisions entitling the state to
      receive revenues at mutually agreed-upon rates from the income a tribe
      derives from Class III gaming
activities.




-3-




We
believe that all of our Class II games, electronic player terminals, and
gaming systems are designed and operated to meet the requirements of
Class II gaming as defined by IGRA. Additionally, we intend to certify our
Class II games and systems in accordance with the grandfathering provision
of the newly enacted Technical Standards promulgated by the NIGC. Moreover, we
believe that all of our Class III games and systems meet the requirements
of the appropriate tribal-state compacts.




We
currently offer our Native American Class II customers two gaming systems,
our Legacy system and our New Generation system. In our Class II and
Class III gaming markets, we currently provide gaming equipment to our
customers on a participation (revenue sharing) basis, and derive revenue based
on a percentage of the hold per day generated by each player
terminal.




During 2004,
the Oklahoma Legislature passed legislation authorizing certain forms of gaming
at racetracks, and additional types of games at tribal gaming facilities,
pursuant to a tribal-state compact. The Oklahoma gaming legislation allows the
tribes to sign a compact with the state of Oklahoma to operate an unlimited
number of electronic instant bingo games, electronic bonanza-style bingo games,
electronic amusement games, and non-house-banked tournament card games. In
addition, certain horse tracks in Oklahoma are allowed to operate a limited
number of instant and bonanza-style bingo games and electronic amusement games.
All vendors placing games at any of the racetracks under the compact will
ultimately be required to be licensed by the state of Oklahoma. Pursuant to the
compacts, vendors placing games at tribal facilities will have to be licensed by
each tribe. All electronic games placed under the compact have to be certified
by independent testing laboratories to meet technical specifications. These
technical specifications were published by the Oklahoma Horse Racing Commission
and the individual tribal gaming authorities in the first calendar quarter
of 2005. We generally receive a 20% revenue share for the games played
under the Oklahoma Gaming Compact.




We offer
intrafacility-linked Class III video lottery systems to Native American
customers in Washington State. The majority of our Class III gaming
equipment is sold for an up-front purchase price; under these purchases, we
receive a small back-office fee; back-office fees cover the service and
maintenance costs for back-office servers installed in each facility to run our
Class III games, as well as the cost of related software updates. In
addition, we offer Class III player terminals under both participation
arrangements and lease-purchase arrangements. As of
September 30, 2008, our Class III gaming systems were located
in 14 gaming facilities in Washington State.




Charity
Gaming. We design, develop, and in some cases, operate gaming systems for
charity gaming enterprises. Charity bingo and other forms of charity gaming are
operated by or for the benefit of nonprofit organizations, for charitable,
educational and other lawful purposes. This and other forms of non-Native
American gaming are not currently subject to a federal regulatory system, such
as the one created by IGRA, to regulate Native American gaming. Regulation of
charity gaming is vested with each individual state, and in some states,
regulatory authority is delegated to county or municipal governmental
units.




In
Alabama, our largest charity market, constitutional amendments have been passed
authorizing charity bingo in certain locations. The regulation of charity bingo
in Alabama is typically vested with a local governmental authority. We typically
place player terminals under participation arrangements in the charity market
and receive a percentage of the hold per day generated by each of the player
terminals. As of September 30, 2008, we had 2,279 player
terminals in three facilities in Alabama.




Domestic and
International Video Lottery Gaming.We designed and developed a central
determinant system for the emerging state video lottery market. Our central
determinant system includes all software, hardware and networks required to
provide outcomes to, remotely manage, and to provide accounting reports for
video lottery gaming conducted on player terminals at multiple locations. In
January 2004, we installed our central determinant system for the video
lottery network that the New York Lottery operates at licensed New York State
racetrack casinos. We currently have approximately 13,000 video lottery
terminals connected to our central determinant system. Our central determinant
system is able to interface with, provide outcomes to and manage player
terminals provided by others. As payment for providing and maintaining the
central determinant system, we receive a small portion of the network-wide hold
per day. We believe that we will be able to achieve future growth in the
domestic and international video lottery market by leveraging our experience in
the states of California, Washington, Iowa and New York, by our leadership in
designing technologically advanced games and systems, and by having the ability
to rapidly adapt game and system technology to satisfy emerging regulatory
requirements.




International
Commercial Bingo Market. In March 2006, we entered into a contract
with Apuestas Internacionales, S.A. de C.V., or Apuestas, a subsidiary of Grupo
Televisa, S.A., to provide traditional and electronic bingo gaming, technical
assistance, and related services for Apuestas’ locations in Mexico. Apuestas
currently has a permit issued by the Mexican Ministry of the Interior
(Secretaria de Gobernación) to open and operate 65 bingo parlors. Apuestas
is projecting that all 65 bingo parlors will be open by May 2011. As
of September 30, 2008, we had installed 4,583 player terminals
at 19 bingo parlors in Mexico under this contract with Apuestas. At
September 30, 2008, all installed player terminals placed in the
Apuestas bingo parlors are pursuant to a revenue share arrangement that is
comparable with our Oklahoma market arrangements.




-4-




As of
September 30, 2008, we have entered into separate contracts with three
other companies incorporated in Mexico to provide traditional and electronic
bingo gaming, technical assistance, and related services for bingo parlors in
Mexico. As of September 30, 2008, we had
installed 550 player terminals at three parlors in Mexico under these
contracts.




The
following table sets forth our end-of-period installed player terminal base by
quarter and by product line for each of the five most recent
quarters:




Quarter
                    Ended
                  
                  Reel
      Time
                    Bingo
                  
                  
                  Legacy&
                    Other(1)
                  
                  
                  Total
                    Class II
                    Units
                  
                  
                  Class III
                    Units(2)
                  
                  
                  Mexico
                    Electronic
                    Bingo Units
                  
                  
                  Charity
                    Units9/30/2008
                  
                  
                  2,223
                  
                  
                  
                  555
                  
                  
                  
                  2,778
                  
                  
                  
                  5,655
                  
                  
                  
                  5,133
                  
                  
                  
                  2,3116/30/2008
                  
                  
                  2,132
                  
                  
                  
                  555
                  
                  
                  
                  2,687
                  
                  
                  
                  5,375
                  
                  
                  
                  4,294
                  
                  
                  
                  2,3623/31/2008
                  
                  
                  2,223
                  
                  
                  
                  563
                  
                  
                  
                  2,786
                  
                  
                  
                  5,169
                  
                  
                  
                  4,039
                  
                  
                  
                  2,46912/31/2007
                  
                  
                  3,477
                  
                  
                  
                  508
                  
                  
                  
                  3,985
                  
                  
                  
                  4,419
                  
                  
                  
                  3,513
                  
                  
                  
                  2,5139/30/2007
                  
                  
                  3,840
                  
                  
                  
                  550
                  
                  
                  
                  4,390
                  
                  
                  
                  4,088
                  
                  
                  
                  2,515
                  
                  
                  
                  2,569




(1)
            At
      September 30, 2007 and December 31, 2007, includes 166
      traditional electronic bingo games installed in certain international
      markets. At March 31, 2008, June 30, 2008 and
      September 30, 2008, includes 252 traditional electronic
      bingo games installed in certain international
  markets.




(2)
            Beginning
      December 31, 2007, includes 50 units installed in Rhode
      Island. The balance of the unit totals for both periods reflects the
      placement of units pursuant to the approved gaming compact between Native
      American tribes, racetracks and the State of Oklahoma, including
      stand-alone games of Multimedia Games’ and other
  vendors.




Our
Strategy




With a
large installed base of electronic gaming devices provided to customers under
revenue-sharing arrangements, our strategy is to leverage our strong customer
relationships, industry expertise and management skills to enhance the
profitability of our placements while increasing the number of unit placements
in current markets, as well as new markets. We plan to achieve this progress in
Native American, commercial casino, charity and video lottery and other domestic
and international gaming markets by placing more high-performing proprietary
and/or third-party gaming devices, at facilities owned by our current customer
base while simultaneously expanding the number of markets in which we conduct
business. In doing so, we expect to increase our revenues, diversify our revenue
sources and expand the number of customers we serve and the number of
jurisdictions in which we conduct business. In addition, we plan to use our
expertise and technology to develop new products and to expand into other new
markets for interactive gaming. Our strategies include the
following:




Continue
marketing products to and developing new products for the existing and emerging
interactive and conventional gaming markets for commercial and Native American
Class III casinos. In addition to our proprietary Class III
products and third-party Class III products that we are currently
providing, we plan to market new proprietary content and stand-alone player
terminals as well as certain third-party gaming content and platforms that we
have agreements for, to both the Native American Class III casino and the
commercial casino markets.




Protect and grow
our existing priority revenue streams.Through prior agreements, we have
established significant relationships with customers in the Oklahoma, Alabama,
Washington State and Mexico markets. Through these relationships, we have
secured significant floor space for the placement of electronic gaming devices
and have developed meaningful installed bases of electronic gaming devices with
key customers. We are prioritizing our efforts to work more closely with these
customers to optimize the performance of our installed base of units at each
location by focusing increased attention on game mix and performance, developing
marketing and promotional programs that leverage our management teams’
significant experience in casino management, and providing appropriate levels of
networking and systems support. In addition, where appropriate, we will provide
assistance to our key customers in the form of project management, with a focus
on facility layout and planning, gaming floor configuration and customized
marketing and promotional initiatives. Such activities are largely new
undertakings made possible by the significant casino operation experience of our
senior management team.




-5-




Tailor Class II
development and placement efforts to meet current market dynamics. The
landscape for Class II gaming continues to change and we will limit future
efforts in this space to select markets that meet the current and future
potential profitability criteria that we have established. In addition to our
expertise in Class II gaming-product development, we also plan to leverage
third-party offerings where appropriate, to support expanding or retaining
customer relationships, and to enhance the overall level of gaming solutions we
provide to our Class II gaming customers, with the overriding goal of
enhancing our net gaming revenue.




Continue to
pursue revenue share opportunities. We have been successful in
establishing long-term development agreements with key customers, which have
expanded both our customer base and our installed base of player terminals at
customer’s facilities. We will continue to seek additional agreements, whereby
we would advance funds to our customers for the construction of new gaming
facilities or for the expansion of existing facilities, in return for which we
would receive certain contractual commitments regarding the placement of player
terminals under revenue-sharing arrangements at the gaming
facility.




Accelerate our
product development efforts: We plan to offer more proprietary
Class III products in more tribal and commercial casino Class III
markets. Our efforts will be focused on several fronts including aggressively
pursuing licensing in Class III markets beyond Oklahoma and Rhode Island,
the two markets where we are currently licensed. By increasing the number of
markets where we are licensed, we will increase the number of customers to whom
we can market our proprietary Class III player terminals. As we pursue new
Class III market opportunities, we will focus our marketing efforts on
offering the “best in class” of our Class III proprietary products based on
the performance of these products in markets where they are presently deployed.
Such practice will allow us to bring market-performance data for specific games
and titles to potential customers. In addition, we are achieving initial
success with content deployed on our (wide-body) proprietary gaming cabinet and
we plan to make this a feature offering as we enter new Class III gaming
markets. Our Class III market strategy also includes a focus on offering
gaming devices that address the emerging niche-market product category of
Community Gaming. We are well suited to offer products for this category, as we
possess the substantial intellectual property based on our strength in
gaming systems and networked gaming technologies established through our
long-term Class II gaming activities. We will also pursue systems and
server-based gaming opportunities, as we are well positioned to address specific
needs of tribal gaming and are positioning ourselves to address the needs
of commercial casino gaming customers, such as tournament play, through the
further development and marketing of existing technologies, including our Casino
Commander functionality.




Pursue
professional service contracts:Our senior management team collectively
possesses decades of experience successfully managing commercial casinos. We
believe there is meaningful customer demand for access to such expertise in both
our existing markets and in markets that we expect to enter. It is
anticipated that under our professional service contracts, we may provide
services such as facility operation and optimization, gaming facility layout,
development and planning, gaming-floor configuration, project management and
customized marketing and promotional programs to both existing and prospective
customers. We plan to pursue opportunities to leverage this commercial casino
management experience into the execution of contracts that provide new,
high-margin revenue streams.




Develop
additional system-based and stand-alone products for domestic and international
video lottery operators and regulators. We currently provide video
lottery technologies to Native American tribes in the state of Washington and
also provide the central determinant system for the New York State Lottery’s
video lottery terminal offerings at eight racetracks in the state. We expect a
ninth racetrack with more than 4,000 additional video lottery devices to
become operational in New York within the next two years. In addition, voters in
Maryland have recently approved the placement of video lottery terminals at
racetracks, and we plan to leverage our expertise and history of stability in
the operation of video lottery systems to pursue a contract for this and other
markets. There are also ongoing legislative initiatives in other states that, if
successful, would permit the play of video lottery games in new jurisdictions.
We plan to leverage our core systems, accounting, database, encrypted
communication, interoperability, data center, network operation center and
gaming system operations capabilities to develop proprietary products to
facilitate the regulators’ performing their oversight
responsibilities.




Pursue expansion
in the existing and emerging domestic charity gaming market. There are
ongoing legislative initiatives in a number of jurisdictions that, if
successful, we believe would allow the use of our technology in charity gaming
facilities in those jurisdictions. We currently supply systems and/or player
terminals to charity operators in Alabama and Louisiana that are authorized to
conduct bingo games on behalf of certain nonprofit organizations. As of
September 30, 2008, we had installed a total of 2,311 player
terminals in the charity gaming market. If similar legislative initiatives are
successful in other markets, we believe we will be able to expand into new and
evolving markets by building upon our existing gaming system and bingo gaming
technology, infrastructure, product base and regulatory expertise.




-6-




Our
Competitive Strengths




We intend
to execute our strategy by leveraging our competitive strengths, which
include:




Senior management
team with extensive gaming operations experience.Since mid 2008, we
have appointed experienced gaming industry managers to lead our efforts
including a new Chief Executive Officer, Chief Operating Officer, Chief
Marketing Officer and General Counsel, each of which brings extensive experience
and a track record of success in the management of commercial casinos to the
Company. These managers have a total of more than 60 years of gaming
operations experience which will be an advantage in our ability to leverage the
benefits of our revenue participation model. We have also added other gaming
operations talent to the organization as we increase our ability to deploy
industry proven analytical tools that will benefit our operations.




Large committed
floor space with key customers. We have agreements with key customers in
the Oklahoma, Alabama and Mexico markets that provide for significant allocation
of floor space at several facilities. These customers are acknowledged leaders
in their respective markets, and the commitment of large percentages of their
gaming floors to our offerings provides us with stability in our installed base
of operating units, as well as opportunities to leverage our collective
knowledge and experience in the gaming industry to work with these customers on
the deployment of tailored services that can generate immediate and long-term
benefits for all parties.




Recurring revenue
from existing installed base.We derive most of our revenues from
participation arrangements with our customers through which we receive a
percentage of the hold per day generated by each of our player terminals. At
September 30, 2008, our installed base of units on participation
totaled nearly 16,000 games. Therefore, our interests are closely aligned
with those of our customers, since a substantial portion of our revenues is
dependent on the revenues they generate.




State-of-the-art
networked systems.Since
our inception, Multimedia Games has focused on a type of gaming that has come to
be known within the gaming industry as server-based central-determinant gaming
and we are a leader in networked-enabled gaming solutions such as our Casino
Commander system which has attractive revenue-enhancing features that have been
benefiting our customers since its deployment several years ago. Increasingly,
many industry peers and operators are recognizing the power of this type of
gaming system architecture, and we believe our leadership in this arena will
allow us to develop new products that enhance the gaming experience. In
addition, we believe that our experience in operating networked gaming will help
us enter new markets in the future.




Full service
gaming solutions.Our
technology-driven approach to our business has yielded what we believe are the
most flexible and innovative gaming systems in the North American gaming
industry. In addition to our networked systems capability, we currently offer
Class II and Class III gaming content and platforms, charity bingo
products, operate Lottery systems in several markets and provide casino
management solutions including cashless payment, player tracking and accounting
systems to our customers. We believe that our investment in and focus on the use
of emerging technologies will help us procure additional non-commodity-priced
business in the future. Our technology embraces the development of new tools to
enable gaming operators to collect and mine data that empowers them to optimize
their gaming facility earnings.




Class II and
Class III game focus. We currently offer proprietary game themes for
Class II and Class III customers, and are in the process of expanding
our Class III game library as well as the number of markets for which we
will offer such products. We plan to port our most successful proprietary
Class II titles to our Class III platform as we consider this the best
strategic and economic approach to expanding our Class III market presence.
Our ability to offer both Class II and Class III products provides us
with advantages in working with certain tribal customers that seek to have
diverse game offerings at their facilities, while providing Multimedia Games
with opportunities to address new international markets and seek out agreements
with new customers in new commercial casino markets.




In
addition, we have license agreements in certain markets whereby we have access
to proven leading third-party game themes which we may use in our Class II,
Class III, charity bingo and certain other markets. These license
agreements with other suppliers allow us to use some of their most popular game
themes, which have player-tested acceptance in worldwide gaming markets. These
games are offered with a variety of pay tables, prize distributions and currency
denominations. By offering both proprietary and third-party products we have an
extensive library of gaming content to offer our customers.




-7-




International
footprint. We have continued to grow our footprint of products in markets
outside of the United States. At the end of fiscal 2008, we had an
installed base of more than 5,000 units in Mexico and approximately
250 installed units in another international market. In addition, we are
developing an electronic bingo system for the Ontario charity market. We expect
additional international markets will pursue various forms of gaming that we are
well suited to address.




Years of
experience and success as a proven operator of high-availability, large-scale
transactional processing gaming systems. Through our subsidiaries, we
have been operating central-determinant-driven systems, cashless payment
systems, and player-against-player gaming systems since 1989. We believe
that our long-term experience as an operator of various types of gaming systems
is unmatched by any other service provider in the gaming industry, and plan to
leverage this valuable experience to obtain new contracts to operate additional
gaming systems in new jurisdictions.




Continual
upgrades of our existing hardware, communication network infrastructure, systems
and application software to incorporate state-of-the-art architecture. We
systematically upgrade the components contained in the player terminals located
at our customers’ facilities so that the terminals can use our most up-to-date
technology.  This allows for us to enhance the gaming and
entertainment experience of our end users by offering games that play at high
speed, as well as for us to implement new technology to offer advanced graphics
and sounds in all of the gaming markets that we serve.




Our
Products and Services




Class II
Games and Systems. We provide the Class II Native American gaming
market with linked, interactive electronic games and related online systems and
player terminals. These games, systems and player terminals
include:




§
            Flexible
      gaming systems that enable us to operate games efficiently and to
      regularly launch new game engines;




§
            Flexible
      game engines that enable us to display the same underlying bingo game
      utilizing various game themes;




§
            High-speed,
      interactive Class II bingo games and game themes we designed and
      developed that provide our end users with an entertaining gaming
      experience;




§
            Player
      terminals linked via nationwide, broadband telecommunications network,
      thereby enabling us to rapidly build quorums and broaden participation in
      games run throughout the country, and monitor the performance of our
      network in real time;




§
            Information
      services that allow our customers to monitor their gaming activities and
      to improve service to end users;
and




§
            Back-office,
      accounting and player tracking systems that help our customers optimize
      their earnings.




To take
advantage of technological advances that increase the capability of our systems,
improve the end-user experience, broaden participation in the games and thereby
increase revenues, we regularly introduce new high-speed, interactive
Class II bingo games.




In
May 1996, we introduced our Legacy gaming system and its related family of
game engines with the launch of MegaMania®, the
first online, interactive bingo game played on player terminals linked within a
single facility; shortly thereafter, we began linking multiple facilities with
one another via nationwide, broadband telecommunications network. When first
introduced, a game of MegaMania took approximately two minutes to play. We used
rotating shifts of teams of employees, working twenty-four hours per day, seven
days a week, to manually draw bingo ball numbers from a bingo ball blower. The
drawn numbers were then keyed into the network to appear simultaneously on
multiple player terminals linked to the network and logged onto that game.
Today, a game of MegaMania takes about one minute to play. In place of a bingo
ball blower, we now use an electronic ball draw that randomly determines bingo
numbers, which are instantly communicated over the network to player terminals.
This new method has significantly increased the speed and reliability of the
game, improved security, and significantly reduced overhead.




-8-




In
January 2001, we introduced our New Generation gaming system and its
related family of game engines with the launch of MegaNanza®, a
bonanza-style bingo game, where the bingo numbers are drawn before the bingo
cards are purchased. The faster-paced New Generation gaming system enhances the
entertainment and gaming experience of our end users, resulting in an overall
increase in the number of end users playing our games.




In
June 2002, we introduced Reel Time Bingo®, a
high-speed, “standard-sequence” bingo game (meaning that the cards are purchased
before the balls are drawn), which is played on our New Generation system. As of
October 27, 2003, we had converted all of our MegaNanza® games to
some version of Reel Time Bingo, both in response to the settlement agreement
reached between us and the NIGC, and to take advantage of improved
technologies.




We
continually strive to improve the capabilities of our core gaming system. In
November 2003, we introduced and began deploying our Gen IV gaming
system. This deployment has enabled us to operate games with complex bonus
rounds, to operate real-time, interfacility progressives and to provide better
interoperability between gaming systems. Furthermore, our Gen IV gaming
system has allowed us to operate multiple gaming engines within a single
facility. This has been especially beneficial in certain Oklahoma facilities
where the operators have decided to continue offering Class II games after
they begin offering the new Class III games that are permitted under the
tribal-state compact. In July 2005, we introduced and began deploying our
Gen5 gaming system. The Gen5 product features a more robust database for
accounting; player tracking and database marketing; enhanced hardware and
software redundancy; the ability to provide customers with currency accounting
and player tracking support for third-party vendor games; and the ability to
offer Class II and Class III games on a single integrated
system.




We
currently offer a variety of Class II player terminal models. Each
Class II player terminal has a screen that always displays the bingo cards
being played as well as a “flashboard” that displays bingo numbers that have
been drawn. Depending upon the end user’s entertainment preference, an
additional display can be selected that minimizes the size of the bingo card
display and shows other graphics that can take many forms, including graphics
that simulate spinning reels similar to slot machines or video lottery games. In
addition to our proprietary titles, some of our player terminals also use
displays adapted from game themes we license from others. The screen also serves
as a touch pad that allows end users to interactively communicate decisions that
influence the play of the game. Such actions may include initiating play,
dropping bingo cards from play, “daubing” or covering numbers drawn, claiming a
prize or ending play. Player terminals vary according to height, width and depth
(to accommodate, in part, the differing space needs of our customers’
facilities), screen size and other features affecting appearance and the visual
appeal to end users.




Our
Class II games are linked via nationwide, broadband telecommunications
network, which provides several important benefits to us, our customers and our
end users:




§
            A
      large number of potential players are available to rapidly build quorums
      for individual games.




§
            For
      certain game designs, larger numbers of end users can compete in a single
      game, which increases the size of the prize
  pool.




§
            Class II
      gaming requires that there be more than one end user participating in a
      game. Our network enables end users to link with each other more quickly,
      thereby increasing the number of games played during a given
      period.




§
            We
      are able to introduce technological enhancements via our network without
      the need for location-by-location down time, thereby avoiding lost
      revenues for our customers.




§
            We
      are able to monitor network performance in real time, which allows us to
      quickly identify and respond to network problems and avoid significant
      down time.




§
            With
      our ability to launch new games broadly over a large number of player
      terminals, the chance that any new game will become popular with end users
      is increased, since the frequency of prizes and its related effect upon
      the popularity of a game depends in part on the total number of end users
      participating in the same game.




In
addition, our back-office system provides accounting, management and information
services to our customers, who are able to monitor all aspects of their gaming
activities by player terminal, by game and by gaming facility. Our back-office
system normally includes a database server that archives details of distribution
and sales, as well as end-user information used by the gaming facilities for
marketing and player tracking, and a management terminal that can monitor
game-system operation and generate system reports. As part of the MGAMe system, we also offer a
player-tracking system that allows facilities to track the playing preferences
of those individual end users who have elected to participate in that facility’s
player-tracking program, and whereby, we gain potentially valuable design
insight into game features that appeal to end users. It also serves as a
marketing tool for our customers, who are made aware, in real time, of end users
playing in their facility.




-9-




We
continuously monitor our network from our network operations center,
headquartered in Austin, Texas, which enables us to identify disruptions or
less-than-optimum network performance, as well as to gather valuable data
regarding the playing habits and preferences of end users; this data is then
utilized in our game design efforts.




Class III
Games and Systems for Washington.We sell, rent or lease Class III
gaming equipment to Native American customers in the state of Washington and
receive a small back-office fee. Back-office fees cover the service and
maintenance costs for back-office servers installed in each facility to run our
Class III games, as well as the cost of related software updates.
Class III video lottery gaming in the state of Washington is allowed
pursuant to a compact between the state and certain Native American tribes in
that state. The compacts contain the specifications for permissible video
lottery systems in the state, including:




§
            Only
      those player terminals within the same gaming facility may be linked with
      one another;




§
            The
      system must be cashless; and




§
            The
      implementation of each game and all system components and software must be
      approved by an independent gaming laboratory as well as by the gaming
      laboratory operated by Washington
State.




An end
user who wishes to play our Class III games in the state of Washington must
open an account with the cashier in the facility and receive a card encoded with
an account number and a personal identification number. The end user can then
use the card to buy an electronic ticket at a player terminal, add money to the
account at a point-of-sale terminal, or cash out the account.




Electronic
replicas of scratch tickets are shown on the player terminals, with the results
of the wager displayed in a variety of graphical game formats that entertain the
end user with motion and sound before revealing the value of the scratch ticket.
We have license agreements with third parties that allow us to use several of
their popular game themes in the state of Washington. Our Class III player
terminals are available in a variety of freestanding and bar-top styles, having
a look and feel that is consistent with traditional video slot
machines.




Our
Class III systems in Washington State comprise all the software and
hardware necessary for operation, and are designed to be readily adaptable to
the video lottery requirements of jurisdictions outside that state. Our hardware
includes multiple servers that generate sets of electronic lottery tickets, and
distribute them on demand to end users sitting at terminals networked throughout
a casino. As with our Class II gaming systems, our Class III
back-office system allows us to maintain end-user information, details of ticket
manufacture, distribution and sales, and to monitor game system operation and
generate system reports.




Class III Games
and Systems for Oklahoma.During 2004, the Oklahoma Legislature
passed legislation authorizing certain forms of gaming at racetracks, and
additional types of games at tribal gaming facilities, pursuant to a
tribal-state compact. The Oklahoma gaming legislation allows the tribes to sign
a compact with the state of Oklahoma to operate an unlimited number of
electronic instant bingo games, electronic bonanza-style bingo games, electronic
amusement games, and non-house-banked tournament card games. In addition,
certain horse tracks in Oklahoma are allowed to operate a limited number of
instant and bonanza-style bingo games and electronic amusement games. All
vendors placing games at any of the racetracks under the compact will ultimately
be required to be licensed by the state of Oklahoma. Pursuant to the compacts,
vendors placing games at tribal facilities will have to be licensed by each
tribe. All electronic games placed under the compact will have to be certified
by independent testing laboratories to meet technical specifications. These
technical specifications were published by the Oklahoma Horse Racing Commission
and the individual tribal gaming authorities in the first calendar quarter
of 2005.




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




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




-10-




Charity
Market. Charity bingo and other forms of charity gaming are operated by
or for the benefit of nonprofit organizations for charitable, educational and
other lawful purposes. These games are typically only interconnected within the
gaming facility where the terminals are located. Regulation of charity gaming is
vested with each individual state, and in some states, regulatory authority is
delegated to county or municipal governmental units. In Alabama, our largest
charity market, constitutional amendments have been passed authorizing charity
bingo in certain locations. The regulation of charity bingo in Alabama is
typically vested with a local governmental authority. We typically place player
terminals under participation arrangements in the charity market and receive a
percentage of the hold per day generated by each of the player terminals. As of
September 30, 2008, we had 2,279 high-speed, standard bingo games
installed for the charity market in three Alabama facilities. In addition, we
had 32 charity gaming units in the state of Louisiana at
September 30, 2008.




State Video
Lottery Market.In January 2004, we began the first operation of our
central determinant system for the video lottery terminal network that the New
York Lottery operates at licensed New York State racetracks. Our central system
is able to interface with and manage player terminals that are provided by
others. As payment for providing and maintaining the central determinant system,
we receive a small portion of the network-wide hold per day. Our contract with
the New York Lottery provides for a three-year term with an additional three
one-year automatic renewal under certain conditions. We are seeking to take
advantage of the recently passed legislation in New York State that allows the
New York Lottery to extend its vendor contracts at its sole discretion,
notwithstanding the automatic renewal provision. We are working to significantly
extend the current contract which is set to expire in 2010.




International
Commercial Bingo Market. In March 2006, we entered into a contract
with Apuestas Internacionales, S.A. de C.V., or Apuestas, a subsidiary
of Grupo Televisa, S.A., to provide traditional and electronic bingo gaming,
technical assistance, and related services for Apuestas’ locations in Mexico.
Apuestas currently has a permit issued by the Mexican Ministry of the Interior
(Secretaria de Gobernación) to open and operate 65 bingo parlors. Apuestas
is projecting that all 65 bingo parlors will be open by May 2011. As
of September 30, 2008, we had installed 4,583 player terminals at
19 parlors in Mexico under this contract with Apuestas. At
September 30, 2008, all installed player terminals placed are pursuant
to a revenue share arrangement that is comparable with our Oklahoma market
arrangements.




As of
September 30, 2008, we had entered into separate contracts with three
other companies incorporated in Mexico to provide traditional and electronic
bingo gaming, technical assistance, and related services for bingo parlors in
Mexico. As of September 30, 2008, we had
installed 550 player terminals at three parlors in Mexico under these
contracts.




Research
and Development




Our
research and development activities primarily focus on the development of new
gaming systems, gaming engines, player tracking systems, casino data management
systems, central video lottery systems, gaming platforms and content, and
enhancements to our existing product lines. We believe our investments in
product development are necessary to deliver differentiated products and
solutions to the marketplace. Research and development costs consist primarily
of salaries and benefits, consulting fees, and an allocation of corporate
facilities costs related to these activities. Once the technological feasibility
of a project has been established, the software project is transferred from
research to development, and capitalization of the software development costs
begins until the product is available for general release.




For the
year ended September 30, 2008, research and development expenses
decreased by 10%, to $16.2 million, from $18.1 million for the
same period of 2007. This decrease primarily resulted from a decreased headcount
in our development group, as we have realigned our development teams in response
to our near-term move toward stand-alone gaming. We expect our research and
development expenses to decrease as we plan to narrow our product portfolio and
systems.




Gaming
Contracts
  All of
our Class II and Class III gaming revenues are derived through
contracts with our Native American customers. Our contracts typically run over
multiple years, and can be terminated earlier under certain specified
conditions. The contracts specify the quantity and type of player terminals to
be installed, and the terms of the rental or participation arrangement. In some
instances, there is also a limited waiver of sovereign immunity by certain
tribes that typically provides for the arbitration of any dispute under the
contract, and the right to enforce any decision of the arbitrator by application
to a federal or state court having jurisdiction, while in other instances there
is no limited waiver of sovereign immunity. Our largest customer, who accounts
for over 39% of our revenue, has not given us a limited waiver of sovereign
immunity. Under these contracts, we are also granted the right, under certain
circumstances, to enter the land of the Native American tribe for the purpose of
removing our property. See “Risk Factors – We do not rely upon the term of our
customer contracts to retain the business of our customers,” and “– Our ability
to enforce Contractual Rights on Native American Land.” Furthermore, the NIGC
has recently expressed concern that some of our “forms of contract” may violate
the spirit of the “sole proprietary interest” concept that is required to be
written into all tribal gaming regulations.
  -11-
  Intellectual
Property
  We rely
to a limited extent upon patent, copyright, trademark and trade secret laws,
license agreements, and employee nondisclosure agreements to protect our
proprietary rights and technology. Since these laws and contractual provisions
provide only limited protection, we rely more upon proprietary know-how and
continuing technological innovation to develop and maintain our competitive
position. Insofar as we rely on trade secrets, unpatented know-how, and
innovation, there is no assurance that others will not independently develop
similar technology or that secrecy will not be breached.
  Patents,
Trademarks and Trade Names.We have patents issued and patents pending in
the United States. We also have patents pending overseas corresponding to some
of our U.S. patents and pending U.S. patent applications. Our trademarks and
trade names include but are not limited to the following: Players Passport®,
MGAMe® System,
Reel Time Bingo®,
MegaNanza®,
MegaBingo®, and
MegaMania®. All
references herein to those trademarks and trade names are deemed to include the
applicable trade name or trademark designation. See “Risk Factors – We may not
be successful in protecting our intellectual property rights, or avoiding claims
that we are infringing upon the intellectual property rights of
others.”
  Licenses
and Registrations
  We are
licensed by the State of Washington to sell Class III video lottery systems
and to conduct Class III gaming in that state, and we are licensed by the
state of Louisiana as a manufacturer of charitable gaming equipment. In
Minnesota, we are licensed by the state as a linked bingo prize provider. For
Class II or Class III gaming, we are licensed by all Native American
jurisdictions in which we do business. We have sought and obtained
determinations that our New Generation games are Class II gaming from each
tribe’s gaming commission prior to the installation of the games in their
facilities. We are also licensed by the State of New York for the purpose of
providing the central-determinant-driven video lottery system operated at
certain racetracks.
  In
accordance with the Federal Gambling Devices Act of 1962, we are required
to register annually with the Criminal Division of the United States Department
of Justice. This registration is required in order for us to sell, distribute,
manufacture, transport and/or receive gaming equipment, machines or components
across interstate lines.
  Competition
  We
currently compete in a variety of gaming markets with companies that are both
larger and smaller than we are. We compete with other vendors for customers,
primarily on the basis of the amount of profit our gaming products generate for
our customers in relation to other vendors’ gaming products and the prices and /
or fees that we choose for our products and services. We believe that the most
important factor influencing our customers’ product selection is the appeal of
those products to end users. This appeal has a direct effect on the volume of
play by end users, and drives the amount of revenue generated for and by our
customers. Our ability to remain competitive depends primarily on our ability to
continuously develop new game themes, gaming engines, hardware platforms and
systems that appeal to end users, and to introduce those game themes and systems
in a timely manner. See “Risk Factors – Our future performance will depend on
our ability to develop and introduce new gaming systems and to enhance existing
games that are widely accepted and played.” We may not be able to continue to
develop and introduce appealing new game themes and systems that meet the
demands of current or prospective customers.
  In our
core Oklahoma market, we believe the increased competition has and may continue
to intensify pressure on our pricing model. In the future, gaming providers will
compete on the basis of price as well as the entertainment value and
technological superiority of their products. While we will continue to compete
by regularly introducing new and faster games with technological enhancements
that we believe will appeal to end users, we believe that the net revenue
retained by our customers from their installed base of player terminals will
become a more significant factor, one that may require us to change the terms of
our participation arrangements with customers to remain
competitive.
  We plan
to market a variety of new gaming platforms, new proprietary content, new
innovative gaming systems, and new proprietary stand-alone player terminals to
both the Native American Class III casino and conventional commercial casino
markets. These traditional gaming markets are very competitive with companies
with significant gaming experience and financial resources.
  -12-
  Employees
  At
September 30, 2008, we had 484 full-time and part-time
employees, including 210 engaged in field operations and business
development, 206 in system and game development, 22 in sales
and marketing activities, 17 in accounting functions,
and 29 in other general administrative and executive functions. We do
not have a collective bargaining agreement with any of our employees. We believe
our relationship with our current employees is good.
  We have
announced a plan targeting a $5 million reduction in operating expenses
that will be effective no later than March 31, 2009.
  Governmental
Regulation
  General.We are subject to federal, state and Native American laws and regulations
that affect both our general commercial relationships with our Native American
tribal customers as well as the products and services provided to them. We also
offer products for charity bingo markets that are subject to state and local
regulation. Our ability to enter into traditional commercial gaming
jurisdictions is subject to established state regulatory requirements. The
following is only a summary of the more material aspects of these laws and
regulations, and is not a complete recitation of all applicable
law.
  Federal
Regulation.The most important pieces of federal legislation affecting
our business are:
  §
                the
      IGRA which is administered by the NIGC and the Secretary of the United
      States Department of the Interior;
and
  §
                the
      Federal Gambling Devices Act of 1962, or the Johnson Act, which requires
      annual registration, and various record-keeping and equipment
      –identification requirements. If we fail to comply with the Johnson Act
      requirements, we could be subject to various penalties including, but not
      limited to, the seizure and forfeiture of
  equipment.
  Tribal-State
Compacts. Native American tribes cannot offer Class III gaming
unless, among other things, they are parties to compacts with the states in
which they operate. The tribal-state compacts typically include provisions
entitling the state to receive revenues from the income a tribe derives from
Class III gaming activities. Although compacts are intended to document the
agreement between the state and a tribe relative to permitted Class III
gaming operations, they are agreements, and can be subject to interpretive and
other ambiguity and disputes. Currently, we operate in three states where
compacts significantly affect our business: California, Oklahoma, and
Washington.
  §
                Oklahoma.During 2004, the Oklahoma Legislature passed legislation
      authorizing certain forms of gaming at racetracks, and additional types of
      games at tribal gaming facilities, pursuant to a tribal-state compact. The
      Oklahoma gaming legislation allows the tribes to sign a compact with the
      state of Oklahoma to operate an unlimited number of electronic instant
      bingo games, electronic bonanza-style bingo games, electronic amusement
      games, and non-house-banked tournament card games. In addition, certain
      horse tracks in Oklahoma are allowed to operate a limited number of
      instant and bonanza-style bingo games and electronic amusement games. All
      vendors placing games at any of the racetracks under the compact will
      ultimately be required to be licensed by the state of Oklahoma. Pursuant
      to the compacts, vendors placing games at tribal facilities will have to
      be licensed by each tribe. All electronic games placed under the compact
      will have to be certified by independent testing laboratories to meet
      technical specifications. These technical specifications were published by
      the Oklahoma Horse Racing Commission and the individual tribal gaming
      authorities in the first calendar quarter of 2005. To date,
      independent testing labs have given wide latitude as to what constitutes a
      compliant game.
  We
believe the 2004 Oklahoma legislation significantly clarifies and expands the
types of gaming permitted by Native America tribes in that state. We expect
continued intensified competition from vendors currently operating in Oklahoma,
as well as new competitors with significant gaming experience and financial
resources. As the rules and regulations governing Class II gaming are
clarified by court decisions and by new rule-making procedures, we anticipate
more competition and further pressure on our market and revenue share
percentages in Oklahoma. New tribal-state compacts, such as the Oklahoma gaming
legislation passed by referendum in 2004, have also led to increased
competition. In addition, we continue to experience an extended period of
uncertainty relative to enforcement of existing restrictions on
non-Class II devices, which is forcing us to continue competing against
games that do not appear to comply with the published regulatory restrictions on
Class II games. As a result of this increased competition in Oklahoma, we
have and may continue to experience pressure on our pricing model, with the
result that gaming providers are competing on the basis of price as well as the
entertainment value and technological superiority of their products. While we
will continue to compete by regularly introducing new and more entertaining
games with technological enhancements that we believe will appeal to end users,
we believe that the level of revenue retained by our customers from their
installed base of player terminals will become a more significant competitive
factor, one that may require us to change the terms of our participation
arrangements with customers.
  -13-
  The
legislation requires Oklahoma tribes to develop their own licensing procedures.
Some of our Oklahoma tribal customers have developed these procedures, and
others are in the process of defining the procedures. For that reason,
deployment of games to be operated under the compact in Oklahoma is proceeding
at an erratic pace and will continue to do so for many months. Moreover, tribal
policies and procedures, as well as tribal selection of gaming vendors, are
subject to the political and governance environment within the tribe. Changes in
tribal leadership or tribal political pressure can affect our relationships with
our customers. As a result of these and other considerations, it remains
difficult to forecast the short-term impact on our business from the recent
Oklahoma gaming legislation.
  §
                Washington.In Washington State, we offer player terminals operated in
      conjunction with local central determinant systems, pursuant to compacts
      between the state and certain Native American tribes in that state. These
      compacts are recognized by IGRA to permit Class III gaming, which
      would otherwise be illegal.
  Native American
Regulation of Gaming.IGRA requires that Native American tribes adopt and
submit for NIGC approval the ordinances that regulate tribes’ conduct of gaming.
While these ordinances vary from tribe to tribe, they commonly provide for the
following:
  §
                Native
      American ownership of the gaming
operation;
  §
                Establishment
      of an independent tribal gaming
commission;
  §
                Use
      of gaming net revenues for Native American government, economic
      development, health, education, housing or related
    purposes;
  §
                Independent
      audits, including specific audits of all contracts for amounts greater
      than $25,000;
  §
                Native
      American background investigations and
licenses;
  §
                Adequate
      safeguards for the environment, public health and safety;
    and
  §
                Dispute
      resolution procedures.
  Pursuant
to IGRA, our tribal customers have adopted regulations requiring the tribe to
have the “sole proprietary interest” in their gaming activities.
  Charity Gaming.Charity bingo facilities are generally operated by nonprofit
organizations for charitable, educational and other lawful purposes. Charity
bingo is not currently subject to a nationwide regulatory system such as the one
created by IGRA to regulate Native American gaming, so regulation is on a
state-by-state, and sometimes a county-by-county basis. We currently offer
charity bingo gaming systems in the state of Alabama pursuant to state and
county regulations. We also offer games to certain operators in the state of
Louisiana.
  -14-
  International
Commercial Bingo Market.We started business in Mexico in 2006. The
Mexican bingo (lottery of numbers) market is regulated by Mexico’s Ministry of
the Interior (Secretaría de Gobernación), a branch of the federal government.
The entities and individuals who have obtained bingo (lottery of number) permits
may only operate player terminals that comply with Mexican law and regulations,
from time to time in effect. Accordingly, our contracts require us to provide
player terminals that comply with said laws and regulations, and therefore, we
submit our games for compliance certification to an independent lab prior to
placing them in a facility of a permit holder.
  Available
Information. Through the Investor Relations link on our website, www.multimediagames.com,
we make available free of charge to the public, as soon as reasonably
practicable after such information has been filed with the Securities and
Exchange Commission, or SEC, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports furnished pursuant to Section 13 or 15(d) of the Securities Exchange
Act. The public may read and copy any materials we file with or furnish to the
SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. The public
may also obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a website,
www.sec.gov, which includes reports, proxy and information statements, and other
information regarding us and other issuers that file electronically with the
SEC. Our website and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on Form 10-K.
Additionally, we make available free of charge on our internet website:
i) our Code of Business Conduct and Ethics; ii) the charter of our
Nominating and Governance Committee; iii) the charter of our Compensation
Committee; and iv) the charter of our Audit Committee.
  Multimedia
Games, Inc. was incorporated in Texas on August 30, 1991. Unless the
context otherwise requires, the terms “Company,” “MGAM,” “we,” “us,” and “our”
include Multimedia Games, Inc., and our wholly-owned subsidiaries: Megabingo,
Inc.; MGAM Systems, Inc.; Innovative Sweepstakes Systems, Inc.; MGAM Services,
LLC; MGAM Systems International, Inc.; Megabingo International, LLC; Multimedia
Games de Mexico 1, S. de R.L. de C.V.; and Servicios de Wild
Basin S. de R.L. de C.V. Our executive offices are located at
206 Wild Basin Rd., Bldg. B, Fourth Floor, Austin, Texas, 78746, and
our telephone number is (512) 334-7500.
  -15-
  ITEM 1A.Risk Factors
  The
following risk factors should be carefully considered in connection with the
other information and financial statements contained in this Annual Report,
including “PART II – Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” If any of these risks actually
occur, our business, financial condition and results of operations could be
seriously and materially harmed, and the trading price of our common stock could
decline.
  Our
business operations and product offerings are subject to strict regulatory
licenses, findings of suitability, registrations, permits and/or
approvals.
  Our
ability to conduct our existing traditional business, expand operations, develop
and distribute new products, games and systems, and expand into new gaming
markets is subject to significant federal, state, local, Native American, and
foreign regulations. Specifically, our company, officers, directors, key
employees, major shareholders, and products, games and systems are subject to
licenses, findings of suitability, registrations, permits and/or approvals
necessary for the operation of our gaming activities.
  We have
received licenses, findings of suitability, registrations, permits and/or
approvals from a number of state, local, Native American, and foreign gaming
regulatory authorities. Our tribal customers are empowered to develop their own
licensing procedures and requirements, and we currently have limited, if any,
information regarding the ultimate process or expenses involved with securing
and or maintaining licensure by the tribes. Moreover, tribal policies and
procedures, as well as tribal selection of gaming vendors, are subject to the
political and governance environment within the tribe.
  We may
require new licenses, permits and approvals in the future, and such licenses,
permits or approvals may not be granted to us. Obtaining and maintaining all
required licenses, findings of suitability, registrations, permits and/or
approvals is time consuming and expensive. The suspension, revocation,
nonrenewal or limitation of any of our licenses would have a material adverse
effect on our business operations, financial condition and results of
operations.
  Our
ability to effectively compete in Native American gaming markets is vulnerable
to legal and regulatory uncertainties.
  Historically,
we have derived most of our revenue from the placement of Class II player
terminals and systems for gaming activities conducted on Native American lands.
These activities are subject to federal regulation under the Gambling Devices
Act, 15 U.S.C. § 1171, et seq
(“Johnson Act”), the Indian Gaming Regulatory Act of 1988 (“IGRA”), the
National Indian Gaming Commission (“NIGC”), and the regulatory requirements of
various tribal gaming commissions. The Johnson Act broadly defines “gambling
devices” to include any “machine or mechanical device” designed and manufactured
“primarily” for use in connection with gambling, and that, when operated,
delivers money or other property to a player “as the result of the application
of an element of chance.” A government agency or court that literally applied
this definition, and did not give effect to subsequent congressional legislation
or to certain regulatory interpretations or judicial decisions, could determine
that the manufacture and use of our electronic player terminals, and perhaps
other key components of our Class II gaming systems that rely to some
extent upon electronic equipment to run a game, constitute Class III gaming
and, in the absence of a tribal-state compact, are illegal. Our tribal customers
could be subject to significant fines and penalties if it is ultimately
determined they are offering an illegal game, and an adverse regulatory or
judicial determination regarding the legal status of our products could have
material adverse consequences for our business, operating results and prospects.
Other government enforcement, regulatory action, judicial decisions, proposed
legislative action, rumors that have in the past and will continue to affect our
business, operating results and prospects, include but are not limited
to:
  §
                proposed
      legislation that would classify electronic technologic aids used by Native
      American tribes in Class II games, such as bingo, as gambling
      devices, and/or require certification by the NIGC of the Class II
      technologic aids;
  §
                proposed
      legislation that would authorize the NIGC to promulgate regulations
      regarding the use of technologic
aids;
  §
                proposed
      rules by the NIGC concerning classification standards to distinguish
      between Class II games played with technologic aids and
      Class III facsimiles of games of chance, a revision of the definition
      of “electronic or electromechanical
facsimile;
  §
                proposed
      legislation and/or rules that would allow the NIGC authority to review
      contracts between Native American tribes and their
    suppliers;
  -16-
  §
                government
      enforcement, regulatory action, judicial decisions, or the prospects or
      rumors involving any of our games which have not been reviewed and / or
      approved as legal Class II games by the
NIGC;
  §
                contractual
      and regulatory interpretations and enforcement actions by state regulators
      and/or courts with regard to compacts between the state various tribes,
      including but not limited to tribes with compacts in the states of
      Washington and Oklahoma;
  §
                adverse
      rulings regarding game classification by state and/or federal
      courts;
  §
                adverse
      regulatory decisions by tribal gaming
  commissions;
  §
                lack
      of regulatory or judicial enforcement action. In particular, we believe we
      have lost, and could continue to lose, market share to competitors who
      offer games that do not appear to comply with published regulatory
      restrictions on Class II games, and thereby offer features not
      available in our products;
  §
                the
      use of sovereign immunity by the tribes to interfere with our ability to
      enforce our contractual rights on Native American
  land;
  §
                new
      laws and regulations relating to Native American gaming may be enacted,
      and that existing laws and regulations could be amended or reinterpreted
      in a manner adverse to our
business;
  §
                investigations
      by the Inspector General for the Department of the Interior and the Acting
      General Counsel for the NIGC into the practice of certain tribes
      conducting gaming on land originally acquired in trust for non-gaming
      purposes; and
  §
                a
      determination by the NIGC that our development agreements, either by
      themselves or when taken together with other agreements demonstrate a
      proprietary interest by us in the tribes gaming activity. Management
      contracts are subject to additional regulatory requirements and oversight,
      including preapproval by the NIGC that could delay our providing products
      and services to customers, as well as divert customers to our
      competitors.
  All of
the above risk factors could result in significant and immediate adverse impacts
on our business and operating results. Additionally, each of the above described
risk factors increase the cost of doing business and could take our
executives’
attention away from operations. The trading price of our common stock has in the
past and may in the future be subject to significant fluctuations based upon
market perceptions of the legal status of our products and our ability to
compete in the Native American markets. Regulatory action against our customers
or equipment in these or in other markets could result in machine seizures and
significant revenue disruptions, among other adverse consequences. Moreover,
tribal policies and procedures, as well as tribal selection of gaming vendors,
are subject to the political and governance environment within the tribe.
Changes in tribal leadership or tribal political pressure can affect our
business relationships within Native American markets.
  The
ultimate outcome of pending litigation is uncertain.
  We are
involved in a number of commercial and intellectual property litigation matters.
Current estimates of loss regarding pending litigation may not be reflective of
final outcome. The results of rulings, judgments and/or settlements of pending
litigation may result in financial liability that is materially higher than what
management has estimated at this time. We make no assurances that we will not be
subject to liability with respect to current or future litigation. We maintain
various forms of insurance coverage. However, substantial rulings, judgments
and/or settlements could exceed the amount of insurance coverage (or any cost
allocation agreement with an insurance carrier), or could be excluded under the
terms of an existing insurance policy. Additionally, failure to secure favorable
outcomes in pending litigation could result in adverse consequences to our
business, operating results and/or overall financial condition (including
without limitation, possible adverse effects on compliance with the terms of our
credit facility).
  Our
ability to enforce contractual rights on Native American land.
  Federally
recognized Native American tribes are independent governments, subordinate to
the United States, with sovereign powers, except as those powers may have been
limited by treaty or by the United States Congress. The power of Native
Americans tribes to enact their own laws, regulate gaming operations and
contracts, is an exercise of Native American sovereignty, as recognized by IGRA.
Native American tribes maintain their own governmental systems and often their
own judicial systems. Native American tribes have the right to tax persons and
enterprises conducting business on Native American lands, and also have the
right to require licenses and to impose other forms of regulation and regulatory
fees on persons and businesses operating on their lands.
  In the
absence of a specific grant of authority by Congress, states may regulate
activities taking place on Native American lands only if the tribe has a
specific agreement or compact with the state. Our contracts with Native American
customers normally provide that only certain provisions will be subject to the
governing law of the state in which a tribe is located. However, these
choice-of-law clauses may not be enforceable.
  -17-
  Native
American tribes generally enjoy sovereign immunity from suits similar to that of
the individual states and the United States. In order to sue a Native American
tribe (or an agency or instrumentality of a Native American tribe), the tribe
must have effectively waived its sovereign immunity with respect to the matter
in dispute.
  Our
contracts with some Native American customers include a limited waiver of each
tribe’s sovereign immunity, and generally provide that any dispute regarding
interpretation, performance or enforcement shall be submitted to, and resolved
by, arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and that any award, determination, order or
relief resulting from such arbitration is binding and may be entered in any
court having jurisdiction. However, in some instance, there is no limited waiver
of sovereign immunity. Our largest customer, who accounts for over 39% of
our revenue, has not given us a limited waiver of sovereign immunity. In the
instances where tribes have not waived sovereign immunity, or in the event that
a limited waiver of sovereign immunity is held to be ineffective, we could be
precluded from judicially enforcing any rights or remedies against a tribe.
These rights and remedies include, but are not limited to, our right to enter
Native American lands to retrieve our property in the event of a breach of
contract by the tribe party to that contract.
  If a
Native American tribe has effectively waived its sovereign immunity, there
exists an issue as to the forum in which a lawsuit can be brought against the
tribe. Federal courts are courts of limited jurisdiction and generally do not
have jurisdiction to hear civil cases relating to Native Americans. In addition,
contractual provisions that purport to grant jurisdiction to a federal court are
not effective. Federal courts may have jurisdiction if a federal question is
raised by the suit, which is unlikely in a typical contract dispute. Diversity
of citizenship, another common basis for federal court jurisdiction, is not
generally present in a suit against a tribe, because a Native American tribe is
not considered a citizen of any state. Accordingly, in most commercial disputes
with tribes, the jurisdiction of the federal courts may be difficult or
impossible to obtain. We may be unable to enforce any arbitration decision
effectively.
  Our
expansion into non-Native American gaming activities will present new challenges
and risks that could adversely affect our business or results of
operations.
  As we
expand into new markets, we expect to encounter business, legal, operational and
regulatory uncertainties similar to those we face in our Native American gaming
business. As a result, we may encounter legal and regulatory challenges that are
difficult or impossible to foresee and which could result in an unforeseen
adverse impact on planned revenues or costs associated with the new market
opportunity. If we are unable to effectively develop and operate within these
new markets, then our business, operating results and financial condition would
be impaired.
  Successful
growth in accordance with our strategy may require us to make changes to our
gaming systems to ensure that they comply with applicable regulatory
requirements, and may require us to obtain additional licenses. In certain
jurisdictions and for certain venues, our ability to enter these markets will
depend on effecting changes to existing laws and regulatory regimes. The ability
to effect these changes is subject to a great degree of uncertainty and may
never be achieved. We may not be successful in entering into other segments of
the gaming industry.
  Generally,
our placement of systems, games and technology into new market segments involves
a number of business uncertainties, including:
  §
                Whether
      our resources and expertise will enable us to effectively operate and grow
      in such new markets;
  §
                Whether
      our internal processes and controls will continue to function effectively
      within these new segments;
  §
                Whether
      we have enough experience to accurately predict revenues and expenses in
      these new markets;
  §
                Whether
      the diversion of management attention and resources from our traditional
      business, caused by entering into new market segments, will have harmful
      effects on our traditional
business;
  §
                Whether
      we will be able to successfully compete against larger companies who
      dominate the markets that we are trying to enter;
  and
  §
                Whether
      we can timely perform under our agreements in these new
      markets.
  -18-
  Our
ability to expand into international gaming markets will present new challenges
and risks that could adversely affect our business or results of
operations.
  We have
only recently begun to develop international business, and we realized revenue
from the sale of an Electronic Instant Lottery System to the Israel National
Lottery during fiscal 2006 and from contracts to supply Electronic Bingo
Terminals to casinos in Mexico during fiscal years 2006, 2007, and 2008.
Neither our transactions in Israel nor in Mexico have been profitable to date or
are currently profitable, and may not lead to future profitable business. To
date, there are not as many permanent facilities opened in Mexico as we
originally projected, and the hold per day in certain of the open facilities in
Mexico has not met our original expectations. There can be no assurances that
our games will gain market acceptance in Mexico, additional facilities will open
in Mexico, or that the hold per day will increase in those facilities in Mexico
currently not meeting our expectations. International transactions are subject
to various risks, including but not limited to:
  §
                Currency
      fluctuations;
  §
                Higher
      operating costs due to local laws or
  regulations;
  §
                Unexpected
      changes in regulatory requirements;
  §
                Tariffs
      and other trade barriers
  §
                Costs
      and risks of localizing products for foreign
  countries;
  §
                Difficulties
      in staffing and managing geographically disparate
    operations;
  §
                Greater
      difficulty in safeguarding intellectual property, licensing and other
      trade restrictions;
  §
                Challenges
      negotiating and enforcing contractual
  provisions;
  §
                Repatriation
      of earnings; and
  §
                Anti-American
      sentiment due to the war in Iraq and other American policies that may be
      unpopular in certain regions, particularly in the Middle
    East.
  Our
ability to comply with interpretation of federal regulations.
  We may
face regulatory risks as a result of interpretations of other federal
regulations, such as banking regulations, as applied to our gaming systems. We
may be required to make changes to our games to comply with such regulations,
with attendant costs and delays that could adversely affect our business.
Specifically, the IRS is conducting a Bank Secrecy Act audit at one of the
tribal casinos, the NIGC has deferred a determination of whether the tribal
gaming operations are in compliance with (25 C.F.R. § 542.3(c)(2)
until the IRS audit is completed.
  Our
ability to develop, enhance and/or introduce successful gaming systems and
games.
  We may be
unable to successfully and cost effectively develop and introduce new and
enhanced gaming systems, games and content that will be widely accepted both by
our customers and their end users. Additionally, we may be unable to enhance
existing products in a timely manner in response to changing regulatory, legal
or market conditions or customer requirements, or new products and/or new
versions of our existing products may not achieve market acceptance. A decrease
in demand for our games could also result in an increase in our inventory
obsolescence charges.
  Our
limited control over our customer’s casino operations.
  Collectively
our senior management has decades of successful experience in gaming operations.
Where appropriate, we seek to provide assistance to our key customers in the
form of project management, with a focus on facility layout and planning, gaming
floor configuration and customized marketing and promotional initiatives.
However, our key customers are solely responsible for the operations of their
facilities. Our key customers may not take our advice on their operations,
marketing, facility layout, gaming floor configuration, and / or promotional
initiatives. To the
extent that our machines are not a part of an optimized facility layout or
gaming floor configuration and / or to the extent that our machines are not
supported by effective marketing / promotional initiatives, our operating
results could suffer.
  -19-
  Our
dependence upon a few customers who are based in Oklahoma.
  For the
years ended September 30, 2008,2007 and 2006,
approximately 58%, 59% and 52%, respectively, of our gaming revenues
were from Native American tribes located in Oklahoma, and
approximately 39%, 42% and 36%, respectively, of our gaming
revenues were from one tribe in that state. The significant concentration of our
customers in Oklahoma means that local economic changes may adversely affect our
customers, and therefore our business, disproportionately to changes in national
economic conditions, including more sudden adverse economic declines or slower
economic recovery from prior declines. The loss of any of our Oklahoma tribes as
customers would have a material and adverse effect upon our financial condition
and results of operations. In addition, the legislation allowing tribal-state
compacts in Oklahoma has resulted in increased competition from other vendors,
who we believe have avoided entry into the Oklahoma market due to its uncertain
and ambiguous legal environment. The legislation allows for other types of
gaming, both at tribal gaming facilities and at Oklahoma racetracks. The loss of
significant market share to these new gaming opportunities or our competitors’
products in Oklahoma could also have a material adverse effect upon our
financial condition and results of operations.
  We
believe the introduction of more aggressive instant bingo machines, with
characteristics of traditional slot machines, into the Oklahoma market, has
adversely affected our operating results and market position in that state and
may continue to do so in the future.
  State
compacts with our existing Native American customers to allow Class III
gaming.
  As our
Class II tribal customers enter into such compacts with the states in which
they operate, allowing the tribes to offer Class III games, we believe the
number of our game machine placements in those customers’ facilities could
decline significantly, and our operating results could be materially adversely
affected. As our tribal customers make the transition to gaming under compacts
with the state, we believe there will be significant uncertainty in the market
for our games that will make our business more difficult to manage or
predict.
  As a
result, we anticipate further pressure on our market and revenue share
percentages in Oklahoma or the market could shift from revenue share
arrangements to a “for sale” model. We believe the establishment of state
compacts depends on a number of political, social, and economic factors which
are inherently difficult to ascertain. Accordingly, although we attempt to
closely monitor state legislative developments that could affect our business,
we may not be able to timely predict when or if a compact could be entered into
by one or more of our tribal customers.
  Our
ability to realize satisfactory returns on money lent to new and existing
customers to develop or expand gaming facilities.
  We enter
into development agreements to provide financing for construction and/or
remodeling of gaming facilities, primarily in the state of Oklahoma. Under our
development agreements, we secure a long-term revenue share percentage and a
fixed number of player terminal placements in the facility, in exchange for
development and construction funding. However, we may not realize the
anticipated benefits of any of these strategic relationships or financing. In
connection with one or more of these transactions, and to obtain the necessary
development funds, we may: issue additional equity securities which would dilute
existing stockholders; extend secured and unsecured credit to potential or
existing tribal customers which may not be repaid; incur debt on terms
unfavorable to us or that we are unable to repay; and incur contingent
liabilities.
  Our
development efforts or financing activities may result in unforeseen operating
difficulties, financial risks, or required expenditures that could adversely
affect our liquidity. It may also divert the time and attention of our
management that would otherwise be available for ongoing development of our
business. In addition, certain of the agreements contain performance standards
for our player terminals that could allow the facility to reduce a portion of
our player terminals.
  The NIGC
has expressed its view that our development agreements violate the requirements
of IGRA and tribal gaming regulations, which state that the Native American
tribes must hold “sole proprietary interest” in the tribes’ gaming operations,
which presents additional risks for our business. See “Certain Risk
Factors – Our ability to effectively compete in Native American gaming
markets is vulnerable to legal and regulatory uncertainties.”
  In the
past we have, and in the future we expect to, reduce our floor space in certain
of our Class II facilities as a result of ongoing competitive pressures
faced by our customers from alternative gaming facilities and faced by our
machines from competitors’ products. In addition, future NIGC decisions could
affect our ability to place our games with these tribes.
  Our
industry is intensely competitive.
  We
compete in an intensely competitive industry against larger companies with
significant financial, research design and development, and marketing resources.
These larger companies are aggressively competing against us in our core
business operations, including but not limited to, charity bingo, lottery, Class
II, Class III, and international bingo markets. Additionally, new smaller
competitors may enter our traditional markets. The increased competition will
intensify pressure on our pricing model. We expect to face increased competition
as we attempt to enter new markets and new geographical locations. In the
future, gaming providers will compete on the basis of price as well as the
entertainment value and technological superiority of their
products.
  -20-
  Other
members of our industry may independently develop games similar to our games,
and competitors may introduce noncompliant games that unfairly compete in
certain markets due to uneven regulatory enforcement policies.
  Additionally,
or customers compete with other providers of entertainment for their end user’s
entertainment budget. Consequently, our customers might not be able to spend new
capital on acquiring gaming equipment. Moreover, our customers might reduce
their utilization of revenue share agreements.
  We
may not be successful in protecting our intellectual property rights, or
avoiding claims that we are infringing upon the intellectual property rights of
others.
  We rely
upon patent, copyright, trademark and trade secret laws, license agreements and
employee nondisclosure agreements to protect our proprietary rights and
technology, but these laws and contractual provisions provide only limited
protection. We rely to a greater extent upon proprietary know-how and continuing
technological innovation to maintain our competitive position. Insofar as we
rely on trade secrets, unpatented know-how and innovation, others may be able to
independently develop similar technology, or our secrecy could be breached. The
issuance of a patent to us does not necessarily mean that our technology does
not infringe upon the intellectual property rights of others. As we enter into
new markets by leveraging our existing technology, and by developing new
technology and new products, it becomes more and more likely that we will become
subject to infringement claims from other parties. We are currently involved in
several patent disputes. See Item 3. Legal Proceedings. Problems with
patents or other rights could increase the cost of our products, or delay or
preclude new product development and commercialization. If infringement claims
against us are valid, we may seek licenses that might not be available to us on
acceptable terms or at all. Litigation would be costly and time consuming, but
may become necessary to protect our proprietary rights or to defend against
infringement claims. We could incur substantial costs and diversion of
management resources in the defense of any claims relating to the proprietary
rights of others or in asserting claims against others. We cannot guarantee that
our intellectual property will provide us with a competitive advantage or that
it will not be circumvented by competitors.
  We
rely on software licensed from third parties, and technology provided by
third-party vendors, the loss of which could increase our costs and delay
deployment and/or suspend of our gaming systems and player
terminals.
  We
integrate various third-party software products as components of our software.
Our business would be disrupted if this software, or functional equivalents of
this software, were either no longer available to us or no longer offered to us
on commercially reasonable terms. In either case, we would be required to either
redesign our software to function with alternate third-party software, or
develop these components ourselves, which would result in increased costs and
could result in delays in our deployment of our gaming systems and player
terminals. Furthermore, we might be forced to limit the features available in
our current or future software offerings.
  We rely
on the content of certain software that we license from third-party vendors. The
software could contain bugs that could have an impact on our
business.
  We also
rely on the technology of third-party vendors, such as telecommunication
providers, to operate our nationwide broadband telecommunications network. A
serious or sustained disruption of the provision of these services could result
in some of our player terminals being non-operational for the duration of the
disruption, which would adversely affect our ability to generate revenue from
those player terminals.
  Our
Credit Facility contains covenants that limit our ability to finance future
operations or capital needs, or to engage in other business
activities.
  The
operating and financial restrictions and covenants in our debt agreements,
including the Credit Facility may adversely affect our ability to finance future
operations or capital needs or to engage in other business activities. Our
Credit Facility requires us to maintain a minimum EBITDA of $60 million on
a trailing twelve month basis, a total debt to EBITDA leverage ratio of no more
than 1.75:1.00 and a minimum fixed charge coverage ratio of at
least 1.5:1.0. The Credit Facility contains certain covenants that, among
other things, restrict our ability as well as our restricted subsidiaries’
ability to:
  -21-
  §
                incur
      additional indebtedness, assume a guarantee or issue preferred
      stock;
  §
                pay
      dividends or make other equity distributions or payments to or affecting
      our subsidiaries;
  §
                purchase
      treasury stock;
  §
                make
      certain investments;
  §
                create
      liens;
  §
                sell
      or dispose of assets or engage in mergers or
    consolidations;
  §
                engage
      in certain transactions with subsidiaries and
  affiliates;
  §
                enter
      into sale leaseback transactions;
and;
  §
                certain
      business activities.
  These
restrictions could limit our ability to obtain future financing, make strategic
acquisitions or needed capital expenditures, withstand economic downturns in our
business or the economy in general, conduct operations or otherwise take
advantage of business opportunities that may arise. A failure to comply with the
restrictions contained in the Credit Facility could lead to an event of default,
which could result in an acceleration of our indebtedness. Such acceleration
would constitute an event of default under the indentures governing the senior
unsecured notes. Our future operating results may not be sufficient to enable
compliance with the covenants in the Credit Facility or to remedy any such
default. In addition, in the event of acceleration, we may not have or be able
to obtain sufficient funds to refinance our indebtedness or make any accelerated
payments. Also, we may not be able to obtain new financing. Even if we were able
to obtain new financing, we cannot guarantee that the new financing will be on
commercially reasonable terms or terms that are acceptable to us. If we default
on our indebtedness, our business financial condition and results of operation
could be materially and adversely affected.
  We
do not rely upon the term of our customer contracts to retain the business of
our customers.
  Our
contracts with our customers are on a year-to-year or multi-year basis. Except
for customers with whom we have entered into development agreements, we do not
rely upon the stated term of our customer contracts to retain the business of
our customers, as often noncontractual considerations unique to doing business
in the Native American market override strict adherence to contractual
provisions. We rely instead upon providing competitively superior player
terminals, games and systems to give our customers the incentive to continue
doing business with us. At any point in time, a significant portion of our
business is subject to nonrenewal, and, if not renewed, would materially and
adversely affect our earnings, financial condition and cash flows.
  If
our key personnel leave us, our business could be materially adversely
affected.
  We depend
on the continued performance of the members of our senior management team and
our technology team. If we were to lose the services of any of our senior
officers, directors, or any key member of our technology team, and could not
find suitable replacements for such persons in a timely manner, it could have a
material adverse effect on our business.
  We
may incur prize payouts in excess of game revenues.
  Certain
of our contracts with our Native American customers relating to our Legacy and
Reel Time Bingo system games provide that our customers receive, on a daily
basis, an agreed percentage of gross gaming revenues based upon an assumed level
of prize payouts, rather than the actual level of prize payouts. This can result
in our paying our customers amounts greater than our customers’ percentage share
of the actual hold per day. In addition, because the prizes awarded in our games
are based upon assumptions as to the number of players in each game and
statistical assumptions as to the frequency of winners, we may experience on any
day, or over short periods of time, a “game deficit,” where the aggregate amount
of prizes paid exceeds aggregate game revenues. If we have to make any excess
payments to customers, or experience a game deficit over any statistically
relevant period of time, we are contractually entitled to adjust the rates of
prize payout to end users in order to recover any deficit. In the future, we may
miscalculate our statistical assumptions, or for other reasons, we may
experience abnormally high rates of jackpot prize wins, which could materially
and adversely affect our cash flow on a temporary or long-term basis, and which
could materially and adversely affect our earnings and financial
condition.
  -22-
  If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report financial results or prevent fraud.
  Effective
internal controls are necessary to provide reliable financial reports and to
assist in the effective prevention of fraud. Any inability to provide reliable
financial reports or prevent fraud could harm our business. We must annually
evaluate our internal procedures to satisfy the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which requires management and auditors
to assess the effectiveness of internal controls. If we fail to remedy or
maintain the adequacy of its internal controls, as such standards are modified,
supplemented or amended from time to time, the Company could be subject to
regulatory scrutiny, civil or criminal penalties or shareholder
litigation.
  In
addition, failure to maintain adequate internal controls could result in
financial statements that do not accurately reflect our financial condition.
There can be no assurance that we will be able to complete the work necessary to
fully comply with the requirements of the Sarbanes-Oxley Act or that our
management and our independent registered public accounting firm will continue
to conclude that our internal controls are effective.
  Our
business prospects and future success rely heavily upon the integrity of our
employees and executives and the security of our gaming systems.
  The
integrity and security of our gaming systems is critical to its ability to
attract customers and players. We strive to set exacting standards of personal
integrity for our employees and for system security involving the gaming systems
that we provide to our customers. Our reputation in this regard is an important
factor in our business dealings with our current and potential customers. For
this reason, an allegation or a finding of improper conduct on our part or on
the part of one or more of our employees that is attributable to us, or of an
actual or alleged system security defect or failure attributable to us could
have a material adverse effect upon our business, financial condition, results,
and prospects, including our ability to retain existing contracts or obtain new
or renewed contracts.
  Our
games and systems may experience loss based on malfunctions, anomalies and/or
fraudulent activities.
  Our games
and systems could produce false payouts as the result of malfunctions, anomalies
and/or fraudulent activities. We depend on our security precautions to prevent
fraud. We depend on regulatory safeguards, which may not be available in all
jurisdictions and/or markets, to protect us against jackpots awarded as a result
of malfunctions, anomalies and/or fraudulent activities. There can be no
guarantee that regulatory safeguards, in jurisdictions and/or markets were they
do exist, will be sufficient to protect us from liabilities associated with
malfunctions, anomalies and/or fraudulent activities.
  The
occurrence of malfunctions, anomalies and/or fraudulent activities could result
in litigation against us by our customers based on lost revenue and or other
claims based in tort or breach of contract. Moreover, these occurrences could
result in investigations and/or disciplinary actions by applicable gaming
regulators.
  Any
disruption in our network or telecommunications services, or adverse weather
conditions in the areas in which we operate could affect our ability to operate
our games, which would result in reduced revenues and customer down
time.
  Our
network is susceptible to outages due to fire, floods, power loss, break-ins,
cyberattacks and similar events. We have multiple site back-up for our services
in the event of any such occurrence. Despite our implementation of network
security measures, our servers are vulnerable to computer viruses and break-ins;
similar disruptions from unauthorized tampering with our computer systems in any
such event could have a material adverse effect on our business, operating
results and financial condition.
  Adverse
weather conditions, particularly flooding, tornadoes, heavy snowfall and other
extreme weather conditions often deter our end users from traveling, or make it
difficult for them to frequent the sites where our games are installed. If any
of those sites experienced prolonged adverse weather conditions, or if the sites
in Oklahoma, where a significant number of our games are installed,
simultaneously experienced adverse weather conditions, our results of operations
and financial condition would be materially adversely affected.
  In
addition, our agreement with the New York State Division of the Lottery permits
termination of the contract at any time for failure by us or our system to
perform properly. Failure to perform under this or similar contracts could
result in substantial monetary damages, as well as contract
termination.
  -23-
  In
addition, we enter into certain agreements that could require us to pay damages
resulting from loss of revenues if our systems are not properly functioning, or
as a result of a system malfunction or an inaccurate pay table.
  Worsening
economic conditions may adversely affect our business.
  The
demand for entertainment and leisure activities tends to be highly sensitive to
consumers’ disposable incomes, and thus a decline in general economic conditions
or an increase in gasoline prices may lead to our end users having less
discretionary income with which to wager. This could cause a reduction in our
revenues and have a material adverse effect on our operating results. The
gaming industry is currently experiencing a period of reduced demand. If as a
result of deteriorating economic conditions, fewer people gamble in our
customers' facilities, or if amounts spent per person in our customers'
facilities are reduced from historical levels, our business could be materially
and adversely affected.
  Additionally,
a decline in general economic conditions might negatively impact our customers’
ability to pay us in a timely fashion. Our customers’ failure to make timely
payments could result in an increase in our bad debt provision.
  Our
ability to recognize revenue at the time of sale and delivery is dependent upon
obtaining Vendor-Specific Objective Evidence, or VSOE, for products yet to be
delivered or services yet to be performed.
  We
believe future transactions with existing and future customers may be more
complex than transactions entered into currently. As a result, we may enter into
more complicated business and contractual relationships with customers which, in
turn, can engender increased complexity in the related financial accounting.
Legal and regulatory uncertainty may also affect our ability to recognize
revenue associated with a particular project, and therefore the timing and
possibility of actual revenue recognition may differ from our
forecast.
  The
carrying value of our assets in Mexico is dependent upon our ability to
successfully deploy games into Mexico.
  We have
excess player stations not deployed at September 30, 2008, which were
intended to be deployed at facilities in Mexico. If the opening of facilities is
altered negatively, either by significant delay, or by cancellation, the
realizable value of these assets could be reduced. In such instances we may be
required to recognize increased expense on our income statement related to the
impairment of these assets.
  ITEM 1B.  Unresolved Staff
Comments
  None
  ITEM 2.  Properties
  We do not
own any real property. As of September 30, 2008, we are under contract
for the following leases, and we believe the facilities are suitable to our
business and adequate for our current and near-term needs:
 Square Feet
                                              
                                              
                                              Monthly Rent
                                              
                                              Expiration DateAustin,
      TexasCorporate
      Offices
                                              
                                              
                                              67,761
                                              
                                              
                                              $
                                              124,627
                                              
                                              July 2010Assembly
      and Warehouse Facilities
                                              
                                              
                                              44,940
                                              
                                              
                                              
                                              45,504
                                              
                                              December 2011Tulsa,
      OklahomaOperations
      and Sales Offices
                                              
                                              
                                              3,736
                                              
                                              
                                              
                                              3,105
                                              
                                              February 2010Warehouse
                                              
                                              
                                              77,000
                                              
                                              
                                              
                                              13,220
                                              
                                              May 2009Plano,
      TexasTechnology
      Offices
                                              
                                              
                                              5,010
                                              
                                              
                                              
                                              8,350
                                              
                                              April 2010Kent,
      WashingtonWarehouse
                                              
                                              
                                              14,400
                                              
                                              
                                              
                                              8,069
                                              
                                              August 2011Albany,
      New YorkOffice
      Space
                                              
                                              
                                              2,708
                                              
                                              
                                              
                                              3,660
                                              
                                              December 2009Schenectady,
      New YorkSystem
      Operations
                                              
                                              
                                              1,690
                                              
                                              
                                              
                                              3,012
                                              
                                              September 2009St.
      Paul, MinnesotaOffice/Warehouse
                                              
                                              
                                              3,000
                                              
                                              
                                              
                                              1,875
                                              
                                              March 2009Mexico
      City, MexicoOffice/Warehouse/Training
      Center
                                              
                                              
                                              26,039
                                              
                                              
                                              
                                              16,802
                                              
                                              May 2009
  -24-
  ITEM 3.  Legal
Proceedings
  Diamond Game
Enterprises, Inc. On November 16, 2004, Diamond Game
Enterprises, Inc., or Diamond Game, filed suit in the State Court in Oklahoma
City, Oklahoma, against us, along with others, including Clifton Lind, Robert
Lannert, Gordon Graves, Video Gaming Technologies, Inc., or VGT, and its
president, John Yarbrough, alleging five causes of action: (i) deceptive
trade practices; (ii) unfair competition; (iii) wrongful interference
with business; (iv) malicious wrong / prima facie tort; and
(v) restraint of trade. The case asserts that we offered allegedly illegal
Class III games on the MegaNanza® and Reel
Time Bingo® gaming
systems to Native American tribes in Oklahoma. Diamond Game claims that the
offer of these games negatively affected the market for its pull-tab game, Lucky
Tab II. Diamond Game also alleges that our development agreements with
Native American tribes unfairly interfere with the ability of Diamond Game to
successfully conduct its business. Diamond Game is seeking injunctive relief and
unspecified damages in excess of $65 million. Diamond Game’s theories of
recovery include claims for actual, treble and punitive damages, as well as
revenue disgorgement.
  Diamond
Game and VGT (and its principals) entered into a confidential settlement
agreement in September 2007. We will be given credit for the actual amount
of that settlement should any verdict be entered against us in connection with
this case. Two motions had been pending before the court in connection with the
matter: (i) Diamond Game filed a motion for partial summary judgment
seeking a court ruling on game classification for MegaNanza and Reel Time Bingo;
and (ii) we filed a motion seeking summary judgment based on jurisdictional
issues. On November 29, 2007, the trial court denied our motion for
summary judgment on the jurisdictional issues, and ruled on Diamond Game’s
motion for partial summary judgment, finding that our MegaNanza and Reel Time
Bingo versions 1.0, 1.1 and 1.2 games are not Class II
games under the Indian Gaming Regulatory Act of 1988, or IGRA, but instead
are Class III games.
  The
court’s ruling stated that it was not binding on our tribal customers and we do
not expect any of the Reel Time Bingo games currently in play in Oklahoma to be
removed as a result of the court’s ruling. Other game versions included in the
ruling are not in play in Oklahoma. The court’s rulings are not dispositive of
the case and the opinion has no affect on the right of Native American tribes to
play games offered by us. The trial court granted our motion for immediate
certification of its ruling to the Oklahoma Supreme Court. We sought immediate
review of the trial court’s decision. On February 19, 2008, the
Oklahoma Supreme Court denied our request for immediate review of the trial
court’s decision. The action of the Oklahoma Supreme Court does not preclude a
subsequent appeal of the trial court’s decision and we will continue to assert
that the games in question are legal Class II games, and that game
classification cannot be decided by an Oklahoma State Court. Presently, the
parties remain engaged in pre-trial discovery. The trial court has assigned a
jury trial date of March 23, 2009.
  While we
continue to vigorously defend ourselves and believe that our MegaNanza and Reel
Time Bingo versions 1.0, 1.1 and 1.2 games were in fact
Class II games, given the inherent uncertainties in this litigation, we are
unable to make any prediction as to the ultimate outcome.
  Kaw Nation of
Oklahoma. In a related case, the Kaw Nation of Oklahoma, a Native
American Tribe in Oklahoma, filed suit against Diamond Game Enterprises, Inc.
and Oklahoma State Court District Judge Noma Gurich on
October 14, 2008. We, along with Clifton Lind, Robert Lannert and
Gordon Graves joined the Kaw Nation as Plaintiffs in that lawsuit. The Kaw
Nation claims that the assumption of jurisdiction and determination by Judge
Gurich over the determination of the classification under IGRA of MegaNanza and
Reel Time Bingo, which the Kaw Nation had previously classified as
Class II, violated the Kaw Nation’s sovereign rights, as well as its rights
under IGRA as the primary regulator of gaming on Native American lands and the
Indian Commerce Clause of the Constitution of the United States of America.
Additionally, we, Clifton Lind, Robert Lannert and Gordon Graves claim jointly
with the Kaw Nation that in the state court lawsuit, Judge Gurich and Diamond
Game have engaged in joint activity under color of state law, which violates the
Plaintiffs’ Constitutional and federal statutory rights, including their rights
to free commercial speech and due process of law. We, Clifton Lind, Robert
Lannert, Gordon Graves and the Kaw Nation also jointly contend that Judge Gurich
and Diamond Game have engaged in activity that is prohibited by the Oklahoma
State Constitution, which expressly disclaims jurisdiction over activity
occurring on Native American lands. The Kaw Nation, we and the other Plaintiffs
seek a declaratory judgment against Judge Gurich, holding that, as a state court
judge, Judge Gurich does not have jurisdiction to determine the classification
under IGRA of games being played on Native American lands. The Plaintiffs also
seek an injunction against Diamond Game, enjoining Diamond Game from proceeding
in its state court lawsuit. On November 4, 2008, Diamond Game filed a
Motion to Dismiss the Kaw Nation lawsuit, alleging that the Plaintiffs had
failed to state a claim upon which relief could be granted. On
November 13, 2008, Plaintiffs filed an Amended Complaint, seeking
additional relief in the alternative that the federal court determine the
classification of MegaNanza and Reel Time Bingo. Plaintiffs filed their response
in opposition to the Motion to Dismiss on November 25, 2008. On
December 1, 2008, Diamond Game filed its Motion to Dismiss Amended
Complaint, again contending that the Plaintiffs had failed to state a claim upon
which relief could be granted, relying in part upon the federal court’s Order of
Remand in the Cory Investments, Ltd. case (see below). At this time, Plaintiffs
intend to file a motion for preliminary injunction in the immediate near future.
Given the inherent uncertainties in this litigation, we are unable to make any
prediction as to the ultimate outcome.
  -25-
  Cory Investments
Ltd.On May 7, 2008, Cory Investments, LTD., or Cory Investments, filed
suit in the State Court in Oklahoma City, Oklahoma against us, along with
others, including Clifton Lind; Robert Lannert; Gordon Graves; Video Gaming
Technologies, Inc. or VGT and its president, Jon Yarbrough, and a former VGT
representative, John Marley; Worldwide Gaming Technologies, or WGT; AGS, LLC,
d/b/a American Gaming Systems; AGS Partners, LLC; Ronald Clapper, the owner of
WGT, AGS, LLC and AGS Partners; Sierra Design Group; and Bally Technologies. The
case asserts that we offered allegedly illegal Class III games on the
MegaNanza and Reel Time Bingo gaming systems to Native American tribes in
Oklahoma which had a severe negative impact on Cory Investments’ market for its
legal Class II games. Cory Investments also alleges that the Defendants
conspired to drive it and other Class II competitors out of the
Class II market in Oklahoma and other states. In addition to the conspiracy
allegations, Cory Investments alleges six causes of action: (i) deceptive
trade practices; (ii) common law unfair competition; (iii) wrongful
interference with business; (iv) malicious wrong / prima facie tort;
(v) intentional interference with contract; and
(vi) unreasonable restraint of trade. Cory Investments is seeking
unspecified actual and punitive damages and equitable relief.
  We and
the other defendants were served with summons and a copy of the lawsuit during
the week of July 21, 2008. The defendants removed the action to the
United States District Court for the Western District of Oklahoma. Cory
Investments filed a motion with the federal court to remand the case back to the
state court. That motion was granted by the federal court on
November 13, 2008, resulting in a transfer of the case back to the
state court. Currently all of the defendants have filed motions to dismiss which
are currently pending before the State Court District Judge. We believe that the
claims of Cory Investments are without merit and intend to defend the case
vigorously. Given the inherent uncertainties in this litigation, we are unable
to make any prediction as to the ultimate outcome.
  International
Gamco, Inc. International Gamco, Inc., or Gamco, claiming certain rights
in U.S. Patent No. 5,324,035, or the ‘035 Patent, brought suit against
us on May 25, 2004, in the U.S. District Court for the Southern
District of California alleging that our central determinant system, as operated
by the New York State Lottery, infringes the ‘035 Patent. Gamco claims
to have acquired ownership of the ‘035 Patent from Oasis Technologies,
Inc., or Oasis, a previous owner of the ‘035 Patent. In February 2003,
Oasis assigned the ‘035 Patent to International Game Technology, or IGT.
Gamco claims to have received a license back from IGT for the New York
State Lottery. The lawsuit claims that we infringed the ‘035 Patent after
the date on which Gamco assigned the ‘035 Patent to IGT.
  Pursuant
to an agreement between us and Bally Technologies, Inc., or Bally, we currently
sublicense the right to practice the technology stated in the ‘035 Patent
in Native American gaming jurisdictions in the United States. Bally obtained
from Oasis the right to sublicense those rights to us, and that sublicense
remains in effect today. Under the sublicense from Bally, in the event that we
desire to expand our own rights beyond Native American gaming jurisdictions, the
agreement provides us the following options: (i) to pursue legal remedies
to establish its rights independent of the ‘035 Patent;
or (ii) to negotiate directly and enter into a separate agreement with
Oasis for such rights, paying either a specified one-time license fee per
jurisdiction or a unit fee per gaming machine.
  We have
made a number of challenges to Gamco’s standing to sue for infringement of the
‘035 Patent. On October 15, 2007, pursuant to an Interlocutory
Appeal, the Federal Circuit reversed the District Court’s Order refusing to
dismiss Gamco’s Supplemental and Second Amended Complaint against us. The
Federal Circuit held that Gamco did not have sufficient rights in the
‘035 Patent to sue us without the involvement of the patent
owner, IGT.
  On
December 4, 2007, Gamco and IGT entered into an Amended and
Restated Exclusive License Agreement whereby IGT granted to Gamco exclusive
rights to the ‘035 Patent in the state of New York and the right to
sue for past infringement of the same. On January 9, 2008, Gamco filed
its Third Amended Complaint for Infringement of the ‘035 Patent against us.
On January 28, 2008, we filed an Answer to the Complaint denying
liability. We also filed a Third Amended Counterclaim against Oasis, Gamco and
certain officers at Gamco, for fraud, promise without intent to perform,
negligent misrepresentation, breach of contract, specific performance and
reformation of contract with regard to our rights under the Sublicense Agreement
for the ‘035 Patent, as well as for non-infringement and invalidity of the
Patent. These parties have filed a motion to dismiss and a motion for summary
judgment as to these claims. We have filed a motion for partial summary judgment
on its breach of contract and specific performance claims seeking to enforce the
terms of the Sublicense Agreement. We have also moved for summary judgment on
Gamco’s complaint on the ground that it is a licensee. All motions to dismiss
and motions for summary judgment will be heard by the court on
February 26, 2009.
  -26-
  The court
has scheduled a Markman hearing to construe the claims of the ‘035 Patent
for January 13, 2009. The court will also consider at that time our
motion for partial summary judgment to invalidate all of the means-plus-function
claims of the ‘035 Patent under 35 U.S.C. § 112, 6. A trial
date has not been set by the court.
  We
continue to vigorously defend this matter. Given the inherent uncertainties in
this litigation, we are unable to make any prediction as to the ultimate
outcome.
  NIGC Class II
Game Classification Regulations. On October 24, 2007, the NIGC
published in the Federal Register, four proposed rules concerning Classification
Standards to distinguish between Class II games played with technologic
aids and Class III facsimiles of games of chance, a revision of the
definition of “electronic or electromechanical facsimile,” technical standards
for Class II gaming and Class II minimum internal control standards.
If the Classification Standards and the revised definition of “electronic or
electromechanical facsimile” become final regulations, they will have a material
and adverse economic impact on the Class II gaming market by limiting the
use of Class II electronic technology and severely restricting the manner
in which bingo may be played thereby making Class II games less attractive
to the customer. On January 15, 2008, the NIGC extended the comment
period for the proposed Class II gaming regulations until
March 9, 2008. However, in May 2008, the Chairman of the NIGC
announced that the NIGC would not move forward with its plans to publish final
regulations revising the definition of “electronic or electromechanical
facsimile” and implementing new Class II gaming classification standards.
The NIGC has published regulations establishing technical standards for
Class II electronic gaming and Class II minimum internal control
standards. The standards allow for a 5-year grandfathering moratorium if
existing games and systems meet minimum requirements. We are currently
submitting games and systems to be evaluated under the new grandfathering
moratorium articulated in 25 CFR 547.4 of the new NIGC technical
standards.
  Development
Agreements.In 2004, we received a letter from the Acting General
Counsel of the NIGC, dated November 30, 2004, advising us that our
agreements with a certain customer may evidence a proprietary interest by us in
a tribe’s gaming activities, in violation of IGRA and the tribe’s gaming
ordinances. The NIGC invited us and the tribe to submit any explanation or
information that would establish that the agreements’ terms do not violate the
requirement that tribes maintain sole proprietary interest in their own gaming
operations.
  In a
letter dated November 8, 2007, the Acting General Counsel of the NIGC
reiterated the statements made in her November 30, 2004 letter, that
the NIGC did not then conclude that the agreements with the tribe that it
reviewed constituted management agreements, but that the NIGC was concerned
that, taken together, the agreements demonstrated a proprietary interest, by us,
in the tribe’s gaming activity that may be contrary to law. Although we believe
that we responded to the NIGC in 2004, explaining why the agreements did
not violate the sole proprietary interest prohibition of IGRA and did not
constitute a management agreement, the November 8, 2007 letter
indicated that the NIGC did not receive the written explanation or further
information and requested explanation. On December 17, 2007, we
responded in writing to the NIGC, correcting the misstatements contained in the
NIGC’s 2004 letter. To date, we have received no further communication from
the NIGC on this issue.
  If
certain of our development agreements are finally determined to be management
contracts or to create a “proprietary” interest of ours in tribal gaming
operations, there could be material adverse consequences to us. In that event,
we may be required, among other things, to modify the terms of such agreements.
Such modification may adversely affect the terms on which we conduct business,
and have a significant impact on our financial condition and results of
operations from such agreements and from other development agreements that may
be similarly interpreted by the NIGC.
  Our
development agreements could be subject to further review at any time. Any
further review of our development agreements by the NIGC, or alternative
interpretations of applicable laws and regulations could require substantial
modifications to those agreements, or result in their designation as “management
contracts,” which could materially and adversely affect the terms on which we
conduct business.
  -27-
  Other Litigation.In addition to the threat of litigation relating to the Class II or
Class III status of our games and equipment, we are the subject of various
pending and threatened claims arising out of the ordinary course of business. We
believe that any liability resulting from these various other claims will not
have a material adverse effect on our results of operations or financial
condition.
  Other.Existing federal and state regulations may also impose civil and criminal
sanctions for various activities prohibited in connection with gaming
operations, including false statements on applications, and failure or refusal
to obtain necessary licenses described in the regulations.
  ITEM 4.  Submission of Matters to a Vote of
Securities Holders
  No matter
was submitted to a vote of security holders during the fourth quarter of
fiscal 2008 covered by this report, through the solicitation of proxies or
otherwise.
  -28-
  PART
II
  ITEM 5.Market for
Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
  Our
common stock is traded on the NASDAQ Global Select Market, or NASDAQ, under the
symbol “MGAM.” Prior to September 27, 2001, we were listed on the
Nasdaq Small Cap Market under the same symbol. The following table sets forth
the quarterly high and low closing sale prices per share of our common stock as
reported by NASDAQ for each quarter during the last two fiscal
years.
  Fiscal Quarter
                          
                          High
                          
                          
                          Low2007First
      Quarter
                          
                          $
                          10.14
                          
                          
                          $
                          8.92Second
      Quarter
                          
                          
                          12.25
                          
                          
                          
                          8.97Third
      Quarter
                          
                          
                          13.24
                          
                          
                          
                          10.66Fourth
      Quarter
                          
                          
                          12.95
                          
                          
                          
                          8.202008First
      Quarter
                          
                          $
                          9.78
                          
                          
                          $
                          6.95Second
      Quarter
                          
                          
                          8.45
                          
                          
                          
                          5.14Third
      Quarter
                          
                          
                          6.05
                          
                          
                          
                          3.75Fourth
      Quarter
                          
                          
                          5.75
                          
                          
                          
                          3.50
  There
were approximately 56 holders of record of our common stock as of
December 8, 2008.
  We have
never declared or paid any cash dividends on our common stock. We intend to
retain our earnings to finance growth and development, and therefore do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. The declaration and payment of any dividends on our common stock would
be at the sole discretion of our Board of Directors, subject to the terms of our
Credit Facility, our financial condition, capital requirements, future
prospects, and other factors deemed relevant.
  There
were no other share repurchases during the year ended
September 30, 2008.
  Equity
Compensation Plan Information
 
 Plan Category(1)
                    
                    Number of securities to
                      be issued upon exercise
                      of outstanding options,
                      warrants, and rights (#)
                    
                    
                    Weighted-average
                      exercise price of
                      outstanding options,
                      warrants, and rights ($)
                    
                    
                    Number of securities
                      remaining available for
                      future issuance under
                      equity compensation
                      plans (excluding
                      securities reflected in
                      the first column)
    (#)Equity
      compensation plansapproved
      by security holders
                    
                    
                    4,290,008
                    
                    
                    $
                    6.84
                    
                    
                    
                    1,640,590Equity
      compensation plansnot
      approved by security holders
                    
                    
                    2,456,500
                    
                    
                    
                    4.93
                    
                    
                    
                    —Total
                    
                    
                    6,746,508
                    
                    
                    $
                    6.14
                    
                    
                    
                    1,640,590
 
 (1)
                Stock
      Plans are discussed in further detailed under “PART IV – Item 15.
      Exhibits and Financial Statement Schedules – Note 10. Stockholders’
      Equity.”
  -29-
  Performance
Comparison Graph.The following graph depicts our total return to
shareholders from September 30, 2003 through
September 30, 2008, relative to the performance of (i) the NASDAQ
Composite Index; and (ii) stock in a selected peer group index, or the
“Peer Group”. The Peer Group consists of Progressive Gaming International Corp.
(formerly Mikohn Gaming Corp.), IGT, WMS, Inc., Bally and Shuffle Master, Inc.
All indices shown in the graph have been reset to a base of 100 as of
September 30, 2003, and assume an investment of $100 on that date
and the reinvestment of dividends paid since that date. Multimedia Games has
never paid a dividend on its common stock. The stock price performance shown in
the graph is not necessarily indicative of future price
performance.
  
 
 -30-
 ITEM 6.Selected
Financial Data
 The
following selected financial data are derived from our Consolidated Financial
Statements. The data below should be read in conjunction with our Consolidated
Financial Statements and Notes thereto, “Risk Factors” contained in Item 1(a) of
this Annual Report and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in Item 7 of this Annual
Report.
  Years
      Ended September 30,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Consolidated
      Income Statement Data
                      
                      (In
      thousands, except per-share amounts)Revenues
                      
                      $
                      131,132
                      
                      
                      $
                      121,917
                      
                      
                      $
                      145,112
                      
                      
                      $
                      153,216
                      
                      
                      $
                      153,675Operating
      income (loss)
                      
                      
                      1,235
                      
                      
                      
                      (4,589
                      )
                      
                      
                      7,502
                      
                      
                      
                      29,822
                      
                      
                      
                      50,431Net
      income (loss)
                      
                      
                      378
                      
                      
                      
                      (744
                      )
                      
                      
                      3,532
                      
                      
                      
                      17,643
                      
                      
                      
                      32,772Earnings
      (loss) per share:Basic
                      
                      
                      0.01
                      
                      
                      
                      (0.03
                      )
                      
                      
                      0.13
                      
                      
                      
                      0.64
                      
                      
                      
                      1.19Diluted
                      
                      
                      0.01
                      
                      
                      
                      (0.03
                      )
                      
                      
                      0.12
                      
                      
                      
                      0.60
                      
                      
                      
                      1.07Consolidated
      Balance Sheet Data:Working
      capital (deficit)
                      
                      $
                      34,149
                      
                      
                      $
                      22,621
                      
                      
                      $
                      (5,835
                      )
                      
                      $
                      (19,401
                      )
                      
                      $
                      249Total
      assets
                      
                      
                      276,940
                      
                      
                      
                      256,269
                      
                      
                      
                      268,541
                      
                      
                      
                      254,692
                      
                      
                      
                      217,407Long-term
      obligations
                      
                      
                      86,575
                      
                      
                      
                      82,412
                      
                      
                      
                      47,243
                      
                      
                      
                      37,317
                      
                      
                      
                      14,685Total
      stockholders’ equity
                      
                      
                      150,732
                      
                      
                      
                      147,809
                      
                      
                      
                      167,945
                      
                      
                      
                      158,917
                      
                      
                      
                      150,147
  Effective
October 1, 2005 (our fiscal year ended September 30, 2006),
we adopted the share-based payment provisions of Statement of Financial
Accounting Standards 123(revised), “Share-Based Payment,” using the
modified prospective transition method. SFAS No. 123(R) is a revision
of SFAS No. 123. Prior period amounts do not include a pro forma
adjustment for stock compensation expense.
  ITEM 7.Management’s Discussion and
Analysis of Financial Condition and Results of Operations
  Overview
  We are a
developer and distributor of comprehensive systems, content, electronic games
and gaming player terminals for the casino, charity, international bingo, and
video lottery markets. Initially, our customers were located primarily in the
Native American gaming sector; however, around 2003, we began diversifying
into broader domestic and international gaming markets.
  Although
we continue to develop systems and products for Native American tribes
throughout the United States, we now also develop and market i) products
and services for the commercial casino market; ii) video lottery systems
and other products for domestic and international lotteries; and
iii) products for charity and international bingo and other emerging
markets.
  Our
products cover a broad spectrum of the gaming industry, including: interactive
systems for both server-based and stand-alone gaming operations; interactive
electronic bingo games for the Class II gaming market and for the
Class III, stand-alone and video lottery markets; proprietary gaming player
terminals in multiple configurations and formats; electronic instant lottery
scratch ticket systems; casino management systems, including player tracking,
cash and cage, slot accounting, and slot management modules; unified currency
systems; and other electronic and paper bingo systems. In addition, we provide
maintenance, operations support and other services for our customers and
products.
  We design
and develop networks, software and content that provide our customers with,
among other things, comprehensive gaming systems, some of which are delivered
through a telecommunications network that links our player terminals with one
another, both within a single gaming facility or among several gaming
facilities.
  -31-
  We derive
the majority of our gaming revenue from participation (revenue sharing)
agreements, pursuant to which we place systems, player terminals, proprietary
and licensed content operated on player terminals, and back-office systems and
equipment (collectively referred to as “gaming systems”), into gaming
facilities. To a lesser degree, we earn revenue from the sale or placement of
gaming systems (e.g., the opening of a new casino, or a change in the law that
allows existing casinos to increase the number of player terminals permitted
under prior law) on a lease-purchase or participation basis and from the
back-office fees generated by video lottery systems, principally in the
Washington State, Class III market. We also generate gaming revenue as
consideration for providing the central determinant system for a network of
player terminals operated by the New York State Division of the Lottery. In
addition, we earn a small portion of our revenue from the sale of lottery
systems and the placement of nontraditional gaming products, such as electronic
scratch tickets, sweepstakes, or linked interactive paper bingo systems.
Recently, we entered the international electronic bingo market and currently
supply bingo systems to three customers in Mexico, whereby we receive fees based
on the net earnings of each system. During fiscal 2009, we intend to
generate revenue from the sale of non-linked Class III player terminals to
Class III Native American markets.
  Class II
Market
  We derive
our Class II gaming revenues from participation arrangements with our
Native American customers. Under these arrangements, we retain ownership of the
gaming equipment installed at our customers’ tribal gaming facilities, and
receive revenue based on a percentage of the hold per day generated by each
gaming system. Our portion of the hold per day is reported by us as “Gaming
revenue – Class II” and represents the total amount that end users wager,
less the total amount paid to end users for prizes, the amounts retained by the
facilities for their share of the hold and the accretion of contract
rights.
  As the
Class II market has matured, we have seen new competitors with significant
gaming experience and financial resources enter the market. New tribal-state
compacts, such as the Oklahoma gaming legislation passed by referendum
in 2004, have also led to increased competition. In addition, there has
been what we believe to be an extended period of non enforcement by regulators
of existing restrictions on non-Class II devices, which has forced us to
continue competing against games that do not appear to comply with the published
regulatory restrictions on Class II games. Due to this increased
competition in Oklahoma, and because of continued conversion to games played
under the compact, we have and may continue to experience pressure on our
pricing model and hold per day, with the result being that gaming providers,
including us, are competing on the basis of price as well as the entertainment
value and technological superiority of their products. We have also experienced
and expect to continue to experience a decline in the number of our
Class II games deployed in Oklahoma, in accordance with our recent
conversion strategy. While we will continue to compete by regularly introducing
new and more entertaining games with technological enhancements that we believe
will appeal to end users, we believe that the level of revenue retained by our
customers from their installed base of player terminals will become a more
significant competitive factor, one that may require us to change the terms of
our participation arrangements with customers. We will continue the deployment
of one-touch, compact-compliant Class III games in Oklahoma, which will
reduce the number of Class II machines in play.
  Class III
Games and systems for Oklahoma
  During 2004,
the Oklahoma Legislature passed legislation authorizing certain forms of gaming
at racetracks, and additional types of games at tribal gaming facilities,
pursuant to a tribal-state compact. The Oklahoma gaming legislation allows the
tribes to sign a compact with the state of Oklahoma to operate an unlimited
number of electronic instant bingo games, electronic bonanza-style bingo games,
electronic amusement games, and non-house-banked tournament card games. In
addition, certain horse tracks in Oklahoma are allowed to operate a limited
number of instant and bonanza-style bingo games and electronic amusement games.
All vendors placing games at any of the racetracks under the compact will
ultimately be required to be licensed by the state of Oklahoma. Pursuant to the
compacts, vendors placing games at tribal facilities will have to be licensed by
each tribe. All electronic games placed under the compact have to be certified
by independent testing laboratories to meet technical specifications. These
technical specifications were published by the Oklahoma Horse Racing Commission
and the individual tribal gaming authorities in the first calendar quarter
of 2005. We are fully licensed in Oklahoma and as of
September 30, 2008, we had placed 5,605 player terminals at
38 facilities that are operating under the Oklahoma gaming compact. We
generally receive a 20% revenue share for the games played under the
Oklahoma Gaming Compact.
  Class III
Games and Systems for Native American and Commercial Casino Markets
  During
fiscal 2007, we began designing and developing stand-alone Class III
player terminals to be sold or placed on a revenue share basis in the large and
broad Class III stand-alone gaming market for Native American casinos as
well as domestic and international commercial casinos. All player terminals
delivered to these markets will have to receive specific jurisdictional
approvals from the appropriate testing laboratory and from the appropriate
regulatory agency. Our first group of stand-alone player terminals has been
placed in the Class III stand-alone market in Rhode Island. We believe that
we will deliver additional player terminals to other Class III markets
beginning in fiscal 2009. We have recently announced key senior management
personnel additions which we believe will help accelerate our entrance into new
Class III markets.
  -32-
  Charity
Market
  Charity
bingo and other forms of charity gaming are operated by or for the benefit of
nonprofit organizations for charitable, educational and other lawful purposes.
These games are typically only interconnected within the gaming facility where
the terminals are located. Regulation of charity gaming is vested with each
individual state, and in some states, regulatory authority is delegated to
county or municipal governmental units. In Alabama, our largest charity market,
constitutional amendments have been passed authorizing charity bingo in certain
locations. The regulation of charity bingo in Alabama is typically vested with a
local governmental authority. We typically place player terminals under
participation arrangements in the charity market and receive a percentage of the
hold per day generated by each of the player terminals. As of
September 30, 2008, we had 2,279 high-speed, standard bingo games
installed for the charity market in three Alabama facilities.
  All
Other Gaming Markets
  Class III Washington State
Market. The majority of our Class III gaming equipment in Washington
State has been sold to customers outright, for a one-time purchase price, which
is reported in our results of operations as “Gaming equipment, system sale and
lease revenue” at the time of proper revenue recognition. Certain game themes we
use in the Class III market have been licensed from third parties and are
resold to customers along with our Class III player terminals.
Historically, revenue from the sale of Class III gaming equipment is
recognized when the units are delivered to the customer, and the licensed games
installed or over the contract term when fair value of undelivered products has
not been established. Because we sell new products, systems and services for
which fair value has not been established, beginning in fiscal 2008,
revenue generated from this market will generally be recognized over the terms
of the contracts. To a considerably lesser extent, we also enter into either
participation arrangements or lease-purchase arrangements for our Class III
player terminals, on terms similar to those used for our player terminals in the
Class II market.
  We also
receive a small back-office fee from both leased and sold gaming equipment in
Washington State. Back-office fees cover the service and maintenance costs for
back-office servers installed in each facility to run our Class III games,
as well as the cost of related software updates.
  State Video Lottery Market. In
January 2004, we installed our central determinant system for the video
lottery terminal network that the New York Lottery operates at licensed New York
State racetrack casinos. As payment for providing and maintaining the central
determinant system, we receive a small portion of the network-wide hold per day.
Our contract with the New York Lottery provides for a three-year term with an
additional three one-year automatic renewal under certain conditions. We are
seeking to take advantage of the recently passed legislation in New York State
that allows the New York Lottery to extend its vendor contracts at its sole
discretion, notwithstanding the automatic renewal provision. We are working to
significantly extend the current contract which is set to expire
in 2010.
  International Commercial Bingo
Market.In March 2006, we entered into a contract with Apuestas
Internacionales, S.A. de C.V., or Apuestas, a subsidiary of Grupo
Televisa, S.A., to provide traditional and electronic bingo gaming,
technical assistance, and related services for Apuestas’ locations in Mexico.
Apuestas currently has a permit issued by the Mexican Ministry of the Interior
(Secretaria de Gobernación) to open and operate 65 bingo parlors. Apuestas
is projecting that all 65 bingo parlors will be open by May 2011. As
of September 30, 2008, we had installed 4,583 player terminals at
19 sites in Mexico under this contract with Apuestas. At
September 30, 2008, all installed player terminals placed are pursuant
to a revenue share arrangement that is comparable with our Oklahoma market
arrangements.
  As of
September 30, 2008, we had entered into separate contracts with three
other companies incorporated in Mexico to provide traditional and electronic
bingo gaming, technical assistance, and related services for bingo parlors in
Mexico. As of September 30, 2008, we had
installed 550 player terminals at three parlors in Mexico under these
contracts.
  Development
Agreements
  As we
seek to continue the growth in our customer base and to expand our installed
base of player terminals, a key element of our strategy has become entering into
development agreements with various Native American tribes to assist in the
funding of new or expansion of existing tribal gaming facilities. Pursuant to
these agreements, we advance funds to the tribes for the construction of new
tribal gaming facilities or for the expansion of existing
facilities.
  -33-
  Amounts
advanced that are in excess of those to be reimbursed by such tribes for real
property and land improvements are allocated to intangible assets and are
generally amortized over the life of the contract on a straight-line
basis.
  In return
for the amounts advanced by us, we receive a commitment for a fixed number of
player terminal placements in the facility or a fixed percentage of the
available gaming floor space, and a fixed percentage of the hold per day from
those terminals over the term of the development agreement. Certain of the
agreements contain player terminal performance standards that could allow the
facility to reduce a portion of our floor space. In addition, certain
development agreements allow the facilities to buy out floor space after
advances that are subject to repayment, have been repaid.
  We have
in the past and may in the future, reduce the number of player terminals in
certain of our facilities as a result of ongoing competitive pressures faced by
our customers from alternative gaming facilities and pressures faced by our
machines from competitors’ products. We have in the past and may also in the
future, by mutual agreement and for consideration, amend these contracts in
order to reduce the number of player terminals at these facilities. In the
second quarter of fiscal 2008, we modified a development agreement by
agreeing to reduce the number of player terminals at a development site. In
return, we received a complete payoff of a note receivable in the amount of
$4.5 million.
  We have
recently fulfilled a commitment to a significant, existing tribal customer to
provide approximately 43.8%, or $65.6 million, of the total funding
for a facility expansion. Because of our commitment to fund the expansion, we
secured the right to place an additional 1,400 gaming units in the expanded
facility in southern Oklahoma. We recorded all advances as a note receivable and
imputed interest on the interest free loan. The discount (imputed interest) was
recorded as contract rights and will be amortized over the life of the
agreement. The repayment period of the note will be based on the performance of
the facility. As of September 30, 2008, we had installed approximately
700 of the additional 1,400 units that we will place in the expanded
facility. The remaining 700 units are expected to be installed by
December 31, 2008.
  As a
result of the substantial levels of development activity in Oklahoma, we expect
the future pace of development in Oklahoma to decline somewhat. Accordingly, we
do not anticipate future levels of development participation in Oklahoma to keep
pace with our historical levels. As of September 30, 2008, we have
placed approximately 4,700 units in 10 facilities in Oklahoma
pursuant to development agreements.
  Recent
Developments
  On
October 24, 2007, the NIGC published in the Federal Register, four
proposed rules concerning Classification Standards to distinguish between
Class II games played with technologic aids and Class III facsimiles
of games of chance, a revision of the definition of “electronic or
electromechanical facsimile,” technical standards for Class II gaming and
Class II minimum internal control standards. If the Classification
Standards and the revised definition of “electronic or electromechanical
facsimile” become final regulations, they will have a material and adverse
economic impact on the Class II gaming market by limiting the use of
Class II electronic technology and severely restricting the manner in which
bingo may be played thereby making Class II games less attractive to the
customer. On January 15, 2008, the NIGC extended the comment period
for the proposed Class II gaming regulations until March 9, 2008.
However, in May 2008, the Chairman of the NIGC announced that the NIGC
would not move forward with its plans to publish final regulations revising the
definition of “electronic or electromechanical facsimile” and implementing new
Class II gaming classification standards. The NIGC has published
regulations establishing technical standards for Class II electronic gaming
and Class II minimum internal control standards. The standards allow for a
5-year grandfathering moratorium if existing games and systems meet minimum
requirements. We are currently submitting games and systems to be evaluated
under the new grandfathering moratorium articulated in
25 CFR 547.4 of the new NIGC technical standards.
  -34-
  Results
of Operations
  The
following tables set forth our end-of-period and average installed base of
player terminals for the years ended September 30, 2008, 2007
and 2006.
  At September 30,2008
                              
                              
                              2007
                              
                              
                              2006End-of-period
      installed player terminal base:Class II
      player terminalsNew
      Generation system - Reel Time Bingo
                              
                              
                              2,223
                              
                              
                              
                              3,840
                              
                              
                              
                              7,280Legacy
      system
                              
                              
                              303
                              
                              
                              
                              384
                              
                              
                              
                              373Oklahoma compact
      games
                              
                              
                              5,605
                              
                              
                              
                              4,088
                              
                              
                              
                              2,408Mexico
                              
                              
                              5,133
                              
                              
                              
                              2,515
                              
                              
                              
                              600Other player terminals(1)
                              
                              
                              2,613
                              
                              
                              
                              2,735
                              
                              
                              
                              2,519
 
 Years Ended September 30,2008
                      
                      
                      2007
                      
                      
                      2006Average
      installed player terminal base:Class II player
      terminalsNew
      Generation system - Reel Time Bingo
                      
                      
                      2,742
                      
                      
                      
                      5,305
                      
                      
                      
                      8,404Legacy
      system
                      
                      
                      324
                      
                      
                      
                      363
                      
                      
                      
                      396Oklahoma compact
      games
                      
                      
                      4,852
                      
                      
                      
                      3,548
                      
                      
                      
                      1,393Mexico
                      
                      
                      3,985
                      
                      
                      
                      1,536
                      
                      
                      
                      210Other player terminals(1)
                      
                      
                      2,722
                      
                      
                      
                      2,613
                      
                      
                      
                      2,629
  (1)
                  Other
      player terminals include charity, Rhode Island Lottery and Malta. Fiscal
      Year 2006 includes Iowa Lottery for average
  counts.
  There
were no sweepstakes video readers installed at
September 30, 2007, and the average installed base for
fiscal 2007 was 376. There were 1,318 sweepstakes video
readers installed at September 30, 2006 and the average installed base
was 820. These sweepstakes video readers are not included in the above
tables.
  The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, included in “PART IV –
Item 15. Exhibits and Financial Statement Schedules.”
  Fiscal 2008
Compared to Fiscal 2007
  Total
revenues for 2008 were $ 131.1 million, compared to
$121.9 million in 2007, a $9.2 million,
or 8% increase.
  Gaming
Revenue – Class II
  §
                Class II
      gaming revenue decreased by $19.6 million, or 41%, to
      $28.4 million in 2008, from $48.0 million in 2007. We
      expect the number of Class II terminals to continue to decrease as
      they are replaced with higher-earning Oklahoma compact player
      terminals.
  §
                Legacy
      revenue decreased $494,000, or 17%, to $2.4 million
      in 2008, from $2.9 million in 2007. The average installed
      base of player terminals and the average hold per day decreased 11%
      and 5%, respectively, due to competitive
  factors.
  §
                Reel
      Time Bingo revenue was $26.0 million in 2008, compared to
      $45.1 million in 2007, a $19.1 million, or 42%
      decrease. The average installed base of player terminals
      decreased 48% which was partially offset by a 16% increase in
      hold per day. Accretion of contract rights related to development
      agreements, which is recorded as a reduction of revenue, decreased
      $1.5 million, or 57% to $1.1 million in 2008, compared
      to $2.6 million in 2007. The reduction in accretion of
      contract rights is the result of allocating the total accretion rights
      across all product lines with the majority being allocated to Oklahoma
      Compact. During 2008, we continued to convert Reel Time Bingo player
      terminals to games played under the compact, which are included in “Gaming
      revenue - Oklahoma compact,” and we expect this trend to continue in the
      future as Reel Time Bingo competes with the higher hold per day of compact
      games. In addition, as a result of the conversion from Reel Time Bingo to
      games played under the compact, our revenue share percentage will decrease
      to the market rate for compact
games.
  -35-
  Gaming
Revenue – Oklahoma Compact
  §
                Oklahoma
      compact games generated revenue of $55.2 million in 2008,
      compared to $37.1 million in 2007, an increase of
      $18.1 million, or 49%. The average installed base increased 37%
      as the conversion of Class II player terminals to compact games
      continues. Hold per day increased 3%, primarily as a result of the
      higher installed base of the stand-alone units, which have a higher hold
      per day. Accretion of contract rights related to development agreements,
      which is recorded as a reduction of revenue, decreased to
      $2.8 million in 2008, compared to $2.9 million
      in 2007.
  Gaming
Revenue – Charity
  §
                Charity
      gaming revenues decreased $3.4 million, or 19%, to
      $14.6 million for 2008, compared to $18.0 million for the
      same period of 2007. The average installed base of player terminals
      and the average hold per day decreased 4% and 18%, respectively.
      The decrease in the hold per day is primarily attributable to competitive
      factors and to a lesser extent, economic factors. Competitive factors
      would include, but are not limited to, a significant increase of
      competitor units added to the gaming floor of our largest charity
      operation, players reward programs not offered on our player terminals and
      location of our player terminals on the gaming
  floor.
  Gaming
Revenue – All Other
  §
                Class III
      back-office fees decreased 2%, to $3.6 million in
      fiscal 2008, from $3.7 million during the same period
      of 2007.
  §
                Revenues
      from the New York Lottery system increased 22%, to $7.0 million
      in 2008, from $5.8 million in 2007. At
      September 30, 2008, eight of the nine planned racetrack casinos
      are operating, with approximately 13,000 total terminals. At the
      current placement levels, we have obtained near break-even operations for
      the New York Lottery system and expect to achieve profitable operations
      after all of the facilities are
operating.
  §
                Revenues
      from the Mexico bingo market increased $5.7 million to
      $10.0 million in 2008, from $4.3 million in 2007.
      As of September 30, 2008, we had installed 5,133 player
      terminals at 22 parlors in Mexico compared to 2,515 terminals at
      nine parlors at September 30, 2007. Our revenue share
      arrangements in Mexico are comparable with our Oklahoma market revenue
      share arrangements.
  Gaming
Equipment, System Sale and Lease Revenue and Cost of Sales
  §
                Gaming
      equipment, system sale and lease revenue increased $7.1 million,
      or 247% to $10.0 million for 2008,
      from $2.9 million for the same period of 2007. Gaming
      equipment and system sale revenue of
      $8.8 million, for 2008, includes 569 player terminal
      sales of $5.8 million and one system sale. Gaming equipment, system
      sale and lease revenue of $1.1 million, for 2007, included two
      system sales and no player terminals. In 2008 and 2007, gaming
      equipment sale revenue included revenues of $182,000 and
      $1.1 million, respectively, related to a certain equipment sale being
      recognized ratably over the term of the agreement. License revenues
      for 2008 were $1.1 million, compared
      to $689,000 for 2007, an increase of $427,000,
      or 62%, due primarily to the player terminal sales discussed above.
      Total cost of sales, which includes cost of royalty fees,
      increased $2.8 million, to $5.0 million in 2008,
      from $2.2 million in 2007 due to the large gaming equipment
      sale discussed above.
  Other
Revenue
  §
                Other
      revenues decreased $395,000 or 19% to $1.7 million for
      fiscal 2008, from $2.1 million during fiscal 2007. The
      decrease is primarily due to the discontinuation of the promotional
      sweepstakes system in
January 2007.
  Selling,
General and Administrative Expenses
  §
                Selling,
      general and administrative expenses increased $6.1 million,
      or 9%, to $72.2 million in 2008, from $66.1 million
      in 2007. This increase was primarily a result of (i) an increase
      in third party game licenses, projects, and patents write offs  and
      reserves of $3.2 million; ii) an increase in property and
      equipment reserves, repairs and maintenance, transportation and related
      costs of $2.6 million; (iii) an increase in salaries and wages
      and the related employee benefits of approximately $2.0 million,
      primarily related to costs of $675,000 associated with the
      resignation of our former Chief Executive Officer, along with headcount
      increases (at September 30, 2008, we employed 484 full-time
      and part-time employees, compared to 427 at
      September 30, 2007); and (iv) an increase in travel
      expenses of approximately $648,000; offsetting these increases was a
      decrease in legal and professional fees of approximately
      $2.9 million, due to the resolution of several legal matters during
      fiscal 2008.
  -36-
  Amortization
and Depreciation
  §
                Amortization
      expense decreased $1.6 million, or 26%, to $4.7 million
      in 2008, compared to $6.3 million in 2007. Depreciation
      expense decreased $3.8 million, or 7%, to
      $48.0 million in 2007, from $51.8 million in 2007,
      primarily as a result of player terminals continuing in service beyond
      their estimated useful life.
  Other
Income and Expense
  §
                Interest
      income increased 10%, to $5.0 million in 2008, from
      $4.6 million in 2007, due to imputed interest resulting from
      advances under certain development agreements. We entered into development
      agreements with a customer under which approximately $72.7 million
      has been advanced and is outstanding at September 30, 2008, and
      for which we impute interest on these interest-free loans. During
      fiscal 2008, we recorded imputed interest of $4.3 million
      relating to development agreements with an imputed interest rate range
      of 6.00% to 9.00% compared to $2.6 million in
      fiscal 2007.
  §
                Interest
      expense increased $3.7 million, or 74%,
      to $8.7 million for 2008, from $5.0 million
      for 2007, due primarily to an increase in amounts outstanding under
      our Credit Facility. During April 2007, we entered into a
      $150 million Revolving Credit Facility which replaced our previous
      Credit Facility in its entirety. On October 26, 2007 we amended
      the Revolving Credit Facility, transferring $75 million of the
      revolving credit commitment to a fully funded $75 million term loan.
      We entered into a second amendment to the Revolving Credit Facility on
      December 20, 2007. The second amendment (i) extended the
      hedging arrangement date related to a portion of the term loan to
      June 1, 2008; and (ii) modified the interest rate margin
      applicable to the Revolving Credit Facility and the term
    loan.
  §
                Other
      income was $3.1 million for the year ended
      September 30, 2008, compared to $3.1 million for the year
      ended September 30, 2007. Other income consisted primarily of
      distributions from a partnership interest accounted for on the cost basis
      method in
      fiscal 2008. Fiscal 2007 included this distribution as well as the
      extinguishment of an intangible asset and related liablility due to the
      termination of a non compete agreement with our former Chief Executive
      Officer as of
April 27, 2007.
  Income
tax expense increased to $302,000 for 2008, compared to an income tax
benefit of $1.2 million in 2007. These figures represent effective tax
rates of 44.4% and 61.3% for fiscal 2008 and 2007,
respectively. The effective tax rate has been impacted by the tax treatment of
stock compensation expense. To the extent that we experience volatility in stock
compensation expense, there will remain volatility in the effective tax
rate.
  On
July 13, 2006, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 48, or FIN 48, “Accounting for
Uncertainty in Income Taxes,” an interpretation of SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109. FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement
recognition, and for the measurement of a tax position taken or expected to be
taken in a tax return. The new FASB standard also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. We adopted FIN 48 in the first quarter
of fiscal 2008 and recorded a liability of $295,000 (in the first
quarter of fiscal 2008) related to uncertain tax positions. This reserve
was charged to Retained Earnings.
  Fiscal 2007
Compared to Fiscal 2006
  Total
revenues for 2007 were $121.9 million, compared to $145.1 million
in 2006, a $23.2 million, or 16% decrease.
  Gaming
Revenue – Class II
  §
                Class II
      gaming revenue decreased by $41.2 million, or 46%, from
      $89.2 million in 2006 to $48.0 million in 2007. We
      expect the number of Class II terminals to continue to decrease as
      they are replaced with higher-earning Oklahoma compact player
      terminals.
  §
                Legacy
      revenue decreased $164,000, or 5%, to $2.9 million
      in 2007, from $3.0 million in 2006. The average installed
      base of Legacy player terminals decreased 8%, which was partially offset
      by a 3% increase in hold per
day.
  -37-
  §
                Reel
      Time Bingo revenue was $45.1 million in 2007, compared to
      $86.2 million in 2006, a $41.1 million, or 48%
      decrease. The average installed base of player terminals and the average
      hold per day decreased 37% and 11%, respectively. Accretion of
      contract rights related to development agreements, which is recorded as a
      reduction of revenue, decreased $1.7 million, or 40% to
      $2.6 million in 2007, compared to $4.3 million
      in 2006. The reduction in accretion of contract rights is the result
      of allocating the total accretion rights across all product lines with the
      majority being allocated to Oklahoma Compact. During 2007, we
      continued to convert Reel Time Bingo player terminals to games played
      under the compact, which are included in “Gaming revenue - Oklahoma
      compact,” and we expect this trend to continue in the future as Reel Time
      Bingo competes with the higher hold per day of compact games. In addition,
      as a result of the conversion from Reel Time Bingo to games played under
      the compact, our revenue share percentage will decrease to the market rate
      for compact games.
  Gaming
Revenue – Oklahoma Compact
  §
                In
      March 2005, we began converting Reel Time Bingo player terminals to
      games that could be played under the Oklahoma compact. These games
      generated revenue of $37.1 million in 2007, compared
      to $10.6 million in 2006, an increase of
      $26.5 million. The average installed base increased 155% as the
      conversion of Class II player terminals to compact games continues.
      Hold per day increased 38%, primarily as a result of the higher
      installed base of the stand-alone units, which have a higher hold per day.
      Accretion of contract rights related to development agreements, which is
      recorded as a reduction of revenue, increased to $2.9 million
      in 2007, compared to no accretion
  in 2006.
  Gaming
Revenue – Charity
  §
                Charity
      gaming revenues decreased 2%, to $18.0 million for 2007,
      compared to $18.4 million for the same period of 2006. The
      average installed player terminal base and average hold per day remained
      consistent across 2007
and 2006.
  Gaming
Revenue – All Other
  §
                Class III
      rental and back-office fees in Washington State decreased 19%, to
      $3.7 million in 2007, from $4.6 million during the same period
      of 2006. As of January 2006, we no longer have any rental
      customers. We continue to receive a small back-office fee from each of the
      twelve gaming facilities in the state of Washington where we are
      located.
  §
                Revenues
      from the New York Lottery system increased 118%, to $5.8 million
      in 2007, from $2.6 million in 2006. At
      September 30, 2007, eight of the nine planned racetrack casinos
      are operating, with approximately 13,100 total terminals. To date, we
      have realized substantially less revenue than anticipated from our New
      York Lottery operations, in significant part due to delays in the opening
      of planned racetrack casino operations at several racetracks. At the
      current placement levels, we have obtained near break-even operations for
      the New York Lottery system and expect to achieve profitable operations
      after all of the facilities are
operating.
  §
                The
      Iowa Lottery system operated between January and May 2006, and
      generated revenues of $616,000 during that time period. Pursuant to
      legislative actions, these units were disconnected from our central
      determinant system in May 2006. Revenue from providing player
      terminals was recorded in “Gaming equipment, system sale and lease
      revenue.”
  §
                Revenues
      from the Mexico bingo market increased $3.7 million to
      $4.3 million in 2007, from $604,000 in 2006. As of
      September 30, 2007, we had installed 2,515 player terminals
      at nine sites in Mexico compared to 600 terminals at four sites
      installed at four sites at September 30, 2006. To date, there
      are not as many permanent facilities opened as we originally projected,
      and the hold per day is below our original expectations. Our revenue share
      arrangements in Mexico are comparable with our Oklahoma market revenue
      share arrangements.
  Gaming
Equipment, System Sale and Lease Revenue and Cost of Sales
  §
                Gaming
      equipment, system sale and lease revenue
      decreased $11.1 million, or 79% to $2.9 million
      for 2007, from $13.9 million for the same period
      of 2006. Gaming equipment and system sale revenue of
      $1.1 million, for 2007, includes two system sales and no
      player terminals. Gaming equipment, system sale and lease revenue of
      $11.7 million, for 2006, included one system sale of
      $8.0 million, 416 player terminals sales of $3.0 million,
      and Iowa Lottery lease revenue of $681,000. In
      2007 and 2006, gaming equipment sale revenue included revenues
      of $1.1 million for both periods, related to a certain equipment sale
      being recognized ratably over the term of the agreement. License revenues
      for 2007 were $689,000, compared to $1.1 million
      for 2006, a decrease of $434,000, or 39%, due
      primarily to the decline in player terminal sales discussed above. Total
      cost of sales, which includes cost of royalty fees,
      decreased $9.5 million, or 81% to $2.2 million
      in 2007, from $11.8 million in 2006 due to the
      decreased sales discussed above.
  -38-
  Other
Revenue
  §
                Other
      revenues decreased $2.4 million or 54%
      to $2.1 million for fiscal 2007,
      from $4.5 million during fiscal 2006. The decrease is
      primarily due to discontinuation of the promotional sweepstakes system in
      January 2007.
  Selling,
General and Administrative Expenses
  §
                Selling,
      general and administrative expenses decreased $2.5 million,
      or 4%, to $66.1 million in 2007, from $68.6 million
      in 2006. This decrease was primarily a result of i) a decrease
      in salaries and wages and the related employee benefits of approximately
      $2.6 million relating to the reduction in staff in February 2007
      (at September 30, 2007, we employed 427 full-time and
      part-time employees, compared to 503 at
      September 30, 2006); ii) a decrease in share-based
      compensation of $1.5 million for 2007 due to a decrease in the
      number of unvested outstanding options; and iii) a decrease in travel
      costs of approximately $1.3 million due to the ramp up in 2006
      for new markets, primarily Mexico. Partially offsetting these decreases
      were a) increases in consulting and contract labor of approximately
      $1.3 million, primarily related to the design of new gaming cabinets;
      b) an increase in other taxes and license fees of $847,000,
      primarily related to an annual license renewal for third-party licenses
      and an estimated settlement for use tax; and c) an increase in
      repairs and maintenance, transportation and related costs
      of $752,000, primarily due to units being refurbished for deployment
      in Mexico.
  Amortization
and Depreciation
  §
                Amortization
      expense decreased $194,000, or 3%, to $6.3 million
      in 2007, compared to $6.5 million in 2006. Depreciation
      expense increased $1.1 million, or 2%, to
      $51.8 million in 2007, from $50.7 million in 2006 due
      to the placement of new player terminals as the conversion of
      Class II player terminals to Oklahoma compact games
      continues.
  Other
Income and Expense
  §
                Interest
      income increased 51%, to $4.6 million in 2007, from
      $3.0 million in 2006, due to imputed interest resulting from
      advances under certain development agreements. We entered into development
      agreements with a customer under which approximately $110.4 million
      has been committed under interest-free loans in which we will impute
      interest. During fiscal 2007, we recorded imputed interest of
      $2.6 million relating to development agreements with an imputed
      interest rate range
  of 6% to 8.25%.
  §
                Interest
      expense increased $518,000, or 12%, to $5.0 million
      for 2007, from $4.5 million for 2006, due primarily to
      an increase in amounts outstanding under our previous Credit Facility. Our
      previous Credit Facility provided us with a $20.0 million term
      loan facility, or the Term Loan, a $25.0 million revolving line
      of credit, or the Revolver, and $35.0 million and
      $9.5 million in reducing revolving lines of credit, or the Reducing
      Revolvers. During April 2007, we entered into a $150 million
      Revolving Credit Facility, which replaced our previous Credit Facility in
      its entirety. We subsequently amended the Revolving Credit Facility on
      October 26, 2007 to transfer $75 million of the
      revolving credit commitment to a fully funded $75 million term
      loan.
  §
                Other
      income was $3.1 million for the year ended
      September 30, 2007, with no such income in fiscal 2006.
      Other income consisted of a distribution from a partnership interest,
      accounted for on the cost basis that we received during 2007. In
      addition, we had the extinguishment of an intangible asset and related
      liability due to the termination of a non compete agreement with our
      former Chief Executive Officer as of
    April 27, 2007.
  Income
tax expense decreased to a benefit of $1.2 million for 2007, compared
to an income tax expense of $2.5 million in 2006. These figures
represent effective tax rates of 61.3% and 41.6% for fiscal 2007
and 2006, respectively. SFAS No. 123(R) is a revision of
SFAS No. 123, and includes several modifications to the way that
income taxes are recorded in the financial statements. The expense for incentive
stock option grants is ratably expensed for financial reporting but is only
deductible for income tax purposes at the time that customer taxable events
takes place, if ever, which could cause variability in our effective tax rates
recorded throughout our fiscal year. The higher effective tax rate for 2006
was primarily a result of the timing of such deductibility of stock
options.
  -39-
  Recent
Accounting Pronouncements Issued
  In
March 2008, the Financial Accounting Standards Board, or the FASB issued
Statement of Financial Accounting Standards No. 161, or SFAS No 161,
“Disclosures about Derivative Instruments and Hedging Activities—An Amendment of
FASB Statement No. 133.” SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including enhanced disclosures
regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities;
and (c) derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after November 15, 2008, though earlier application is
encouraged. Accordingly, we expect to adopt SFAS No. 161 beginning in
fiscal 2010. We expect that SFAS No. 161 will have an impact on
accounting for derivative instruments and hedging activities once adopted, but
the significance of the effect is dependent upon entering into these related
transactions, if any, at that time.
  In
July 2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in
Income Taxes,” an interpretation of SFAS, No. 109, “Accounting for Income
Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with
SFAS No. 109. FIN 48 also prescribes a recognition threshold and
measurement attribute for the financial statement recognition, and for the
measurement of a tax position taken or expected to be taken in a tax return. The
new FASB standard also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The Interpretation is effective for fiscal years beginning after
December 15, 2006. We adopted FIN 48 in the first quarter of
fiscal 2008 and recorded a liability of $295,000 related to uncertain
tax positions in the first quarter of fiscal 2008. There have been no
additional reserves booked in fiscal 2008 related to
FIN 48.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements,” which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 will be applied prospectively and
will be effective for us beginning in October 2008. We are currently
evaluating the effect, if any, of SFAS 157 on our consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115 (Accounting for Certain Investments in Debt and Equity
Securities),” which permits entities to choose to measure many financial
instruments and certain other items at fair value with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement became effective for us beginning in
October 2008. We are currently evaluating the effect, if any, of
SFAS 159 on our consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 141 (revised), “Business
Combinations.” SFAS No. 141(R) changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption
prohibited. We will be required to adopt SFAS No. 141(R) in the first
quarter of fiscal year 2009.
  In
December 2007, the FASB issued SFAS No. 160, “Non Controlling
Interests in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin, or ARB No. 51, “Consolidated Financial Statements.” SFAS
No. 160 changes the accounting for non controlling (minority) interests in
consolidated financial statements including the requirements to classify non
controlling interests as a component of consolidated stockholders’ equity, and
the elimination of “minority interest” accounting in results of operations with
earnings attributable to non controlling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting
for both increases and decreases in a parent’s controlling ownership interest.
SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. We will be required
to adopt SFAS No. 160 in the first quarter of fiscal year 2009.
We do not expect the adoption of SFAS No. 160 to have a material effect on
our operations or financial position.
  -40-
  Liquidity
and Capital Resources
  At
September 30, 2008, we had unrestricted cash and cash equivalents of
$6.3 million, compared to $5.8 million at
September 30, 2007. Our working capital as of
September 30, 2008 increased to $34.1 million, compared to
working capital of $22.6 million for 2007. The increase in working
capital was primarily the result of increases in accounts receivable and notes
payable. During 2008, we used $46.0 million for capital expenditures
of property and equipment, and collected $27.3 million on development
agreements, with $41.7 million advanced under development agreements. Under
the Credit Facility, our availability as of September 30, 2008, is
$55.3 million, subject to covenant restrictions.
  As of
September 30, 2008, our total contractual cash obligations were as
follows (in thousands):
  Less than
                            1 year
                          
                          
                          1-3 years
                          
                          
                          3-5 years
                          
                          
                          TotalRevolving
      Credit Facility(1)
                          
                          $
                          1,102
                          
                          
                          $
                          2,484
                          
                          
                          $
                          20,023
                          
                          
                          $
                          23,609Credit
      Facility Term Loan(2)
                          
                          
                          4,494
                          
                          
                          
                          10,827
                          
                          
                          
                          69,154
                          
                          
                          
                          84,475Operating
      leases(3)
                          
                          
                          2,706
                          
                          
                          
                          2,255
                          
                          
                          
                          12
                          
                          
                          
                          4,973Purchase
      commitments(4)
                          
                          
                          13,223
                          
                          
                          
                          6,750
                          
                          
                          
                          —
                          
                          
                          
                          19,973Total
                          
                          $
                          21,525
                          
                          
                          $
                          22,316
                          
                          
                          $
                          89,189
                          
                          
                          $
                          133,030
  
 There
were no contractual obligations beyond 5 years as of
September 30, 2008.
  (1)
                Relating
      to the Revolving Credit Facility, bearing interest at the Eurodollar rate
      plus the applicable spread (6.24% as of
      September 30, 2008).
  (2)
                Consists
      of amounts borrowed under our Credit Facility at the Eurodollar rate plus
      the applicable spread (6.99% as of
      September 30, 2008).
  (3)
                Consists
      of operating leases for our facilities and office equipment that expire at
      various times through 2011.
  (4)
                Consists
      of commitments to order third-party gaming content licenses and for the
      purchase of player terminals.
  During
fiscal 2008, we generated cash from operations of $58.9 million,
compared to $34.1 million during 2007. This $24.8 million
increase in cash generated from operations over the prior period was primarily a
result of the increase in earnings compared to the previous year and the timing
of payments related to accounts payable and collections from accounts
receivable.
  Cash used
in investing activities increased to $64.9 million in 2008, from
$33.6 million in 2007. The increase was primarily the result of a
$14.4 million increase in advances, net of reimbursements under development
agreements. During the year ended September 30, 2008, capital
expenditures consisted of the following:
  Capital Expenditures(In thousands)Gaming
      equipment
                      
                      $
                      38,265Third-party
      gaming content licenses
                      
                      
                      7,514Other
                      
                      
                      218Total
                      
                      $
                      45,997
  Cash
provided by financing activities for 2008 was $6.4 million, compared
to $356,000 in 2007. The increase was primarily the result of a
$5.0 million increase in the net borrowings under the Credit
Facility.
  Our
capital expenditures for the next twelve months will depend upon the number of
new player terminals that we are able to place into service at new or existing
facilities and the actual number of repairs and equipment upgrades to the player
terminals that are currently in the field. As a result of the earnings potential
of compact games in the Oklahoma market, it is our strategy to either place
compact games or to convert our Oklahoma Class II games to the compact
games. As part of our strategy, we will offer compact games developed by us, as
well as games from two other gaming suppliers. As a result, we have entered into
purchase commitments for future purchases of player stations and licenses
totaling $13.2 million.
  We have
recently fulfilled a commitment to a significant, existing tribal customer to
provide approximately 43.8%, or $65.6 million, of the total funding
for a facility expansion. Because of our commitment to fund the expansion, we
secured the right to place an additional 1400 gaming units in the expanded
facility in southern Oklahoma. We recorded all advances as a note receivable and
imputed interest on the interest free loan. The discount (imputed interest) was
recorded as contract rights and will be amortized over the life of the
agreement. The repayment period of the note will be based on the performance of
the facility. As of September 30, 2008, we had installed approximately
700 of the additional 1,400 units that we will place in the expanded
facility. The remaining 700 units are expected to be installed by
December 31, 2008.
  -41-
  We
believe that our existing cash and cash equivalents, cash provided from our
operations, and amounts available under our Credit Facility can sustain our
current operations; however, our performance and financial results are, to a
certain extent, subject to general conditions in or affecting the Native
American gaming industry, and to general economic, political, financial,
competitive and regulatory factors beyond our control. If our business does not
continue to generate cash flow at current levels, or if the level of funding
required in connection with our joint development agreements is greater or
proceeds at a pace faster than anticipated, or if we receive a material judgment
against the Company in one of the various lawsuits (See “Risk Factors – “The
ultimate outcome of pending litigation is uncertain,” and Commitments and
Contingencies), we may need to raise additional financing. Sources of additional
financing might include additional bank debt or the public or private sale of
equity or debt securities. However, sufficient funds may not be available, on
terms acceptable to us or at all, from these sources or any others to enable us
to make necessary capital expenditures and to make discretionary investments in
the future.
  Off
Balance Sheet Arrangements
  At
September 30, 2008, we had no off balance sheet arrangements.
  Credit
Facility
  On
April 27, 2007, we entered into a $150 million Revolving Credit
Facility which replaced our previous Credit Facility in its entirety. On
October 26, 2007, we amended the Revolving Credit Facility,
transferring $75 million of the revolving credit commitment to a fully
funded $75 million term loan due April 27, 2012. The Term Loan is
amortized at an annual amount of 1% per year, payable in equal quarterly
installments beginning January 1, 2008, with the remaining amount due
on the maturity date. We entered into a second amendment to the Revolving Credit
Facility on December 20, 2007. The second amendment (i) extended
the hedging arrangement date related to a portion of the term loan to
June 1, 2008; and (ii) modified the interest rate margin
applicable to the Revolving Credit Facility and the term loan.
  The
Credit Facility provides us with the ability to finance development agreements
and acquisitions and working capital for general corporate purposes. Amounts
under the $75 million revolving credit commitment and the $75 million
term loan mature in five years, and advances under the term loan and revolving
credit commitment bear interest at the Eurodollar rate plus the applicable
spread (6.24% and 6.99%, respectively, as of
September 30, 2008), tied to various levels of interest pricing
determined by total debt to EBITDA.
  The
Credit Facility is collateralized by substantially all of our assets, and also
contains financial covenants as defined in the agreement. These covenants
include (i) a minimum fixed-charge coverage-ratio of not less
than 1.50 : 1.00; (ii) a maximum total debt to EBITDA ratio
of not more than 2.25 : 1.00 through June 30, 2008,
and 1.75 : 1.00 from September 30, 2008 thereafter; and
(iii) a minimum trailing twelve-month EBITDA of not less than
$57 million for the quarter ended September 30, 2007, and
$60 million for each quarter thereafter. As of
September 30, 2008, we are in compliance with the loan covenants. The
Credit Facility requires certain mandatory prepayments be made on the term loan
from the net cash proceeds of certain asset sales and condemnation proceedings
(in each case to the extent not reinvested, within certain specified time
periods, in the replacement or acquisition of property to be used in our
businesses). In the second quarter of 2008, we made a mandatory prepayment
of the term loan in the amount of $4.5 million due to an early prepayment
of a development agreement note receivable. As of September 30, 2008,
the Credit Facility had availability of $55.3 million, subject to covenant
restrictions.
  The
Credit Facility also required that we enter into hedging arrangements covering
at least $50 million of the term loan for a three-year period by
June 1, 2008; therefore, on May 29, 2008, we purchased,
for $390,000, an interest rate cap (5% cap rate) covering
$50 million of the term loan. We account for this hedge in accordance with
FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” which requires entities to recognize all derivative instruments as
either assets or liabilities in the balance sheet, at their respective fair
values. We record changes on a mark to market basis reflecting these changes
through interest expense in the statement of operations. The value of this hedge
was $296,552 at September 30, 2008.
  -42-
  Share
Repurchase
  During
July 2007, we completed a modified “Dutch Auction” Tender Offer to purchase
up to $25.0 million of our common stock and the associated preferred share
purchase rights. We accepted, for purchase, an aggregate of 1,992,032
shares of our common stock at a purchase price of $12.74 per share,
for an aggregate share repurchase of approximately $25.0 million.
Additionally, we incurred costs of $387,457 related to the Tender Offer that was
recorded in treasury stock.
  Stock
Repurchase Authorizations
  During
fiscal 2008, we did not repurchase any shares of our common stock. During
fiscal 2007, we repurchased 1,992,032 shares, of our common stock, at
an average cost of $12.74.
  Stock-Based
Compensation
  At
September 30, 2008, we had approximately 6.7 million options
outstanding, with exercise prices ranging from $1.00 to $21.53 per
share. At September 30, 2008, approximately 3.9 million of the
outstanding options were exercisable.
  During
fiscal 2008, options to purchase 2.7 million shares of common stock
were granted. During fiscal 2008, we issued 127,374 shares of common
stock as a result of stock option exercises with a weighted average exercise
price of $1.71.
  Critical
Accounting Policies
  We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based on the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the periods
presented. There can be no assurance that actual results will not differ from
those estimates. We believe the following represent our most critical accounting
policies.
  Management
considers an accounting estimate to be critical if:
  §
                It
      requires assumptions to be made that were uncertain at the time the
      estimate was made (Critical
      Assumption #1), and
  §
                Changes
      in the estimate or different estimates that could have been selected could
      have a material impact on our consolidated results of operation or
      financial condition (Critical
      Assumption #2).
  Revenue
Recognition.As further discussed in the discussion of our Revenue
Recognition policy in Note 1 of our consolidated financial statements,
revenue from the sale of software is accounted for under Statement of
Position 97-2, “Software Revenue Recognition,” or SOP 97-2, and its various
interpretations. If Vendor-Specific Objective Evidence, or VSOE, of fair value
does not exist, the revenue is deferred until such time that all elements have
been delivered or services have been performed. If any element is determined to
be essential to the function of the other, revenues are generally recognized
over the term of the services that are rendered. In those limited situations
where VSOE does not exist for any undelivered elements of a multiple element
arrangement, then the aggregate value of the arrangement, including the value of
products and services delivered or performed, is initially deferred until all
hardware and software is delivered, and then is recognized ratably over the
period of the last deliverable, generally the service period of the contract.
Depending upon the elements and the terms of the arrangement, we recognize
certain revenues under the residual method. Under the residual method, revenue
is recognized when VSOE of fair value exists for all of the undelivered
elements in the arrangement, but does not exist for one or more of the delivered
elements in the arrangement. Under the residual method, we defer the fair value
of undelivered elements, and the remainder of the arrangement fee is then
allocated to the delivered elements and is recognized as revenue, assuming the
other revenue recognition criteria are met.
  Assumptions/Approach
Used: The
determination whether all elements of sale have VSOE is a subjective measure,
where we have made determinations about our ability to price certain aspects of
transactions.
  Effect
if Different Assumptions Used: When we have determined
that VSOE does not exist for any undelivered elements of an arrangement, then
the aggregate value of the arrangement, including the value of products and
services delivered or performed, is initially deferred until all hardware and
software is delivered, and then is recognized ratably over the period of the
last deliverable, generally the service period of the contract. The deferral of
revenue under arrangements where we have determined that VSOE does not exist has
resulted in $8.8 million being recorded as deferred revenue at
September 30, 2008. If we had made alternative assessments as to the
existence of VSOE in these arrangements, some or all of these amounts could have
been recognized as revenue prior to September 30, 2008.
  -43-
  Share-Based
Compensation Expense. Effective October 1, 2005, we adopted the
fair value recognition provisions of SFAS 123(R), using the modified prospective
transition method, and therefore have not restated prior periods’ results. Under
this method, we recognize compensation expense for all share-based payments
granted after October 1, 2005 and prior to but not yet vested as of
October 1, 2005, in accordance with SFAS 123(R). Under the fair
value recognition provisions of SFAS 123(R), we recognize share-based
compensation net of an estimated forfeiture rate, and only recognize
compensation cost for those shares expected to vest on a straight-line basis
over the service period of the award. Prior to SFAS 123(R) adoption, we
accounted for share-based payments under APB No. 25, and accordingly
generally recognized compensation expense only if options were granted to
outside consultants with a discounted exercise price.
  Assumptions/Approach
Used: Determining the appropriate fair value model and calculating the
fair value of share-based payment awards requires the input of highly subjective
assumptions, including the expected life of the share-based payment awards, and
stock price volatility. Management determined that volatility is based on
historical volatility trends.  In addition, we are required to estimate the
expected forfeiture rate, and only recognize expense for those shares expected
to vest. If our actual forfeiture rate is materially different from our
estimate, the share-based compensation expense could be significantly different
from what we have recorded in the current period.
  Effect
if Different Assumptions Used: The assumptions used in calculating the
fair value of share-based payment awards, along with the forfeiture rate
estimation, represent management’s best estimates, but these estimates involve
inherent uncertainties and the application of management’s judgment. As a
result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future.
  Property and
Equipment and Leased Gaming Equipment. Property and equipment and leased
gaming equipment is stated at cost. The cost of property and equipment and
leased gaming equipment is depreciated over their estimated useful lives,
generally using the straight-line method for financial reporting, and regulatory
acceptable methods for tax reporting purposes. Player terminals placed with
customers under participation arrangements are included in leased gaming
equipment. Leased gaming equipment includes a “pool” of rental terminals, i.e.,
the “rental pool.” Rental pool units are those units that have previously been
placed in the field under participation arrangements, but are currently back
with us being refurbished and/or awaiting redeployment. Routine maintenance of
property and equipment and leased gaming equipment is expensed in the period
incurred, while major component upgrades are capitalized and depreciated over
the estimated useful life (Critical Assumption #1) of the component. Sales and
retirements of depreciable property are recorded by removing the related cost
and accumulated depreciation from the accounts. Gains or losses on sales and
retirements of property are reflected in our results of operations.
  Management
reviews long-lived asset classes for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. (Critical Assumption #2)
  Assumptions/Approach
used for Critical Assumption #1: The carrying value of the asset is
determined based upon management’s assumptions as to the useful life of the
asset, where the assets are depreciated over the estimated life on a straight
line basis, where the useful life of items in the rental pool has been
determined by management to be three years.
  Effect
if different assumptions used for Critical Assumption #1: While we believe that the
useful lives that have been determined for our fixed assets are reasonable,
different assumptions could materially affect the carrying value of the assets,
as well as the depreciation expense recorded in each respective period related
to those assets. During the year ended September 30, 2008, a
significant portion of the $52.7 million of depreciation and amortization
expense related to assets in the rental pool. If the depreciable life of assets
in our rental pool were changed from three years to another period of time, we
could incur a materially different amount of depreciation expense during the
period.
  Assumptions/Approach
used for Critical Assumption #2: Recoverability of assets to be held and
used is measured through considerations of the future undiscounted cash flows
expected to be generated by the assets as a group, as opposed to analysis by
individual asset, or assets in place at a specific location. If such assets are
considered to be impaired, the impairment recognized is measured by the amount
by which the carrying amount of the assets exceeds their fair value. Assets to
be disposed of are reported at the lower of the carrying amount or the fair
value less costs of disposal. The carrying value of the asset is determined
based upon management’s assumptions as to the useful life of the asset, where
the assets are depreciated over the estimated life on a straight-line
basis.
  -44-
  Effect
if different assumptions used for Critical Assumption #2: Impairment
testing requires judgment, including estimations of useful lives of the assets,
estimated cash flows, and determinations of fair value. While we believe our
estimates of useful lives and cash flows are reasonable, different assumptions
could materially affect the measurement of useful lives, recoverability and fair
value. If actual cash flows fall below initial forecasts, we may need to record
additional amortization and/or impairment charges. Additionally, while we
believe that analysis of the recoverability of assets in our rental pool is
accurately assessed from a homogenous level due to the interchangeability of
player stations and parts, if these assets were to be reviewed for impairment
using another approach, there could be different outcomes to any impairment
analysis performed.
  Development
Agreements.We enter into development agreements to provide financing for
new gaming facilities or for the expansion of existing facilities. In return,
the facility dedicates a percentage of its floor space to exclusive placement of
our player terminals, and we receive a fixed percentage of those player
terminals’ hold per day over the term of the agreement. Certain of the
agreements contain player terminal performance standards that could allow the
facility to reduce a portion of our guaranteed floor space. In addition, certain
development agreements allow the facilities to buy out floor space after
advances that are subject to repayment have been repaid. The agreements
typically provide for a portion of the amounts retained by the gaming facility
for their share of the hold to be used to repay some or all of the advances
recorded as notes receivable. Amounts advanced in excess of those to be
reimbursed by the customer for real property and land improvements are allocated
to intangible assets and are generally amortized over the life of the contract,
using the straight-line method of amortization (Critical Assumption #1),
which is recorded as a reduction of revenue generated from the gaming facility.
In the past and in the future, we may by mutual agreement and for consideration,
amend these contracts to reduce our floor space at the facilities. Any proceeds
received for the reduction of floor space is first applied against the
intangible asset for that particular development agreement, if any.
  Management
reviews intangible assets related to development agreements for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable (Critical Assumption #2). For the year
ended September 30, 2008, there was no impairment to the assets’
carrying values.
  Assumptions/Approach
used for Critical Assumption #1:Amounts advanced in excess
of those to be reimbursed by the customer for real property and land
improvements are allocated to intangible assets and are generally amortized over
the life of the contract, using the straight-line method of amortization, which
is recorded as a reduction of revenue generated from the gaming facility. We use
a straight-line amortization method, as a pattern of future benefits cannot be
readily determined.
  Effect
if Different Assumptions used for Critical Assumption #1:While we believe that the
use of the straight-line method of amortization is the best way to account for
the costs associated with the costs of acquiring exclusive floor space rights at
our customers facilities, the use of an alternative method could have a material
effect on the amount recorded as a reduction to revenue in the current reporting
period.
  Assumptions/Approach
used for Critical Assumption #2: We estimate cash flows directly
associated with the used of the intangible assets to test recoverability and
remaining useful lives based upon the forecasted utilization of the asset and
expected product revenues. In developing estimated cash flows, we incorporate
assumptions regarding future performance, including estimations of hold per day
and estimated units. When the carrying amount exceeds the undiscounted cash
flows expected to result from the use and eventual disposition of the asset, we
then compare the carrying amount to its current fair value. We recognize an
impairment loss if the carrying amount is not recoverable and exceeds its fair
value.
  Effect
if Different Assumptions used for Critical Assumption #2:Impairment testing requires
judgment, including estimations of cash flows, and determinations of fair value.
While we believe our estimates of future revenues and cash flows are reasonable,
different assumptions could materially affect the measurement of useful lives,
recoverability and fair value. If actual cash flows fall below initial
forecasts, we may need to record additional amortization and/or impairment
charges.
  Allowance for
Doubtful Accounts.We
maintain an allowance for doubtful accounts related to our accounts receivable
and notes receivable that have been deemed to have a high risk of
uncollectibility. Management reviews its accounts receivable and notes
receivable on a monthly basis to determine if any receivables will potentially
be uncollectible. Management analyzes historical collection trends and changes
in its customer payment patterns, customer concentration, and creditworthiness
when evaluating the adequacy of its allowance for doubtful accounts. In our
overall allowance for doubtful accounts, we include any receivable balances
where uncertainty exists as to whether the account balance has become
uncollectible. Based on the information available, management believes the
allowance for doubtful accounts is adequate; however, actual write-offs might
exceed the recorded allowance.
  -45-
  Income
Taxes.In
accordance with SFAS, No. 109, we have recorded a deferred tax assets
and liabilities to account for the expected future tax benefits and consequences
of events that have been recognized in our financial statements and our tax
returns. There are several items that result in deferred tax asset and liability
impact to the balance sheet. If we conclude that it is more likely than not that
some portion or all of the deferred tax assets will not be realized under
accounting standards, it is reduced by a valuation allowance to remove the
benefit of recovering those deferred tax assets from our financial statements.
Additionally, in accordance with FIN 48, we have recorded a liability of
$295,000 associated with uncertain tax positions. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. We are required to determine whether it is more likely than not (a
likelihood of more than 50 percent) that a tax position will be sustained
upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position in order to record any
financial statement benefit. If that step is satisfied, then we must measure the
tax position to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that
is greater than 50 percent likely of being realized upon ultimate
settlement.
  Assumptions/Approach
Used: Numerous
judgments and assumptions are inherent in the determination of future taxable
income and tax return filing positions that we take, including factors such as
future operating conditions.
  Effect
if Different Assumptions Used:Management, along with
consultation from an independent public accounting firm used in tax
consultation, continually evaluate complicated tax law requirements and their
effect on our current and future tax liability and our tax filing positions.
Despite our attempt to make an accurate estimate, the ultimate utilization of
our deferred tax assets associated with the tax basis of our leased gaming
equipment and property and equipment of $16.0 million is largely dependent
upon our ability to generate taxable income in the future. Our liability for
uncertain tax positions is dependent upon our judgment on the amount of
financial statement benefit that an uncertain tax position will realize upon
ultimate settlement and on the probabilities of the outcomes that could be
realized upon ultimate settlement of an uncertain tax position using the facts,
circumstances and information available at the reporting date to establish the
appropriate amount of financial statement benefit. To the extent that a
valuation allowance or uncertain tax position is established or increased or
decreased during a period, we may be required to include an expense or benefit
within income tax expense in the income statement.
  Inflation
and Other Cost Factors
  Our
operations have not been nor are they expected to be materially affected by
inflation. However, our domestic and international operational expansion is
affected by the cost of hardware components, which are not considered to be
inflation sensitive, but rather, sensitive to changes in technology and
competition in the hardware markets. In addition, we expect to continue to incur
increased legal and other similar costs associated with regulatory compliance
requirements and the uncertainties present in the operating environment in which
we conduct our business. However, this expectation could change depending upon a
number of factors, including those described under “Item 1. Business – Risk
Factors.”
  -46-
  U.S.
GAAP Net Income to EBITDA Reconciliation
  EBITDA is
defined as earnings before interest, taxes, amortization, depreciation, and
accretion of contract rights. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles, we
believe the use of the non-GAAP financial measure EBITDA enhances an overall
understanding of our past financial performance, and provides useful information
to the investor because of its historical use by us as a performance measure,
and the use of EBITDA by companies in the gaming sector as a measure of
performance. However, investors should not consider this measure in isolation or
as a substitute for net income, operating income, or any other measure for
determining our operating performance that is calculated in accordance with
GAAP. In addition, because EBITDA is not calculated in accordance with GAAP, it
may not necessarily be comparable to similarly titled measures employed by other
companies. A reconciliation of EBITDA to the most comparable GAAP financial
measure, net income, follows:
  U.S. GAAP Net Income (Loss) to
                        EBITDA Reconciliation(In thousands)2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Net
      income (loss)
                      
                      $
                      378
                      
                      
                      $
                      (744
                      )
                      
                      $
                      3,532
                      
                      
                      $
                      17,643
                      
                      
                      $
                      32,772Add
      back:Amortization
      and depreciation
                      
                      
                      52,717
                      
                      
                      
                      58,179
                      
                      
                      
                      57,227
                      
                      
                      
                      57,105
                      
                      
                      
                      37,255Accretion
      of contract rights
                      
                      
                      4,092
                      
                      
                      
                      5,576
                      
                      
                      
                      4,256
                      
                      
                      
                      2,538
                      
                      
                      
                      53Interest
      expense, net
                      
                      
                      3,687
                      
                      
                      
                      421
                      
                      
                      
                      1,454
                      
                      
                      
                      722
                      
                      
                      
                      374Income
      tax expense (benefit)
                      
                      
                      302
                      
                      
                      
                      (1,179
                      )
                      
                      
                      2,516
                      
                      
                      
                      11,457
                      
                      
                      
                      17,285EBITDA
                      
                      $
                      61,176
                      
                      
                      $
                      62,253
                      
                      
                      $
                      68,985
                      
                      
                      $
                      89,465
                      
                      
                      $
                      87,739
  ITEM 7A.  Quantitative and Qualitative
Disclosures about Market Risk
  We are
subject to market risks in the ordinary course of business, primarily associated
with interest rate fluctuations.
  Our
Credit Facility provides us with additional liquidity to meet our short-term
financing needs, as further described under “PART II – Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources” and “PART IV – Item 15. Exhibits and
Financial Statement Schedules – Note 6. Credit Facility, Long-Term Debt and
Capital Leases.” Pursuant to our Credit Facility, we may currently borrow up to
a total of $150 million, and our availability as of
September 30, 2008, is $55.3 million, subject to covenant
restrictions.
  In
connection with the development agreements we enter into with many of our Native
American tribal customers, we are required to advance funds to the tribes for
the construction and development of tribal gaming facilities, some of which are
required to be repaid. As a result of our adjustable interest rate notes payable
and fixed interest rate notes receivable described above, we are subject to
market risk with respect to interest rate fluctuations. Any material increase in
prevailing interest rates could cause us to incur significantly higher interest
expense.
  To the
extent that Libor rates do not exceed the 5% Cap that we purchased in
fiscal 2008, we estimate that a hypothetical increase
of 100 basis points in interest rates would increase our interest
expense by approximately $875,000, based on our variable debt outstanding
of $87.0 million as of September 30, 2008. The Credit Facility
also required that we enter into hedging arrangements covering at least
$50 million of the term loan for a three-year period. On
May 29, 2008, we purchased, for $390,000, an interest rate cap
(5% cap rate) covering $50 million of the term loan.
  We
account for currency translation from our Mexico operations in accordance with
SFAS No. 52, “Foreign Currency Translation.” Balance sheet accounts
are translated at the exchange rate in effect at each balance sheet date. Income
statement accounts are translated at the average rate of exchange prevailing
during the period. Translation adjustments resulting from this process are
charged or credited to other comprehensive income. We do not currently manage
this exposure with derivative financial instruments.
  ITEM 8.  Financial Statements and
Supplementary Data
  The
financial statements and supplemental data required by this item are included in
PART IV, Item 15.
  -47-
  ITEM 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  None.
  ITEM 9A.  Controls and
Procedures
  Evaluation of
Disclosure Control and Procedures.As of the end of the period covered by
this report, an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of
management’s disclosure controls and procedures (as defined in rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) to ensure
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, is (i) recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms; and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving desired control objectives, and
management is necessarily required to apply its judgment when evaluating the
cost-benefit relationship of potential controls and procedures. Based upon the
evaluation, the Chief Executive Officer and our Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective as of September 30, 2008.
  There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
  Management’s
Report on Internal Control over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting
principles.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  Our
management, including our Chief Executive Officer and our Chief Financial
Officer, assessed the effectiveness of our internal control over financial
reporting as of September 30, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control — Integrated
Framework. Based on our assessment and those criteria, we believe that we
maintained effective internal control over financial reporting as of
September 30, 2008.
  Our
independent registered public accounting firm, BDO Seidman, LLP, have issued an
attestation report dated December 15, 2008 on our internal control
over financial reporting. That report is included on page 52.
  ITEM 9B.  Other
Information
  None.
 PART
III
  Certain
information required by PART III is omitted from this Form 10-K, because we
will file a definitive Proxy Statement pursuant to Regulation 14A, or Proxy
Statement, no later than 120 days after the end of the fiscal year covered by
this Form 10-K, and certain information to be included therein is incorporated
herein by reference.
  ITEM 10.  Directors, Executive Officers and
Corporate Governance
  The
information required by this Item is incorporated by reference to the Proxy
Statement under the headings “Proposal One – Election of Directors,” and
“Information Regarding Executive Officer Compensation – Executive Officers” and
“Section 16(a) Beneficial Ownership Reporting Compliance.”
  -48-
  We have
adopted a code of ethics applicable to our Chief Executive Officer, Chief
Financial Officer, Controller and other finance leaders, which is a “code of
ethics” as defined by applicable rules of the SEC. This code is publicly
available on our website at http://ir.multimediagames.com/downloads.cfm. If we
make any amendments to this code other than technical, administrative or other
non-substantive amendments, or grants any waivers, including implicit waivers,
from a provision of this code to our Chief Executive Officer, Chief Financial
Officer or Controller, we will disclose the nature of the amendment or waiver,
its effective date and to whom it applies on our website or in a report on
Form 8-K filed with the SEC.
  Information
required by this item relating to the Audit Committee of our Board of Directors
is incorporated by reference to the Proxy Statement under the heading “Corporate
Governance Board of Directors Meetings and Committees – Audit
Committee.”
  ITEM 11.  Executive
Compensation
  The
information required by this Item is incorporated by reference to the Proxy
Statement under the heading “Executive Compensation” and “Corporate Governance –
Compensation Committee.”
  ITEM 12.  Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
  The
information required by this Item is incorporated by reference to the Proxy
Statement under the heading “Security Ownership of Certain Beneficial Owners and
Management” and “Executive Compensation – Equity Compensation Plan
Information.”
  ITEM 13.  Certain Relationships and Related
Transactions and Director Independence
  The
information required by this Item is incorporated by reference to the Proxy
Statement under the heading “Executive Compensation – Certain Relationships and
Related Transactions” and “Corporate Governance – Affirmative Determination
Regarding Director Independence and Other Matters.”
  ITEM 14.  Principal Accountant Fees and
Services
  The
information required by this Item is incorporated by reference to the Proxy
Statement under the heading “Independent Registered Public Accounting Firm Fees”
and “Policy on Audit Committee Pre Approved Audit and Permissible Non Audit
Services of the Independent Registered Public Accounting Firm.”
  -49-
  PART
IV
  ITEM 15.  Exhibits and Financial Statement
Schedules
 
 (a)
                  The
      following documents are filed as part of this Annual Report on Form
      10-K:
  (1)
                  Financial
      Statements
  Reports
      of Independent Registered Public Accounting Firm
                          
                          
                          51Consolidated
      Balance Sheets, as of September 30, 2008
      and 2007
                          
                          
                          52Consolidated
      Statements of Operations, Years Ended
      September 30, 2008, 2007 and 2006
                          
                          
                          53Consolidated
      Statements of Stockholders’ Equity and Comprehensive
      Income (Loss),Years Ended September 30, 2008, 2007 and 2006
                          
                          
                          54Consolidated
      Statements of Cash Flows, Years Ended
      September 30, 2008, 2007 and 2006
                          
                          
                          55Notes
      to Consolidated Financial Statements
                          
                          
                          57
  (2)
                  Financial
      Statement Schedule
  Schedule
      II Valuation and Qualifying Accounts
                          77
 
 (3)
                  The
      Exhibits listed in the Exhibit Index, which appears immediately following
      the signature page and are incorporated herein by reference, and are filed
      as part of this Annual Report on Form
10-K.
   -50-
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders
 Multimedia
Games, Inc.
 Austin,
Texas
  We have
audited the accompanying consolidated balance sheets of Multimedia Games, or the
Company, Inc. as of September 30, 2008 and 2007 and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
September 30, 2008. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule 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 and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statements and schedule 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 financial position of Multimedia Games, Inc. at
September 30, 2008 and 2007, and the results of its operations
and its cash flows for the each of the three years in the period ended
September 30, 2008, in conformity with accounting principles generally
accepted in the United States of America.
  Also, in
our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
  As
discussed in Note 9 of the consolidated financial statements, effective
October 1, 2008, the Company adopted the provisions of FASB
Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in
Income Taxes,” an interpretation of SFAS No. 109, “Accounting for
Income Taxes.”
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Multimedia Games, Inc. internal control over
financial reporting as of September 30, 2008, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria) and our report dated
December 15, 2008 expressed an unqualified opinion
thereon.
  /s/ BDO
Seidman, LLP
  Houston,
Texas
 December 15, 2008
  -51-
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders
 Multimedia
Games, Inc.
 Austin,
Texas
  We have
audited Multimedia Games, Inc., or the Company’s, internal control over
financial reporting as of September 30, 2008, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
  We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, Multimedia Games, Inc. maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2008, based on the
COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Multimedia
Games, or the Company, Inc. as of September 30, 2008 and 2007 and
the related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended September 30, 2008, and our report dated December 15,
2008 expressed an unqualified opinion thereon.
  /s/ BDO
Seidman, LLP
  Houston,
Texas
 December 15, 2008
  -52-


MULTIMEDIA
GAMES, INC.




CONSOLIDATED
BALANCE SHEETS


As
of September 30, 2008 and 2007


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




2008
                        
                        
                        2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                        
                        $
                        6,289
                        
                        
                        $
                        5,805Accounts
      receivable, net of allowance for doubtful accountsof
      $1,209 and $854, respectively
                        
                        
                        23,566
                        
                        
                        
                        22,176Inventory
                        
                        
                        2,445
                        
                        
                        
                        3,602Deferred
      contract costs
                        
                        
                        998
                        
                        
                        
                        —Prepaid
      expenses and other
                        
                        
                        2,170
                        
                        
                        
                        2,906Current
      portion of notes receivable, net
                        
                        
                        23,072
                        
                        
                        
                        12,248Federal
      and state income tax receivable
                        
                        
                        2,198
                        
                        
                        
                        —Deferred
      income taxes
                        
                        
                        6,876
                        
                        
                        
                        1,932Total
      current assets
                        
                        
                        67,614
                        
                        
                        
                        48,669Restricted
      cash and long-term investments
                        
                        
                        868
                        
                        
                        
                        928Leased
      gaming equipment, net
                        
                        
                        36,024
                        
                        
                        
                        38,579Property
      and equipment, net
                        
                        
                        67,329
                        
                        
                        
                        75,332Long-term
      portion of notes receivable, net
                        
                        
                        46,690
                        
                        
                        
                        36,797Intangible
      assets, net
                        
                        
                        37,356
                        
                        
                        
                        35,884Other
      assets
                        
                        
                        4,157
                        
                        
                        
                        3,497Deferred
      income taxes
                        
                        
                        16,902
                        
                        
                        
                        16,583Total
      assets
                        
                        $
                        276,940
                        
                        
                        $
                        256,269LIABILITIES AND
      STOCKHOLDERS’EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt
                        
                        $
                        1,544
                        
                        
                        $
                        563Accounts
      payable and accrued expenses
                        
                        
                        29,248
                        
                        
                        
                        22,021Federal
      and state income tax payable
                        
                        
                        33
                        
                        
                        
                        2,444Deferred
      revenue
                        
                        
                        2,640
                        
                        
                        
                        1,020Totalcurrentliabilities
                        
                        
                        33,465
                        
                        
                        
                        26,048Revolving
      line of credit
                        
                        
                        19,000
                        
                        
                        
                        7,000Long-term
      debt less current portion
                        
                        
                        66,444
                        
                        
                        
                        74,484Other
      long-term liabilities
                        
                        
                        1,131
                        
                        
                        
                        928Deferred
      revenue, less current portion
                        
                        
                        6,168
                        
                        
                        
                        —Totalliabilities
                        
                        
                        126,208
                        
                        
                        
                        108,460Commitments
      and contingencies (Notes 6,7,8,9, 10, and 11)Stockholders’
      equity:Preferred
      stock:Series
      A, $0.01 par value, 1,800,000 shares authorized,no
      shares issued and outstanding;
                        
                        
                        —
                        
                        
                        
                        —Series
      B, $0.01 par value, 200,000 shares authorized,no
      shares issued and outstanding
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, $0.01 par value, 75,000,000 shares authorized;32,511,988
      and 32,134,614 shares issued, and26,608,571and
      26,231,197 shares outstanding, respectively
                        
                        
                        325
                        
                        
                        
                        321Additional
      paid-in capital
                        
                        
                        83,076
                        
                        
                        
                        80,112Treasury
      stock, 5,903,417 shares at cost
                        
                        
                        (50,128
                        )
                        
                        
                        (50,128
                        )Retained
      earnings
                        
                        
                        117,581
                        
                        
                        
                        117,498Accumulated
      other comprehensive income (loss)
                        
                        
                        (122
                        )
                        
                        
                        6Total stockholders’equity
                        
                        
                        150,732
                        
                        
                        
                        147,809Total liabilities andstockholders’equity
                        
                        $
                        276,940
                        
                        
                        $
                        256,269




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




-53-


MULTIMEDIA
GAMES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Years Ended September 30, 2008, 2007 and 2006


(In
thousands, except per-share amounts)




2008
                        
                        
                        2007
                        
                        
                        2006REVENUES:Gaming
      revenue:Class II
                        
                        $
                        28,360
                        
                        
                        $
                        47,964
                        
                        
                        $
                        89,167Oklahoma
      Compact
                        
                        
                        55,182
                        
                        
                        
                        37,131
                        
                        
                        
                        10,629Charity
                        
                        
                        14,632
                        
                        
                        
                        18,010
                        
                        
                        
                        18,416All
      other
                        
                        
                        21,338
                        
                        
                        
                        13,887
                        
                        
                        
                        8,483Gaming
      equipment, system sale and lease revenue
                        
                        
                        9,959
                        
                        
                        
                        2,869
                        
                        
                        
                        13,946Other
                        
                        
                        1,661
                        
                        
                        
                        2,056
                        
                        
                        
                        4,471Total
      revenues
                        
                        
                        131,132
                        
                        
                        
                        121,917
                        
                        
                        
                        145,112OPERATING
      COSTS AND EXPENSES:Cost
      of gaming equipment and systems soldand
      royalty fees paid
                        
                        
                        5,012
                        
                        
                        
                        2,223
                        
                        
                        
                        11,768Selling,
      general and administrative expenses
                        
                        
                        72,168
                        
                        
                        
                        66,104
                        
                        
                        
                        68,615Amortization
      and depreciation
                        
                        
                        52,717
                        
                        
                        
                        58,179
                        
                        
                        
                        57,227Total
      operating costs and expenses
                        
                        
                        129,897
                        
                        
                        
                        126,506
                        
                        
                        
                        137,610Operating
      income (loss)
                        
                        
                        1,235
                        
                        
                        
                        (4,589
                        )
                        
                        
                        7,502OTHER
      INCOME (EXPENSE):Other
      income
                        
                        
                        3,132
                        
                        
                        
                        3,087
                        
                        
                        
                        —Interest
      income
                        
                        
                        5,011
                        
                        
                        
                        4,575
                        
                        
                        
                        3,024Interest
      expense
                        
                        
                        (8,698
                        )
                        
                        
                        (4,996
                        )
                        
                        
                        (4,478
                        )Income
      (loss) before income taxes
                        
                        
                        680
                        
                        
                        
                        (1,923
                        )
                        
                        
                        6,048Income
      tax (expense) benefit
                        
                        
                        (302
                        )
                        
                        
                        1,179
                        
                        
                        
                        (2,516
                        )Net
      income (loss)
                        
                        $
                        378
                        
                        
                        $
                        (744
                        )
                        
                        $
                        3,532Basic
      earnings (loss) per common share
                        
                        $
                        0.01
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        0.13Diluted
      earnings (loss) per common share
                        
                        $
                        0.01
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        0.12Shares
      used in earnings (loss) per common shareBasic
                        
                        
                        26,292
                        
                        
                        
                        27,389
                        
                        
                        
                        27,175Diluted
                        
                        
                        27,201
                        
                        
                        
                        27,389
                        
                        
                        
                        29,108




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





-54-





MULTIMEDIA
GAMES, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)


For
the Years Ended September 30, 2008, 2007, and 2006


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


Common
      Stock
                                                
                                                
                                                
                                                
                                                
                                                Treasury
      StockAccumulatedAdditional
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                Other
                                                
                                                
                                                TotalNumber
      of
                                                
                                                
                                                
                                                
                                                
                                                Paid-in
                                                
                                                
                                                Number
      of
                                                
                                                
                                                
                                                
                                                
                                                Retained
                                                
                                                
                                                Comprehensive
                                                
                                                
                                                Stockholders’Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Capital
                                                
                                                
                                                Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Earnings
                                                
                                                
                                                Income
                                                
                                                
                                                EquityBalance,
      September 30, 2005
                                                
                                                
                                                30,802,524
                                                
                                                
                                                $
                                                308
                                                
                                                
                                                $
                                                67,184
                                                
                                                
                                                
                                                3,752,239
                                                
                                                
                                                $
                                                (23,285
                                                )
                                                
                                                $
                                                114,710
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                158,917Exercise
      of stock options
                                                
                                                
                                                620,294
                                                
                                                
                                                
                                                6
                                                
                                                
                                                
                                                2,817
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,823Purchase
      of treasury stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                159,146
                                                
                                                
                                                
                                                (1,456
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,456
                                                )Tax
      benefit of stock options exercised
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,418
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,418Share-based
      compensation expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,624
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                2,624Options
      for consulting services
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                78
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                78Comprehensive
      income:Net
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,532
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,532Foreign
      currency translation adjustment
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                9
                                                
                                                
                                                
                                                9Comprehensive
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,541Balance,
      September 30, 2006
                                                
                                                
                                                31,422,818
                                                
                                                
                                                
                                                314
                                                
                                                
                                                
                                                74,121
                                                
                                                
                                                
                                                3,911,385
                                                
                                                
                                                
                                                (24,741
                                                )
                                                
                                                
                                                118,242
                                                
                                                
                                                
                                                9
                                                
                                                
                                                
                                                167,945Exercise
      of stock options
                                                
                                                
                                                711,796
                                                
                                                
                                                
                                                7
                                                
                                                
                                                
                                                3,397
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                3,404Purchase
      of treasury stock
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,992,032
                                                
                                                
                                                
                                                (25,387
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (25,387
                                                )Tax
      benefit of stock options exercised
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,430
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,430Share-based
      compensation expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,164
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,164Comprehensive
      income:Net
      loss
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (744
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (744
                                                )Foreign
      currency translation adjustment
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (3
                                                )
                                                
                                                
                                                (3
                                                )Comprehensive
      loss
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (747
                                                )Balance,
      September 30, 2007
                                                
                                                
                                                32,134,614
                                                
                                                
                                                
                                                321
                                                
                                                
                                                
                                                80,112
                                                
                                                
                                                
                                                5,903,417
                                                
                                                
                                                
                                                (50,128
                                                )
                                                
                                                
                                                117,498
                                                
                                                
                                                
                                                6
                                                
                                                
                                                
                                                147,809Exercise
      of stock options
                                                
                                                
                                                127,374
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                216
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                217Tax
      benefit of stock options exercised
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                112
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                112Share-based
      compensation expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,469
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,469FIN48
      Reserve
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (295
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (295
                                                )Shares
      issued from purchases
                                                
                                                
                                                250,000
                                                
                                                
                                                
                                                3
                                                
                                                
                                                
                                                1,167
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,170Comprehensive
      income:Net
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                378
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                378Foreign
      currency translation adjustment
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (128
                                                )
                                                
                                                
                                                (128
                                                )Comprehensive
      income
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                250Balance,
      September 30, 2008
                                                
                                                
                                                32,511,988
                                                
                                                
                                                $
                                                325
                                                
                                                
                                                $
                                                83,076
                                                
                                                
                                                
                                                5,903,417
                                                
                                                
                                                $
                                                (50,128
                                                )
                                                
                                                $
                                                117,581
                                                
                                                
                                                $
                                                (122
                                                )
                                                
                                                $
                                                150,732




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





-55-




MULTIMEDIA
GAMES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Years Ended September 30, 2008, 2007 and 2006


(In thousands)




2008
                  
                  
                  2007
                  
                  
                  2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                  
                  $
                  378
                  
                  
                  $
                  (744
                  )
                  
                  $
                  3,532Adjustments
      to reconcile net income (loss) to cash providedby
      operating activities:Amortization
                  
                  
                  4,703
                  
                  
                  
                  6,338
                  
                  
                  
                  6,532Depreciation
                  
                  
                  48,014
                  
                  
                  
                  51,841
                  
                  
                  
                  50,695Accretion
      of contract rights
                  
                  
                  4,092
                  
                  
                  
                  5,576
                  
                  
                  
                  4,256Provisions
      for long-lived assets
                  
                  
                  5,657
                  
                  
                  
                  320
                  
                  
                  
                  1,142Deferred
      income taxes
                  
                  
                  (5,263
                  )
                  
                  
                  (10,833
                  )
                  
                  
                  (8,865
                  )Share-based
      compensation
                  
                  
                  1,469
                  
                  
                  
                  1,164
                  
                  
                  
                  2,702Provision
      for doubtful accounts
                  
                  
                  421
                  
                  
                  
                  466
                  
                  
                  
                  849Interest
      income from imputed interest
                  
                  
                  (4,308
                  )
                  
                  
                  (2,559
                  )
                  
                  
                  (1,240
                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (1,987
                  )
                  
                  
                  (4,190
                  )
                  
                  
                  90Inventory
                  
                  
                  4,178
                  
                  
                  
                  (2
                  )
                  
                  
                  (3,186
                  )Deferred
      contract costs
                  
                  
                  (998
                  )
                  
                  
                  —
                  
                  
                  
                  789Prepaid
      expenses and other
                  
                  
                  76
                  
                  
                  
                  (2,743
                  )
                  
                  
                  2,074Federal
      and state income tax payable/receivable
                  
                  
                  (4,904
                  )
                  
                  
                  319
                  
                  
                  
                  (1,187
                  )Notes
      receivable
                  
                  
                  (8,402
                  )
                  
                  
                  (335
                  )
                  
                  
                  (793
                  )Accounts
      payable and accrued expenses
                  
                  
                  7,227
                  
                  
                  
                  (9,650
                  )
                  
                  
                  (3,627
                  )Other
      long-term liabilities
                  
                  
                  263
                  
                  
                  
                  (96
                  )
                  
                  
                  (257
                  )Deferred
      revenue
                  
                  
                  8,307
                  
                  
                  
                  (762
                  )
                  
                  
                  (1,356
                  )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                  
                  
                  58,923
                  
                  
                  
                  34,110
                  
                  
                  
                  52,150CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipmentand
      leased gaming equipment
                  
                  
                  (45,997
                  )
                  
                  
                  (59,212
                  )
                  
                  
                  (37,639
                  )Proceeds
      from disposal of assets
                  
                  
                  340
                  
                  
                  
                  1,599
                  
                  
                  
                  —Acquisition
      of intangible assets
                  
                  
                  (4,845
                  )
                  
                  
                  (3,850
                  )
                  
                  
                  (5,411
                  )Advances
      under development agreements
                  
                  
                  (41,660
                  )
                  
                  
                  (28,492
                  )
                  
                  
                  (37,240
                  )Repayments
      under development agreements
                  
                  
                  27,273
                  
                  
                  
                  43,629
                  
                  
                  
                  12,500Proceeds
      from development agreement floor space buyback
                  
                  
                  —
                  
                  
                  
                  12,731
                  
                  
                  
                  3,036NET
      CASH USED IN INVESTING ACTIVITIES
                  
                  
                  (64,889
                  )
                  
                  
                  (33,595
                  )
                  
                  
                  (64,754
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from exercise of stock options,warrants
      and related tax benefit
                  
                  
                  329
                  
                  
                  
                  4,834
                  
                  
                  
                  4,241Proceeds
      from shares issued
                  
                  
                  1,170
                  
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from long-term debt
                  
                  
                  4,574
                  
                  
                  
                  75,047
                  
                  
                  
                  —Principal
      payments of long-term debt and capital leases
                  
                  
                  (11,633
                  )
                  
                  
                  (5,124
                  )
                  
                  
                  (13,605
                  )Proceeds
      from revolving lines of credit
                  
                  
                  31,418
                  
                  
                  
                  23,777
                  
                  
                  
                  54,549Payments
      on revolving lines of credit
                  
                  
                  (19,418
                  )
                  
                  
                  (72,791
                  )
                  
                  
                  (26,305
                  )Purchase
      of treasury stock
                  
                  
                  —
                  
                  
                  
                  (25,387
                  )
                  
                  
                  (1,456
                  )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  6,440
                  
                  
                  
                  356
                  
                  
                  
                  17,424EFFECT
      OF EXCHANGE RATES ON CASH
                  
                  
                  10
                  
                  
                  
                  (5
                  )
                  
                  
                  1Net
      increase in cash and cash equivalents
                  
                  
                  484
                  
                  
                  
                  866
                  
                  
                  
                  4,821Cash
      and cash equivalents, beginning of year
                  
                  
                  5,805
                  
                  
                  
                  4,939
                  
                  
                  
                  118Cash
      and cash equivalents, end of year
                  
                  $
                  6,289
                  
                  
                  $
                  5,805
                  
                  
                  $
                  4,939




-56-


MULTIMEDIA
GAMES, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS –
(Continued)


For
the Years Ended September 30, 2008, 2007 and 2006


(In
thousands)




2008
                  
                  
                  2007
                  
                  
                  2006SUPPLEMENTAL
      CASH FLOW DATA:Interest
      paid
                  
                  $
                  7,564
                  
                  
                  $
                  4,805
                  
                  
                  $
                  4,011Income
      tax paid
                  
                  $
                  10,852
                  
                  
                  $
                  7,629
                  
                  
                  $
                  11,151NONCASH
      TRANSACTIONS:Contract
      rights resulting from imputed interest ondevelopment
      agreement notes receivables
                  
                  $
                  6,380
                  
                  
                  $
                  6,290
                  
                  
                  $
                  6,393Transfer
      of leased gaming equipment to inventory
                  
                  $
                  3,021
                  
                  
                  $
                  —
                  
                  
                  $
                  —




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





-57-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.  Summary
of Significant Accounting Policies




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




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




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




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




§
            Persuasive
      evidence of an arrangement exists;




§
            Delivery
      has occurred;




§
            Price
      to the buyer is fixed or determinable;
and




§
            Collectability
      is probable.




Gaming
Revenue - The Company derives Gaming Revenue from the following
sources:




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




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




-58-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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




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




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




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




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




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




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




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




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




Costs and
Billings on Uncompleted Contract-During fiscal 2008,
the Company entered into a fixed-price contract with a customer, pursuant to
which it will deliver an electronic bingo system. Revenues from this fixed-price
contract will be recognized on the completed-contract method in accordance with
American Institute of Certified Public Accountants Statement of
Position 81-1.




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




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





-59-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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




(in thousands)Costs
      incurred on uncompleted contracts
                    
                    $
                    1,350Billings
      on uncompleted contracts
                    
                    
                    (352
                    )Deferred
      contract costs
                    
                    $
                    998




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




Restricted Cash
and Long-Term Investments –Restricted cash and long-term investments at
September 30, 2008 and 2007, were $868,000 and $928,000,
respectively, representing the fair value of investments held by the Company’s
prize fulfillment firm related to outstanding MegaBingo® jackpot
prizes.




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




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




Development
Agreements –The Company enters into development agreements to provide
financing for new gaming facilities or for the expansion of existing facilities.
In return, the facility dedicates a percentage of its floor space to placement
of the Company’s player terminals, and the Company receives a fixed percentage
of those player terminals’ hold per day over the term of the agreement which is
generally for 83 months. Certain of the agreements contain player terminal
performance standards that could allow the facility to reduce a portion of the
Company’s guaranteed floor space. In addition, certain development agreements
allow the facilities to buy out floor space after advances that are subject to
repayment have been repaid. The agreements typically provide for a portion of
the amounts retained by the gaming facility for their share of the operating
profits of the facility to be used to repay some or all of the advances recorded
as notes receivable. Amounts advanced in excess of those to be reimbursed by the
customer for real property and land improvements are allocated to intangible
assets and are generally amortized over the term of the contract, which is
recorded as a reduction of revenue generated from the gaming facility. In the
past and in the future, the Company may by mutual agreement and for
consideration, amend these contracts to reduce its floor space at the
facilities. Any proceeds received for the reduction of floor space is first
applied against the intangible asset recovered for that particular development
agreement, if any and the remaining net book value of the intangible asset is
prospectively amortized on a straight-line method over the remaining estimated
useful life.




At
September 30, 2008 and 2007, the following net amounts related to
advances made under development agreements were recorded in the following
balance sheet captions:




September 30,
                        2008
                      
                      
                      September 30,
                        2007(In
      thousands)Included
      inNotes
      Receivable(1)
                      
                      $
                      61,750
                      
                      
                      $
                      49,045Property
      and equipment,net
      of accumulated depreciation
                      
                      
                      —
                      
                      
                      
                      56Intangible
      assets – contract rights,net
      of accumulated amortization
                      
                      
                      29,368
                      
                      
                      
                      27,080








(1)
            The
      Company collected approximately $27.3 million on development
      agreement notes receivable
during 2008.





-60-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Notes
receivable from development agreements are generated from reimbursable amounts
advanced under development agreements. The Company has entered into development
agreements with a customer under which approximately $72.7 million has been
advanced and is outstanding at September 30, 2008, and for which we
impute interest on these interest-free loans discounting the balances to
$61.8 million. During fiscal 2008, the Company recorded imputed
interest of $4.3 million relating to development agreements with an imputed
interest rate range of 6.00% to 9.00% compared to $2.6 million in
fiscal 2007.




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




Management
reviews long-lived asset classes for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to its fair value, which considers
the future undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or the fair value less costs of disposal. In the fourth Quarter of
fiscal 2008, the Company recorded reserves of $5.6 million related to
property and equipment and leased gaming equipment (See Note 2, “Property
and Equipment and Leased Gaming Equipment.”)




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




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




Other Income -Other income was $3.1 million for the years ended
September 30, 2008, and 2007. Other income consisted of
distributions from a partnership interest, accounted for on the cost basis, of
$3.1 million in 2008 and $1.7 million in 2007. Also
in 2007, other income consisted of $1.4 million resulting from the
extinguishment of a liability resulting from the settlement with the Company’s
former Chief Executive Officer.




Other Long-Term
Liabilities –Other long-term liabilities at September 30, 2008
and 2007 include the present value of investments held by the Company’s
prize-fulfillment firm related to outstanding MegaBingo jackpot-prize-winner
annuities of $868,000 and $928,000, respectively. At
September 30, 2008, other long term liabilities also included $263,000
associated with the resignation of a former Chief Executive
Officer.




Fair Value of
Financial Instruments –The carrying value of financial instruments
reported in the accompanying consolidated balance sheets for cash, accounts and
notes receivable, accounts payable, and accrued expenses payable and other
liabilities, approximate fair value due to the immediate or short-term nature or
maturity of these financial instruments. The carrying amounts for our credit
facility approximates fair value due to the fact that the underlying instrument
includes provisions to adjust interest rates to approximate fair market
value




Segment and
Related Information –Although the Company has a number of operating
divisions, separate segment data has not been presented as they meet the
criteria for aggregation as permitted by SFAS No. 131, “Disclosures About
Segments of an Enterprise and Related Information.”





-61-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Costs of Computer
Software –Software development costs have been accounted for in
accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.” Under
SFAS No. 86, capitalization of software development costs begins upon
the establishment of technological feasibility and prior to the availability of
the product for general release to customers. We capitalized software
development costs of approximately $3.7 million during 2008,
$2.8 million during 2007, and $4.6 million during 2006.
Software development costs primarily consist of personnel costs and rent for
related office space. We begin to amortize capitalized costs when a product is
available for general release to customers. Amortization expense is determined
on a product-by-product basis at a rate not less than straight-line basis over
the product’s remaining estimated economic life, but not to exceed five years.
Amortization of software development costs was approximately $3.3 million
in 2008, $4.3 million in 2007, and $4.2 million
in 2006, and is included in amortization and depreciation in the
accompanying consolidated statements of operations.




Income Taxes –The Company accounts for income taxes using the asset and liability
method and applies the provisions of Statement of Financial Accounting
Standards, or SFAS, No. 109, “Accounting for Income Taxes.” Under SFAS
No. 109, deferred tax liabilities or assets arise from differences between
the tax basis of liabilities or assets and their bases for financial reporting,
and are subject to tests of recoverability in the case of deferred tax assets.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets to the extent realization is not judged to be more likely
than not.




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




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




For
      the Year Ended
                  September 30,(In
      thousands, except shares and per-share amounts)2008
                
                
                2007
                
                
                2006Income
      (loss) available to common stockholders
                
                $
                378
                
                
                $
                (744
                )
                
                $
                3,532Weighted
      average common shares outstanding
                
                
                26,291,968
                
                
                
                27,388,921
                
                
                
                27,174,998Effect
      of dilutive securities:Options
                
                
                909,462
                
                
                
                —
                
                
                
                1,933,476Weighted
      average common and potential shares outstanding
                
                
                27,201,430
                
                
                
                27,388,921
                
                
                
                29,108,474Basic
      earnings (loss) per share
                
                $
                0.01
                
                
                $
                (0.03
                )
                
                $
                0.13Diluted
      earnings (loss) per share
                
                $
                0.01
                
                
                $
                (0.03
                )
                
                $
                0.12




At
September 30, 2008, options to purchase approximately 2.9 million
shares of common stock, with exercise prices ranging from 4.68
to $21.53, per share were outstanding, but were not included in the
computation of diluted earnings per share due to their antidilutive
effect.




At
September 30, 2007, options to purchase approximately 1.7 million
shares of common stock, with exercise prices ranging from $7.61
to $21.53, were not included in the computation of diluted earnings per
share due to the antidilutive effect, and approximately 1.8 million
equivalent shares were not included due to the loss generated in the current
year.




At
September 30, 2006, options to purchase
approximately 1.9 million weighted shares of common stock at exercise
prices ranging from $7.61 to $21.53 per share were outstanding, but
were not included in the computation of diluted earnings per share due to their
antidilutive effect.




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




-62-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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




There
were option grants to purchase 2.7 million common shares during the year
ended September 30, 2008. The assumptions used for the years
ended 2008, 2007 and 2006, and the resulting estimates of
weighted-average fair value per share of options granted during these periods
are as follows:




2008
                    
                    
                    2007
                    
                    
                    2006Weighted
      expected life
                    
                    4.98 years
                    
                    
                    4.63 years
                    
                    
                    4.65
      yearsRisk-free
      interest rate
                    
                    
                    3.0% - 4.1
                    %
                    
                    
                    4.10
                    %
                    
                    
                    4.10
                    %Expected
      volatility
                    
                    
                    50.23
                    %
                    
                    
                    62.00
                    %
                    
                    
                    62.00
                    %Expected
      dividend yields
                    
                    None
                    
                    
                    None
                    
                    
                    NoneWeighted-average
      fair value of options granted during the period
                    
                    $
                    2.14
                    
                    
                    $
                    5.88
                    
                    
                    $
                    5.53Expected
      annual forfeiture rate
                    
                    
                    5.31
                    %
                    
                    
                    5.31
                    %
                    
                    
                    5.31
                    %




Total pre
tax share-based compensation for the years
ended 2008, 2007 and 2006 was $1.5 million,
$1.2 million and $2.7 million, respectively. The total income tax
benefit recognized in the statement of operations for share-based compensation
arrangements was $103,000, $162,000 and $548,000 for the years ended
September 30, 2008, 2007 and 2006, respectively. In
accordance with SFAS No. 123 (R), the share-based compensation
for 2008, 2007 and 2006 has been recorded by the
Company.




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




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




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




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




-63-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




In
December 2007, the FASB issued SFAS No. 141 (revised), “Business
Combinations.” SFAS No. 141(R) changes the accounting for business
combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008, with early adoption
prohibited. The Company will be required to adopt SFAS No. 141(R) in the
first quarter of fiscal year 2010.




In
December 2007, the FASB issued SFAS No. 160, “Non Controlling
Interests in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin, or ARB No. 51, “Consolidated Financial Statements.” SFAS
No. 160 changes the accounting for non controlling (minority) interests in
consolidated financial statements including the requirements to classify non
controlling interests as a component of consolidated stockholders’ equity, and
the elimination of “minority interest” accounting in results of operations with
earnings attributable to non controlling interests reported as part of
consolidated earnings. Additionally, SFAS No. 160 revises the accounting
for both increases and decreases in a parent’s controlling ownership interest.
SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited The Company will be
required to adopt SFAS No. 160 in the first quarter of fiscal
year 2010. The Company does not expect the adoption of SFAS No. 160 to
have a material effect on its operations or financial position.




2.  Property
and Equipment and Leased Gaming Equipment




At
September 30, 2008 and 2007, the Company’s property and equipment
and leased gaming equipment consisted of the following:




2008
                        
                        
                        2007
                        
                        Estimated
                          Useful
                          Lives(in
      thousands)Gaming
      equipment and third-party gaming content licenses available for
      deployment(1)
                        
                        $
                        30,252
                        
                        
                        $
                        32,013Deployed
      gaming equipment
                        
                        
                        96,584
                        
                        
                        
                        94,564
                        
                        3-5
      yearsDeployed
      third-party gaming content licenses
                        
                        
                        34,444
                        
                        
                        
                        28,366
                        
                        1.5-3
      yearsTribal
      gaming facilities and portable buildings
                        
                        
                        4,720
                        
                        
                        
                        5,296
                        
                        5-7
      yearsThird-party
      software costs
                        
                        
                        7,732
                        
                        
                        
                        8,434
                        
                        3-5
      yearsVehicles
                        
                        
                        3,502
                        
                        
                        
                        3,499
                        
                        3-10
      yearsOther
                        
                        
                        3,191
                        
                        
                        
                        3,263
                        
                        3-7
      yearsTotal
      property and equipment
                        
                        
                        180,425
                        
                        
                        
                        175,435Less
      accumulated depreciation and amortization
                        
                        
                        (113,096
                        )
                        
                        
                        (100,103
                        )Total
      property and equipment, net
                        
                        $
                        67,329
                        
                        
                        $
                        75,332Leased
      gaming equipment
                        
                        $
                        165,903
                        
                        
                        $
                        154,769
                        
                        3
      yearsLess
      accumulated depreciation
                        
                        
                        (129,879
                        )
                        
                        
                        (116,190
                        )Total
      leased gaming equipment, net
                        
                        $
                        36,024
                        
                        
                        $
                        38,579











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




During 2008,
the Company sold, disposed of, or wrote off $3.8 million of net book
value related to third-party gaming content licenses, installation costs, tribal
gaming facilities and portable buildings, and other equipment. Of this
$3.8 million, $3.0 million related to the sale, in the
fiscal 2008 fourth quarter, of 496 previously deployed
units.




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




In
accordance with SFAS 144, “Accounting for the impairment or Disposal of
Long-Lived Assets,” the Company i) recognizes an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows; and (ii) measures an impairment loss as the
difference between the carrying amount and fair value of the asset.





-64-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




During
the fourth quarter of 2008, the Company performed an annual impairment test
of our long-lived assets in accordance with SFAS 144. As part of this
analysis, we considered whether the future benefits expected from certain
long-lived assets exceeded the assets carrying value. In several instances,
managements’ intentions for current projects shifted as a new management team
was inserted at the Company in the fourth fiscal quarter of 2008, leading
us to terminate funding (both in terms of human resources and capital spent) on
some of these projects, based upon our determination that the future benefit of
several of the projects was minimal. In these instances, the carrying value of
existing assets related to these projects was determined to be impaired. As
such, the Company recorded reserves of $5.6 million related to property and
equipment and leased gaming equipment in the fourth fiscal quarter. The reserves
included $3.0 million related to undeployed gaming licenses and prepaid
royalties, $2.4 million related to undeployed gaming cabinets, and $200,000
related other miscellaneous assets. The Company considered the potential salvage
value of the assets and determined that such an amount would be negligible.
Therefore, classification of these assets as ‘held for sale’ is not
necessary.




3.  Development
Agreements




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




The
Company has recently fulfilled a commitment to a significant, existing tribal
customer to provide approximately 43.8%, or $65.6 million, of the
total funding for a facility expansion. Because of the Company’s commitment to
fund the expansion, it secured the right to place an additional
1,400 gaming units in the expanded facility in southern Oklahoma. The
Company recorded all advances as a note receivable and imputed interest on the
interest free loan. The discount (imputed interest) was recorded as contract
rights and will be amortized over the life of the agreement. The repayment
period of the note will be based on the performance of the facility. As of
September 30, 2008, the Company had installed approximately
700 of the additional 1,400 units that it will place in the expanded
facility. The remaining 700 units are expected to be installed by
December 31, 2008.




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




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




September 30,
                      2008
                    
                    
                    September 30,
                      2007Included
      in:
                    
                    (In
      thousands)Notes
      receivable, net
                    
                    $
                    61,750
                    
                    
                    $
                    49,045Property
      and equipment,net
      of accumulated depreciation
                    
                    
                    —
                    
                    
                    
                    56Intangible
      assets – contract rights,net
      of accumulated amortization
                    
                    
                    29,368
                    
                    
                    
                    27,080





-65-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




4.  Intangible
Assets




At
September 30, 2008 and 2007, the Company’s intangible assets
consisted of the following:




2008
                      
                      
                      2007
                      
                      Estimated
                        Useful
                        Lives(In
      thousands)Contract
      rights under development agreements
                      
                      $
                      41,325
                      
                      
                      $
                      34,946
                      
                      5-7
      yearsInternally
      developed gaming software
                      
                      
                      26,473
                      
                      
                      
                      23,255
                      
                      1-5
      yearsPatents
      and trademarks
                      
                      
                      8,464
                      
                      
                      
                      7,450
                      
                      1-5
      yearsOther
                      
                      
                      1,054
                      
                      
                      
                      2,376
                      
                      3-5
      yearsTotal
      intangible assets
                      
                      
                      77,316
                      
                      
                      
                      68,027Less
      accumulated amortization – all other
                      
                      
                      (39,960
                      )
                      
                      
                      (32,143
                      )Total
      intangible assets, net
                      
                      $
                      37,356
                      
                      
                      $
                      35,884




Contract
rights are amounts allocated to intangible assets for dedicated floor space
resulting from development agreements, described under “Development Agreements.”
The related amortization expense, or accretion of contract rights, is netted
against its respective revenue category in the consolidated statements of
operations. In the preceding table, $14.4 million of the $41.3 million
at September 30, 2008, in contract rights is not currently being
amortized pending completion of a customer facility expansion, which is expected
to be completed by December 31, 2008.




Internally-developed
gaming software is accounted for under the provisions of SFAS No. 86,
“Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed,” and is stated at cost, which is amortized over the estimated useful
life of the software, generally using the straight-line method. The Company
amortizes internally-developed games over a twelve-month period, gaming engines
over an eighteen-month period, gaming systems over a three-year period and its
central management systems over a five-year period. Software development costs
are capitalized once technological feasibility has been established, and are
amortized when the software is placed into service. Any subsequent software
maintenance costs, such as bug fixes and subsequent testing, are expensed as
incurred. Discontinued software development costs are expensed when the
determination to discontinue is made. For the years ended September
30, 2008, 2007, and 2006, amortization expense related to
internally-developed gaming software was $3.3 million , $4.3 million
and $4.2 million, respectively. During fiscal 2008, 2007,
and 2006, the Company wrote off $531,000, $300,000 and
$307,000, respectively, related to internally-developed gaming software
that the Company chose to abandon.




Management
reviews intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An analysis of intangible assets at September 30, 2008
indicated there was an impairment to goodwill which resulted in a $335,277
reserve being recorded in accordance with SFAS 142, “Goodwill and Other
Intangible Assets.”





-66-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Amortization
expense, inclusive of accretion of contract rights, totaled $8.8 million,
$11.9 million and $10.8 million for the years ended
September 30, 2008, 2007 and 2006, respectively. Annual estimated
amortization expense for each of the five succeeding fiscal years is as
follows:




Year
                      
                      Amount(In
      thousands)2009
                      
                      $
                      11,1372010
                      
                      
                      7,5112011
                      
                      
                      6,3152012
                      
                      
                      5,4332013
                      
                      
                      4,724Total
                      
                      $
                      35,120




5.  Notes
Receivable




At
September 30, 2008 and 2007, the Company’s notes receivable
consisted of the following:




2008
                    
                    
                    2007(In
      thousands)Notes
      receivable from development agreements
                    
                    $
                    72,706
                    
                    
                    $
                    57,929Less
      imputed interest discount reclassed to contract rights
                    
                    
                    (10,956
                    )
                    
                    
                    (8,884
                    )Notes
      receivable from equipment sales and other
                    
                    
                    8,012
                    
                    
                    
                    —Notes receivable,
      net
                    
                    
                    69,762
                    
                    
                    
                    49,045Less
      current portion
                    
                    
                    (23,072
                    )
                    
                    
                    (12,248
                    )Notes receivable –
      noncurrent
                    
                    $
                    46,690
                    
                    
                    $
                    36,797




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




Notes
receivable from equipment sales outstanding as of September 30, 2008
consist of financial instruments issued by customers for the purchase of player
terminals and licenses, and bear interest at 7.97%. All of the Company’s
notes receivable from equipment sales are collateralized by the related
equipment sold, although the value of such equipment, if repossessed, may be
less than the note receivable outstanding.




6.  Accounts
Payable and Accrued Expenses




At
September 30, 2008 and 2007, the Company’s accounts payable and
accrued expenses consisted of the following:




2008
                      
                      
                      2007(In
      thousands)Trade
      accounts payable and accrued expenses
                      
                      $
                      23,022
                      
                      
                      $
                      15,653Third-party
      licenses payable
                      
                      
                      —
                      
                      
                      
                      614Accrued
      bonus and salaries
                      
                      
                      2,474
                      
                      
                      
                      1,679Other
                      
                      
                      3,752
                      
                      
                      
                      4,075Accounts
      payable and accrued expenses
                      
                      $
                      29,248
                      
                      
                      $
                      22,021




7.  Credit
Facility, Long-Term Debt




At
September 30, 2008 and 2007, the Company’s Credit Facility,
long-term debt and capital leases consisted of the following:




2008
                    
                    
                    2007(In
      thousands)Long-term
      revolving lines of credit
                    
                    $
                    19,000
                    
                    
                    $
                    7,000Term
      loan facility
                    
                    $
                    67,988
                    
                    
                    $
                    75,047Less
      current portion
                    
                    
                    (1,544
                    )
                    
                    
                    (563
                    )Long-term debt, less current
      portion
                    
                    $
                    66,444
                    
                    
                    $
                    74,484





-67-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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




The
Credit Facility provides the Company with the ability to finance development
agreements and acquisitions and working capital for general corporate purposes.
Amounts under the $75 million revolving credit commitment and
the $75 million term loan mature in five years, and advances under the
term loan and revolving credit commitment bear interest at the Eurodollar rate
plus the applicable spread (6.24% and 6.99%, respectively, as of
September 30, 2008) tied to various levels of interest pricing
determined by total debt to EBITDA.




The
Credit Facility is collateralized by substantially all of the Company’s assets,
and also contains financial covenants as defined in the agreement. These
covenants include (i) a minimum fixed-charge coverage-ratio of not less
than 1.50 : 1.00; (ii) a maximum total debt to EBITDA ratio
of not more than 2.25 : 1.00 through June 30, 2008,
and 1.75 : 1.00 from September 30, 2008 thereafter; and
(iii) a minimum trailing twelve-month EBITDA of not less
than $57 million for the quarter ended September 30, 2007,
and $60 million for each quarter thereafter. As of
September 30, 2008, the Company is in compliance with its loan
covenants. The Credit Facility requires certain mandatory prepayments be made on
the term loan from the net cash proceeds of certain asset sales and condemnation
proceedings (in each case to the extent not reinvested, within certain specified
time periods, in the replacement or acquisition of property to be used in its
businesses). In the second quarter of 2008, the Company made a mandatory
prepayment of the term loan in the amount of $4.5 million due to an early
prepayment of a development agreement note receivable. As of
September 30, 2008, the Credit Facility had availability of
$55.3 million, subject to covenant restrictions.




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




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




Long-term
debt at September 30, 2008, includes the Credit Facility’s term
loan.




A
schedule for each of the fiscal years ending after September 30, 2008,
representing the maturities of long-term debt is as follows:




Year
                      
                      Long-Term
                        Debt
                      
                      
                      Revolving
                        Lines of Credit(in
      thousands)2009
                      
                      $
                      1,544
                      
                      
                      $
                      —2010
                      
                      
                      750
                      
                      
                      
                      —2011
                      
                      
                      750
                      
                      
                      
                      —2012
                      
                      
                      64,944
                      
                      
                      
                      19,000Total
                      
                      $
                      67,988
                      
                      
                      $
                      19,000





-68-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




8.  Leases




The
Company leases its corporate offices, warehouses and certain office equipment
under noncancelable operating leases. In addition, the Company leases certain
equipment used in its operations under capital lease arrangements.




A
schedule of future minimum rental payments required under noncancelable
operating leases, follows:




Year
                    
                    Operating(In thousands)2009
                    
                    $
                    2,7062010
                    
                    
                    2,0032011
                    
                    
                    2522012
                    
                    
                    122013
                    
                    
                    —Total
      Minimum Lease Payments
                    
                    $
                    4,973




Rental
expense during 2008, 2007, and 2006 amounted to
$2.7 million, $2.5 million and $2.1 million
respectively.




9.  Income
Taxes




The
provision for income tax expense (benefit) consisted of the following for the
years ended September 30, 2008, 2007 and 2006:


2008
                            
                            
                            2007
                            
                            
                            2006(In
      thousands)CURRENT:Federal
                            
                            $
                            4,223
                            
                            
                            $
                            8,784
                            
                            
                            $
                            10,176State
                            
                            
                            828
                            
                            
                            
                            638
                            
                            
                            
                            1,213Foreign
                            
                            
                            514
                            
                            
                            
                            274
                            
                            
                            
                            —5,565
                            
                            
                            
                            9,696
                            
                            
                            
                            11,389DEFERRED:Federal
                            
                            
                            (4,673
                            )
                            
                            
                            (10,489
                            )
                            
                            
                            (8,072
                            )State
                            
                            
                            (590
                            )
                            
                            
                            (386
                            )
                            
                            
                            (801
                            )Foreign
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —(5,263
                            )
                            
                            
                            (10,875
                            )
                            
                            
                            (8,873
                            )Income
      tax expense (benefit)
                            
                            $
                            302
                            
                            
                            $
                            (1,179
                            )
                            
                            $
                            2,516




The
effective income tax rates differ from the statutory U.S. federal income tax
rates as follows for the years ended September 30, 2008, 2007,
and 2006:




2008
                  
                  
                  2007
                  
                  
                  2006Federal
      income tax expense (benefit) at statutory rate
                  
                  
                  35.0
                  %
                  
                  
                  (35.0
                  %)
                  
                  
                  35.0
                  %State
      income tax expense, net of federal benefit
                  
                  
                  7.8
                  %
                  
                  
                  8.5
                  %
                  
                  
                  3.1
                  %Foreign
      income tax expense, net of federal benefit
                  
                  
                  47.7
                  %
                  
                  
                  9.3
                  %
                  
                  
                  0
                  %Other,
      net
                  
                  
                  (46.1
                  %)
                  
                  
                  (44.7
                  %)
                  
                  
                  3.5
                  %Provision
      (benefit) for income taxes
                  
                  
                  44.4
                  %
                  
                  
                  (61.9
                  %)
                  
                  
                  41.6
                  %




The
“other, net” category above captures the impact of several tax expense items,
the three largest of which, are all favorable to the Company in the fiscal
years 2008 and 2007, and included an unrecorded federal refund, an
over-accrual of state income tax expense, and the true-up of the company tax
accounts.





-69-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Differences
between the book value and the tax basis of the Company’s assets and liabilities
at September 30, 2008 and 2007 result in deferred tax assets and
liabilities as follows:




2008
                  
                  
                  2007(In
      thousands)Deferred
      tax asset – current:Allowance
      for doubtful accounts
                  
                  $
                  455
                  
                  
                  $
                  321Inventory
      reserve
                  
                  
                  1,526
                  
                  
                  
                  514Accruals
      not currently deductible for tax purposes
                  
                  
                  1,764
                  
                  
                  
                  924Deferred
      revenue
                  
                  
                  3,131
                  
                  
                  
                  173Current
      deferred tax asset
                  
                  
                  6,876
                  
                  
                  
                  1,932Noncurrent
      deferred tax asset:Property
      and equipment and leased gaming equipment,due
      principally to depreciation differences
                  
                  
                  11,400
                  
                  
                  
                  14,582Intangible
      assets, due principally toamortization
      differences
                  
                  
                  4,516
                  
                  
                  
                  1,249Non-qualified
      stock compensation expense
                  
                  
                  986
                  
                  
                  
                  752Noncurrent
      deferred tax asset
                  
                  
                  16,902
                  
                  
                  
                  16,583Deferred
      tax asset
                  
                  $
                  23,778
                  
                  
                  $
                  18,515




For 2008, 2007,
and 2006, the Company recorded reductions of $112,000, $1.4 million
and $1.4 million respectively, of its federal and state income tax
liability due to the effects of stock compensation.




Although
realization is not assured, the Company believes it is more likely than not that
all the deferred tax assets at September 30, 2008 and 2007 will
be realized. Accordingly, the Company believes no valuation allowance is
required for the deferred tax assets. However, the amount of the deferred tax
asset considered realizable could be adjusted in the future if estimates of
reversing taxable temporary differences are revised.




The
Company paid income taxes, net of refunds received of $10.9 million
in 2008, $7.6 million in 2007 and $11.2 million
in 2006.




In
fiscal 2008 the Company conducted operations in Mexico through a subsidiary
treated as a disregarded entity for U.S. income tax purposes. Accordingly,
income or losses are taxed or benefited, as appropriate, in the Company’s U.S.
tax provision. At present, Company management doubts the Mexican operations can
benefit from past losses from a Mexican tax perspective. Accordingly, a full
valuation allowance has been recorded against the deferred tax asset related to
the Mexican net operating loss. The effect on the total income tax expense is
deemed immaterial.


10.  Stockholders’
Equity




Preferred
Stock




During
fiscal 1995, the Company amended its articles of incorporation to provide for
the issuance of up to 2,000,000 shares of Preferred Stock in such series and
with such rights and preferences as may be approved by the Board of Directors.
In January 1995, the Board of Directors approved a Series A Preferred
Stock, which is cumulative, voting and convertible. In October 1998 the
Board of Directors approved a Series B Junior Participating Preferred Stock,
which is cumulative and voting. As of September 30, 2008, there were
no shares of Series A Preferred Stock or Series B Junior Participating
Preferred Stock outstanding.




Treasury
Stock




During
July 2007, the Company completed a modified “Dutch Auction” Tender Offer
and purchased $25.0 million of its common stock and the associated
preferred share purchase rights. The Company accepted, for purchase, an
aggregate of 1,992,032 shares of its common stock at a net purchase price
of $12.74 per share, to record an aggregate share repurchase of
approximately $25.0 million and incurred transaction costs of $387,457
related to the Tender Offer that was recorded in treasury stock.




During
fiscal 2008, the Company did not repurchase any shares of its Common
Stock.




During
fiscal 2007 and 2006, the Company repurchased with cash 1,992,000
and 159,000 shares of its Common Stock at an average cost of
$12.74 and $9.15, respectively.





-70-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Director
Compensation Plan




On
October 1, 2004, the Company adopted a new plan to compensate the
members of its Board of Directors for their services as directors, including
serving on committees of the board. Under the Director Compensation Plan, each
of the Company’s directors, including directors who are also regular full-time
employees, will receive $37,500 per year, except for the Chairman of the
Board, who will receive $75,000 per year. In addition, each director will
receive $500 for each board meeting attended in person, $250 for each
board meeting attended by telephone, $400 for each committee meeting
attended in person and $200 for each committee meeting attended by
telephone. Each member of the Audit Committee will also receive an additional
$15,000 per year for serving on the Audit Committee, except for the
Chairman of the Audit Committee who will receive $25,000 per year for
serving on the Audit Committee as its Chairman. In general, each sitting
director will receive an option grant on an annual basis for 10,000 shares
of Common Stock that will vest over a six-month period.




Common
Stock Warrants and Options




In
connection with past financing arrangements and as compensation for consulting
and professional services, the Company has issued warrants and options to
purchase its Common Stock. New shares were issued to satisfy stock option
exercises. As of September 30, 2008 and 2007, there were no
warrants outstanding.




Stock
Option Plans




Nonqualified
stock options have been granted to the Company’s directors under its nonemployee
director stock plans. Nonqualified and incentive stock options have been granted
to the Company’s officers and employees under its employee stock plans. Options
granted to its officers and employees generally vest over four years and expire
ten years from the date of grant. The Company expects to continue to issue stock
options to new employees as they are hired, as well as to current employees as
incentives from time to time.




The
Company issues new shares to satisfy stock option exercises under the
plans.




At
September 30, 2008, there were stock options available for grant under the
following plans:




Approved
                    by
                    Shareholders
                  
                  Options available
                    for grant as of
                    September 30, 20082000
      Stock Option Plan
                  May 2001
                  
                  
                  63,3172001
      Stock Option Plan
                  May 2002
                  
                  
                  306,3732002
      Stock Option Plan
                  February 2003
                  
                  
                  488,4002003
      Outsider Director Stock Option Plan
                  February 2004
                  
                  
                  782,500Total
                  
                  
                  
                  1,640,590




For the
year ended September 30, 2008, the activity relating to stock option
issuances under the stock option plans is as follows:




Number
                  of Options
                
                
                Weighted-
                  Average
                  Exercise
                  Price per
                  Share
                
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Term
                  (in years)
                
                
                Aggregate
                  Intrinsic
                  ValueStock
      Options Outstanding October 1, 2007
                
                
                4,183,606
                
                
                $
                7.09Granted
                
                
                2,732,500
                
                
                
                4.51Exercised
                
                
                (127,374
                )
                
                
                1.71Forfeited
                
                
                (42,224
                )
                
                
                7.88Stock
      Options Outstanding September 30, 2008
                
                
                6,746,508
                
                
                $
                6.14
                
                
                
                5.50
                
                
                $
                3,223,389Stock
      Options Exercisable September 30, 2008
                
                
                3,904,133
                
                
                $
                7.08
                
                
                
                3.62
                
                
                $
                2,760,689





-71-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




For the
years ended September 30, 2008, 2007 and 2006, other
information pertaining to stock options was as follows:




2008
                    
                    
                    2007
                    
                    
                    2006Weighted-average
      grant-date fair value ofstock
      options granted
                    
                    $
                    2.14
                    
                    
                    $
                    5.88
                    
                    
                    $
                    9.87Total
      intrinsic value of options exercised (in millions)
                    
                    
                    .5
                    
                    
                    
                    4.8
                    
                    
                    
                    4.2Total
      grant-date fair value of stock options vested during the year (in
      millions)
                    
                    
                    1.7
                    
                    
                    
                    2.4
                    
                    
                    
                    5.1




A summary
of the status of the Company’s nonvested options as of
September 30, 2008 and changes during the year ended
September 30, 2008 is as follows:




Nonvested
      Options
                      
                      Number of
                        Options
                      
                      
                      Weighted-Average
                        Grant-Date
                        Fair ValueNonvested
      at October 1, 2007
                      
                      
                      468,000
                      
                      
                      $
                      4.51Granted
                      
                      
                      2,732,500
                      
                      
                      
                      2.14Vested
                      
                      
                      (315,901
                      )
                      
                      
                      5.40Forfeited
                      
                      
                      (42,224
                      )
                      
                      
                      7.88Nonvested
      at September 30, 2008
                      
                      
                      2,842,375
                      
                      
                      
                      2.25




Cash
received from option exercise under all share-based payment arrangements for the
years ended September 30, 2008, 2007 and 2006
was $217,520, $3.4 million, and $2.8 million. For
September 2008, 2007, and 2006, the Company recorded reductions
of $328,000, $1.4 million, and $1.4 million, respectively, of its
federal and state income tax liability, with an offsetting credit to additional
paid-in capital resulting from the tax benefits of stock options.




As of
September 30, 2008, there was $5.6 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the plans. That cost is expected to be recognized over a
weighted-average period of 3.54 years. This estimate is subject to change
based upon a variety of future events which include, but are not limited to,
changes in estimated forfeiture rates, cancellations and the issuance of new
options.




Employee
Benefit Plans




During
1994, the Company established an employee savings plan pursuant to Section
401(k) of the Internal Revenue Code. The plan provides for the employees to make
tax-deferred deposits into the plan up to the maximum of
$20,500 for 2008. The Company matches the first 3% of employees’
contributions completely, and matches half of the next 2%. Such Company
contributions amounted to $694,000, $730,000, and $775,000 for
the years ended September 30, 2008, 2007, and 2006,
respectively.




11.  Commitments
and Contingencies




Litigation
and Regulatory Proceedings




General.The
Company is subject to litigation involving federal, state and Native American
laws and regulations that affect both its general commercial relationships with
its Native American tribal customers as well as the products and services
provided to them. The outcome of litigation may not be assured, and despite
management’s views of the merits of our litigation, or the reasonableness of our
estimates and reserves, the Company’s financial statements could nonetheless be
materially affected by an adverse judgment.  The Company believes it
has adequate reserves for its current legal matters.




The
Company maintains certain liability insurance; however, certain cost of
defending lawsuits, such as those below the insurance deductible amount, are not
covered by, or only partially covered by its insurance policies, or its
insurance carriers could refuse to cover certain of these claims in whole or in
part. The Company accrues costs to defend itself from litigation as it is
incurred or as it becomes determinable.





-72-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The
following is only a summary of the more material aspects of these laws and
regulations, and is not a complete recitation of all applicable
law.




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




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




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




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




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




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




Diamond Game
Enterprises, Inc. On November 16, 2004, Diamond Game
Enterprises, Inc., or Diamond Game, filed suit in the State Court in Oklahoma
City, Oklahoma, against the Company, along with others, including Clifton Lind,
Robert Lannert, Gordon Graves, Video Gaming Technologies, Inc., or VGT, and its
president, John Yarbrough, alleging five causes of action: (i) deceptive
trade practices; (ii) unfair competition; (iii) wrongful interference
with business; (iv) malicious wrong / prima facie tort; and
(v) restraint of trade. The case asserts that the Company offered allegedly
illegal Class III games on the MegaNanza® and Reel
Time Bingo® gaming
systems to Native American tribes in Oklahoma. Diamond Game claims that the
offer of these games negatively affected the market for its pull-tab game, Lucky
Tab II. Diamond Game also alleges that our development agreements with
Native American tribes unfairly interfere with the ability of Diamond Game to
successfully conduct its business. Diamond Game is seeking injunctive relief and
unspecified damages in excess of $65 million. Diamond Game’s theories of
recovery include claims for actual, treble and punitive damages, as well as
revenue disgorgement.





-73-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Diamond
Game and VGT (and its principals) entered into a confidential settlement
agreement in September 2007. The Company will be given credit for the
actual amount of that settlement should any verdict be entered against the
Company in connection with this case. Two motions had been pending before the
court in connection with the matter: (i) Diamond Game filed a motion for
partial summary judgment seeking a court ruling on game classification for
MegaNanza and Reel Time Bingo; and (ii) The Company filed a motion seeking
summary judgment based on jurisdictional issues. On November 29, 2007,
the trial court denied the Company’s motion for summary judgment on the
jurisdictional issues, and ruled on Diamond Game’s motion for partial summary
judgment, finding that our MegaNanza and Reel Time Bingo
versions 1.0, 1.1 and 1.2 games are not Class II games
under the Indian Gaming Regulatory Act of 1988, or IGRA, but instead are
Class III games.




The
court’s ruling stated that it was not binding on our tribal customers and the
Company does not expect any of the Reel Time Bingo games currently in play in
Oklahoma to be removed as a result of the court’s ruling. Other game versions
included in the ruling are not in play in Oklahoma. The court’s rulings are not
dispositive of the case and the opinion has no affect on the right of Native
American tribes to play games offered by us. The trial court granted our motion
for immediate certification of its ruling to the Oklahoma Supreme Court. The
Company sought immediate review of the trial court’s decision. On
February 19, 2008, the Oklahoma Supreme Court denied the Company’s
request for immediate review of the trial court’s decision. The action of the
Oklahoma Supreme Court does not preclude a subsequent appeal of the trial
court’s decision and the Company will continue to assert that the games in
question are legal Class II games, and that game classification cannot be
decided by an Oklahoma State Court. Presently, the parties remain engaged in
pre-trial discovery. The trial court has assigned a jury trial date of
March 23, 2009.




While the
Company continues to vigorously defend ourselves and believe that its MegaNanza
and Reel Time Bingo versions 1.0, 1.1 and 1.2 games were in
fact Class II games, given the inherent uncertainties in this litigation,
the Company is unable to make any prediction as to the ultimate
outcome.




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




The
Company and the other defendants were only recently served with summons and a
copy of the lawsuit during the week of July 21, 2008 and a response to
the petition is not yet due. The defendants removed the action to the United
States District Court for the Western District of Oklahoma. Cory Investments
filed a motion with the federal court to remand the case back to the state
court. That motion was granted by the federal court on
November 13, 2008, resulting in a transfer of the case back to the
state court. Currently all of the defendants have filed motions to dismiss which
are currently pending before the state court district judge. The Company
believes that the claims of Cory Investments are without merit and intends to
defend the case vigorously. Given the inherent uncertainties in this litigation,
the Company is unable to make any prediction as to the ultimate
outcome.




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





-74-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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




The
Company has made a number of challenges to Gamco’s standing to sue for
infringement of the ‘035 Patent. On October 15, 2007, pursuant to
an Interlocutory Appeal, the Federal Circuit reversed the District Court’s Order
refusing to dismiss Gamco’s Supplemental and Second Amended Complaint against
the Company. The Federal Circuit held that Gamco did not have sufficient rights
in the ‘035 Patent to sue the Company without the involvement of the patent
owner, IGT.




On
December 4, 2007, Gamco and IGT entered into an Amended and
Restated Exclusive License Agreement whereby IGT granted to Gamco exclusive
rights to the ‘035 Patent in the state of New York and the right to
sue for past infringement of the same. On January 9, 2008, Gamco filed
its Third Amended Complaint for Infringement of the ‘035 Patent against the
Company. On January 28, 2008, the Company filed an Answer to the
Complaint denying liability. The Company also filed a Third Amended Counterclaim
against Oasis, Gamco and certain officers at Gamco, for fraud, promise without
intent to perform, negligent misrepresentation, breach of contract, specific
performance and reformation of contract with regard to the Company’s rights
under the Sublicense Agreement for the ‘035 Patent, as well as for
non-infringement and invalidity of the Patent. These parties have filed a motion
to dismiss and a motion for summary judgment as to these claims. The Company has
filed a motion for partial summary judgment on its breach of contract and
specific performance claims seeking to enforce the terms of the Sublicense
Agreement. The Company has also moved for summary judgment on Gamco’s complaint
on the ground that it is a licensee. All motions to dismiss and motions for
summary judgment will be heard by the court on February 26,
2009.




The court
has scheduled a Markman hearing to construe the claims of the ‘035 Patent for
January 13, 2009. The court will also consider at that time the
Company’s motion for partial summary judgment to invalidate all of the
means-plus-function claims of the ‘035 Patent under 35 U.S.C.
§ 112, 6. A trial date has not been set by the court.




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




Off
Balance Sheet Arrangements




As of
September 30, 2008, the Company had no off balance sheet
arrangements.




Employment
Agreements




We have
employment agreements with most of our employees with positions of Senior Vice
President or above. These employment agreements generally provide for an initial
rate of pay and other general employment terms. If there is a change in
control of the Company, some executives are entitled to severance benefits. Most
of the employment agreements include post-employment non-compete provisions
and the terms of the severance benefits generally range from twelve-to
twenty-four month’s salary continuation with similar non compete
periods.




Clifton
Lind.On
September 9, 2004, the Company entered into an Executive Employment
Agreement, or the Agreement, with Clifton E. Lind to provide for Mr. Lind to
continue as the Company’s President and Chief Executive Officer, and setting
forth certain terms of Mr. Lind’s employment. The agreement provided that Mr.
Lind would receive an annual base salary of $450,000, and would be eligible
to receive incentive compensation on an annual basis as determined by the
Compensation Committee of the Board of Directors, based upon a performance
review of Mr. Lind performed by the Compensation Committee.




Mr. Lind
resigned as President and Chief Executive Officer on March 31, 2008.
Mr. Lind will receive i) his base salary for 18 months in equal
monthly installments following the date of termination; ii) one year of his
projected incentive compensation; and iii) full acceleration of the vesting
of any unexercised or unvested stock options that he holds. Mr. Lind will be
prohibited from a) working for, providing assistance to, or investing in
(subject to certain exceptions) any business that is competitive with that of
the Company, for a period of 18 months; b) soliciting any of the
Company’s customers or prospective customers, or disparaging the Company for a
period of 12 months; c) soliciting any of the Company’s employees for
a period of 18 months; and d) disclosing any of the Company’s confidential
information.





-75-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




License
Agreements




In
June 2004, the Company entered into an agreement with WMS Gaming, Inc., to
purchase WMS cabinets and games for placement in various Class II and
Class III jurisdictions in North America. The agreement has been amended
several times to add additional purchase commitments and to clarify placement
authorizations. In June 2005, the parties extended the term of the
agreement until April 1, 2007, with an extension granted until
April 1, 2008 with respect to the development and placement of
purchased cabinets and game themes, and until April 30, 2009 with
respect to certain jurisdictions. In December 2007, WMS and the Company
agreed to additional Class III cabinet purchases and agreed to extend the
term of the agreement until June 30, 2009 for certain jurisdictions,
with limited sell-off rights extending thereafter. The Company has satisfied all
required cabinet and game-theme purchases.




On
November 27, 2006 the Company entered into a letter agreement with
Aristocrat Technologies, Inc. in which the Company is granted the right to
purchase, as well as the exclusive right to place Aristocrat Class III
cabinets and attendant game themes to certain Native American tribes within the
State of Oklahoma. The initial term of the agreement is three years from
delivery of the first order of Aristocrat cabinets, with a two-year extension by
mutual agreement. In October 2008, Aristocrat and the Company agreed to
additional Class III cabinet purchases and agreed to extend the term of the
agreement until December 15, 2010.




In
April 2001, the Company entered into a license agreement with Bally
Technologies, Inc. (formerly Alliance Gaming Inc.), or Bally, to use certain of
Alliance’s trademarks, logos and other audiovisual aids and graphics in the
Washington State Class III market. The Company’s contract requires it to
purchase a minimum number of licenses to operate games over specified periods.
During September 2001, Alliance extended the license agreement to provide
the Company access to Alliance’s catalog of game themes for use in Class II
bingo games. This extension also required the Company to purchase a minimum
number of Class II licenses over a specified period. As of the end of
fiscal 2008, the Company is in compliance with all provisions of the
agreement.




In
addition, the Company has entered into license agreements with other game
content providers to purchase player terminals and licenses over specified
periods.




Certain
of the Company’s license agreements require it to pay royalty fees based on a
fixed percentage of the hold per day generated by a player
terminal.




12.  Concentrations
of Credit Risk




The
Company maintains its cash in bank deposit accounts which at times may exceed
the federal depository insurance limits. At September 30, 2008, the
Company had concentrations of cash in one bank totaling approximately
$5.5 million. The Company has not experienced any losses on such accounts
in the past.




Accounts
receivable represent short-term credit granted to customers for which collateral
is generally not required. As of September 30, 2008 and 2007,
approximately 44% and 52%, respectively, of the Company’s accounts
receivable were from Native American tribes or their gaming
enterprises.




In
addition, a large percentage of these tribes have their reservations and gaming
operations in the state of Oklahoma. Despite the industry and geographic
concentrations related to the Company’s customers, due to the historical
experience of the Company on receivable collections, management considers credit
risk to be minimal with respect to accounts receivable. At
September 30, 2008 and 2007, the following concentrations existed
in the Company’s account receivable, as a percentage of total accounts
receivable:




2008
                    
                    
                    2007Customer
      A
                    
                    
                    17
                    %
                    
                    
                    18
                    %Customer
      B
                    
                    
                    13
                    %
                    
                    
                    22
                    %




For the
years ended September 30, 2008, 2007 and 2006, the following
customers accounted for more than 10% of the Company’s total
revenues:




2008
                      
                      
                      2007
                      
                      
                      2006Customer
      A
                      
                      
                      39
                      %
                      
                      
                      42
                      %
                      
                      
                      36
                      %Customer
      B
                      
                      
                      7
                      %
                      
                      
                      10
                      %
                      
                      
                      8
                      %Customer
      C
                      
                      
                      10
                      %
                      
                      
                      4
                      %
                      
                      
                      2
                      %





-76-





MULTIMEDIA
GAMES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Approximately 58%
and 59% of the Company’s total revenues for the years ended
September 30, 2008 and 2007, respectively, were from tribes
located in Oklahoma.




While the
Company believes that its relationship with all of its customers is good, the
loss of any of these customers would have a material and adverse effect upon its
financial condition and results of operations and cash flows.




Notes
receivable consist of financial instruments issued by customers for the purchase
of player terminals and licenses, and amounts generated from reimbursable
amounts advanced under development agreements, generally at prevailing interest
rates. Substantially all of the Company’s notes receivable are from Native
American tribes or their gaming enterprises. At September 30, 2008, two
customers represented approximately 89% and 11% of the notes
receivable.




13.  Related
Party Transactions




During
fiscal 2007, in connection with executing a content license agreement, the
Company paid $25,000 to a family member of the former Chairman of the
Board.




During
fiscal 2008, the Company has paid approximately $48,000 to a former
Chairman of the Board for consulting services.




During
fiscal 2008, the Company also paid approximately $150,000 to the
former Chief Executive Officer for consulting services.




14.  Supplemental
Consolidated Quarterly Financial Data (Unaudited)




Year Ended
      September 30, 2008Quarters EndedDecember 31,
                  2007
                
                
                March 31,
                  2008
                
                
                June 30,
                  2008
                
                
                September 30,
                  2008(In
      thousands, except per-share amounts)Total
      revenues
                
                $
                30,235
                
                
                $
                32,202
                
                
                $
                30,252
                
                
                $
                38,443Operating
      income (loss)
                
                
                821
                
                
                
                2,722
                
                
                
                209
                
                
                
                (2,517
                )Income
      (loss) before taxes
                
                
                153
                
                
                
                2,239
                
                
                
                348
                
                
                
                (2,060
                )Net
      income (loss)
                
                
                399
                
                
                
                1,258
                
                
                
                164
                
                
                
                (1,443
                )Diluted
      earnings (loss) per share
                
                
                0.01
                
                
                
                0.05
                
                
                
                0.01
                
                
                
                (0.06
                )Weighted
      average common shares outstanding, diluted
                
                
                27,380
                
                
                
                27,243
                
                
                
                27,153
                
                
                
                26,595





Year Ended
      September 30, 2007Quarters EndedDecember 31,
                  2006
                
                
                March 31,
                  2007
                
                
                June 30,
                  2007
                
                
                September 30,
                  2007(In
      thousands, except per-share amounts)Total
      revenues
                
                $
                29,050
                
                
                $
                30,726
                
                
                $
                30,898
                
                
                $
                31,243Operating
      income (loss)
                
                
                (4,562
                )
                
                
                (961
                )
                
                
                (272
                )
                
                
                1,206Income
      (loss) before taxes
                
                
                (4,298
                )
                
                
                4
                
                
                
                1,256
                
                
                
                1,115Net
      income (loss)
                
                
                (2,812
                )
                
                
                6
                
                
                
                685
                
                
                
                1,377Diluted
      earnings (loss) per share
                
                
                (0.10
                )
                
                
                0.00
                
                
                
                0.02
                
                
                
                0.05Weighted
      average common shares outstanding, diluted
                
                
                27,534
                
                
                
                29,450
                
                
                
                29,747
                
                
                
                27,924




In
accordance with SFAS 144, the Company i) recognizes an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows; and (ii) measures an impairment loss as the
difference between the carrying amount and fair value of the asset.




During
the fourth quarter of 2008, the Company performed an annual impairment test
of our long-lived assets in accordance with SFAS 144. As part of this
analysis, we considered whether the future benefits expected from certain
long-lived assets exceeded the assets carrying value. In several instances,
managements’ intentions for current projects shifted as a new management team
was inserted at the Company in the fourth fiscal quarter of 2008, leading
us to terminate funding (both in terms of human resources and capital spent) on
some of these projects, based upon our determination that the future benefit of
several of the projects was minimal. In these instances, the carrying value of
existing assets related to these projects was determined to be impaired. As
such, the Company recorded reserves of $5.6 million related to property and
equipment and leased gaming equipment in the fourth fiscal quarter. The reserves
included $3.0 million related to undeployed gaming licenses and prepaid
royalties, $2.4 million related to undeployed gaming cabinets, and $200,000
related other miscellaneous assets. The Company considered the potential salvage
value of the assets and determined that such an amount would be negligible.
Therefore, classification of these assets as ‘held for sale’ is not
necessary.





-77-




MULTIMEDIA
GAMES, INC.




Schedule
II – Valuation and Qualifying Accounts




Allowance
for Doubtful Accounts




Balance at
                    Beginning of
                    Period
                  
                  
                  (Recoveries)/
                    Additions
                  
                  
                  Deductions
                  
                  
                  Balance at
                    End of
                    Period(In
      thousands)FY 2008
                  
                  $
                  854
                  
                  
                  $
                  421
                  
                  
                  $
                  66
                  
                  
                  $
                  1,209FY 2007
                  
                  $
                  1,007
                  
                  
                  $
                  466
                  
                  
                  $
                  619
                  
                  
                  $
                  854FY 2006
                  
                  $
                  229
                  
                  
                  $
                  849
                  
                  
                  $
                  71
                  
                  
                  $
                  1,007





-78-




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this Annual Report to be signed
on its behalf by the undersigned, thereunto duly authorized.




MULTIMEDIA
      GAMES, INC.By:
                  /s/ Randy S. CieslewiczRandy
      S. CieslewiczChief
      Financial Officer




Dated:
December 15, 2008




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




/s/ ANTHONY M. SANFILIPPO
              
              Chief
      Executive Officer and Director
              
              December
      15, 2008Anthony
      M. Sanfilippo
              
              (Principal
      Executive Officer)/s/ RANDY S. CIESLEWICZ
              
              Chief
      Financial Officer
              
              December
      15, 2008Randy
      S. Cieslewicz
              
              (Principal
      Financial Officerand
      Principal Accounting Officer)/s/ MICHAEL J. MAPLES
              
              Chairman
      of the Board and Director
              
              December
      15, 2008Michael
      J. Maples/s/ ROBERT D. REPASS
              
              Director
              
              December
      15, 2008Robert
      D. Repass/s/ JOHN M. WINKELMAN
              
              Director
              
              December
      15, 2008John
      M. Winkelman/s/ EMANUEL R. PEARLMAN
              
              Director
              
              December
      15, 2008Emanuel
      Pearlman/s/ NEIL E. JENKINS
              
              Director
              
              December
      15, 2008Neil
      E. Jenkins





-79-





EXHIBIT
INDEX




EXHIBIT NO.
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    TITLE
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    LOCATION3.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Amended
      and Restated Articles of Incorporation
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (1)3.2
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Amendment
      to Articles of Incorporation
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (2)3.3
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Second
      Amended and Restated Bylaws, as Amended
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)10.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Form
      of Integrated Gaming Services Agreement
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (3)10.2
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    1994
      Employee Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (3)10.3
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    1994
      Director Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (3)10.4
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    1996
      Stock Incentive Plan, as Amended
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (4)10.5
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    President’s
      Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (5)10.6
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    1998
      Senior Executive Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (4)10.7
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    2000
      Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (4)10.8
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    2001
      Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (6)10.9
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Stockholder
      Rights Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (7)10.10
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    2002
      Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (8)10.11
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    2003
      Outside Director Stock Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (9)10.12
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Ad
      Hoc Option Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (10)10.13
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    2008
      Employee Inducement Award Plan
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)10.14
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Form
      of Indemnification Agreement
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (11)10.15
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Employment
      Agreement executed September 9, 2004 between the Company and Clifton
      Lind
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (12)10.16
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Employment
      Agreement executed May 29, 2008 between the Company and Gary
      Loebig
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (13)10.17
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Employment
      Agreement executed June 15, 2008 between the Company and Anthony
      Sanfilippo
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (14)10.18
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Stock
      Purchase Agreement executed June 15, 2008 between the Company
      and Anthony Sanfilippo
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (14)10.19
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Amendment
      to Credit Agreement, dated as of October 26, 2007, by and among
      MGAM  Systems, Inc., Megabingo, Inc., Comerica Bank, CIT Lending
      Services Corporation and  the Banks party to Credit
      Agreement
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (15)10.20
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Second
      Amendment to Credit Agreement, dated as of December 20, 2007, by
      and among MGAM Systems, Inc., Megabingo, Inc. and Comerica
      Bank
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (16)10.21
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Employment
      Agreement executed September 14, 2008 between the Company and
      Patrick Ramsey
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (17)21.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Subsidiaries
      of registrant
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)23.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Consent
      of BDO Seidman, LLP
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)31.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Certification
      of the Principle Executive Officer, pursuant to Section 302 of
      theSarbanes-Oxley
      Act of 2002
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)31.2
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Certification
      of the Principle Accounting Officer, pursuant to Section 302 of
      theSarbanes-Oxley
      Act of 2002
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)32.1
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    Certification
      of the Chief Executive Officer and Chief Financial Officer, Pursuant to
      U.S.C. Section 1350, as adopted, pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                                                                                                                                                                                                                    
                                                                                                                                                                                                                    (18)





(1)
                    Incorporated
      by reference to our Form 10-QSB filed with the Securities and Exchange
      Commission, or SEC, for the quarter ended
      March 31, 1997.(2)
                    Incorporated
      by reference to our Form 10-Q filed with the SEC for the quarter ended
      December 31, 2003.(3)
                    Incorporated
      by reference to our Form 10-KSB filed with the SEC for the fiscal year
      ended September 30, 1994.(4)
                    Incorporated
      by reference to our Registration Statement on Form S-8 filed with the
      SEC on December 1, 2000 (File No.333-51072).(5)
                    Incorporated
      by reference to our Form 10-KSB filed with the SEC for the fiscal year
      ended September 30, 1998.(6)
                    Incorporated
      by reference to our Registration Statement on Form S-8 filed with the SEC
      on October 18, 2001 (File No. 333 -
      100611).(7)
                    Incorporated
      by reference to our Registration Statement on Form 8-A filed with the SEC
      on October 15, 1998 (File No. 000-28318).(8)
                    Incorporated
      by reference to our Form 10-Q filed with the SEC for the quarter ended
      March 31,
2003.





-80-








(9)
                  Incorporated
      by reference to Appendix B of our Definitive Proxy Statement on Schedule
      14A filed with the SEC on January 6, 2004.(10)
                  Incorporated
      by reference to our Registration Statement on Form S-8 filed with the SEC
      on October 18, 2002 (File No. 333 -
      100612).(11)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on June 4,
      2008.(12)
                  Incorporated
      by reference to our Form 10-K filed with the SEC for the fiscal year ended
      September 30, 2004.(13)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on June 4,
      2008(14)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on
      June 18, 2008(15)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on November 1,
      2007(16)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on December 27,
      2007.(17)
                  Incorporated
      by reference to our Form 8-K filed with the SEC on September
      17, 2008(18)
                  Filed
      herewith.





-81-