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UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C.
20549



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FORM
10-K/A

Amendment No. 1



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

For The Fiscal Year Ended December 31, 2006

OR



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

For the transition period from              to
            .

Commission File No. 0-22752



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Progressive Gaming International
Corporation

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 88-0218876                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|920 Pilot Road, P.O. Box 98686 Las Vegas, Nevada               |  | 89119                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (702) 896-3890

Securities registered pursuant to Section 12(b) of the Act:



|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Title of each class          |  | Name of each exchange on which registered
|Common Stock, $.10 par value |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act:

NONE



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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 (Section 229.405 of this chapter) 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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):



|                         |  |                        |  |                       
|------------------------ |  | ---------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer    x |  | Non-accelerated filer ̈

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

The aggregate market value of the common stock of the registrant as of June 30, 2006 held by non-affiliates was $263,405,025.

The number of shares outstanding of the registrants common stock was 34,824,254 as of March 12, 2007.



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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (Amendment No. 1) does not reflect events occurring after the original filing of our Annual Report on Form 10-K for the fiscal year ended December 31,
2006 (the Form 10-K) or modify or update those disclosures as presented in the Form 10-K, except to reflect certain revisions and clarifications in Part II, Items 7 and 8 and Part IV, Item 15. The revisions and
clarifications in Part II, Items 7 and 8 delete all references to any independent valuation for impairment of our long-lived assets in order to comply with Rule 436(c) of the Securities Act of 1933, as amended. Part II, Items 9 and 9A are being
refiled in this Amendment No. 1 but have not been modified or updated from what was filed in the Form 10-K. Part IV, Item 15 is being amended to update the certifications required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 and the consents of our independent registered public accounting firms as of the date of this Amendment No. 1.



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This information should be read in conjunction with the audited consolidated financial statements and notes thereto contained herein. Except for the
historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed here. Factors that could cause or contribute
to such differences include risks detailed in Part I, Item I under the caption Risk Factors and elsewhere in this Annual Report on Form 10-K.

General Information

We develop, acquire and distribute table and slot game content as well as
software products to meet the needs of gaming operators worldwide. Our business consists of two reportable segments:



| |  |  | Table and Slot Games. Our table and slot games segment develops, acquires, licenses and distributes proprietary and non-proprietary branded and
non-branded table and slot games. Our recurring slot and table revenues primarily consist of: (i) fixed periodic rental fees, (ii) periodic revenue share arrangements for a percentage of the net win (net win
produced by a gaming device is defined as the gross revenue minus all jackpots, payouts and any approved claims) or (iii) periodic license fees for proprietary game content provided to third parties for use on their game hardware. Our
non-recurring slot and table revenues primarily consist of (i) the sale of our game hardware, (ii) the perpetual license of our proprietary content, and (iii) license fees for the use of our game patents.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Systems. Our systems segment offers a suite of products that when combined, supports every facet of a gaming operation, and consolidates the
management of slot machines, table games, server-based gaming, account wagering, marketing and cage into one fully integrated system. The system can support from one venue to several hundred venues in a multi-site configuration. Systems revenues are
primarily comprised of software, hardware and support services, which comprise both upfront payments as well as recurring fees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Previously, our interior signage division manufactured and sold interior casino signage and related products. Effective May 2, 2005, we completed the sale of our interior sign division to MSG Acquisitions, LLC. Accordingly, no revenues
and expenses related to signs, displays and slot glass are reflected in the results of operations subsequent to this date. Our historical products segment, which included our interior sign division and our electronic jackpot and mystery systems, was
revised effective December 31, 2005. Electronic jackpot and mystery systems are now included in our system segment.

A significant
portion of our revenues is generated from the license of intellectual property, software and content. Overall periodic license fees were approximately 23% and 20% of our overall revenues for the years ended December 31, 2006 and 2005,
respectively.

In December 2004, we announced our intent to focus the business on game content and technology and completed several
strategic transactions immediately following this decision (see Acquisitions / Divestitures



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below). We revised our business segment reporting in the third quarter of 2005 as a result of the realignment of the business. Also, in 2003, we expanded the
disclosure of our revenues and expenses. The principal changes from previous presentations were related to the disclosure of direct and indirect costs of revenues by segment, and separate disclosure of significant expenses related to slot rent,
research and development, and depreciation and amortization. This more expanded view of our operating lines of business classifies royalties as a cost of revenue along with other direct costs of revenues by business segment. Previous presentations
classified this cost as a reduction of revenues. Operating income or loss, net income or loss, and basic and fully diluted earnings or loss per share for prior periods are unchanged from previous presentations. With respect to our current segments,
we evaluate performance and allocate resources based upon profit or loss from operations before income taxes. The accounting policies of our reportable segments are the same as those described in the summary of critical accounting policies below.

Acquisitions / Divestitures

In December 2004, we entered into two strategic transactions to enhance our table games and
table systems products. First, we agreed to acquire the table games management system, PitTrak®, including its existing customer base from Hotel Systems Pty, Ltd. of Sydney Australia.
PitTrak® has a similar functionality as TableLink® and provided us with an existing installed base of over 400 tables and access
to sell its management solutions worldwide. The purchase of PitTrak® was completed in January 2005. We also purchased and exclusively licensed certain suites of patents related to
player card image based recognition (IBR) and licensed the exclusive rights to develop and distribute an IBR card recognition shoe.

In connection with our focus on game content and technology we sold our interior sign division during May 2005.

In
June 2005, we entered into a worldwide exclusive license with Magellan, a developer of advanced, high-speed ISO-compliant RFID systems. We licensed, on an exclusive basis, for the life of the subject patents, Magellans rights to its RFID
reader, tag and related intellectual property for any gaming applications. We also purchased a minority equity stake in Magellan.

In
conjunction with the development of our slot and content technology, we acquired VirtGame Corp. during the fourth quarter of 2005 in a stock swap in which we will issue a total of 1,758,498 shares of our common stock. VirtGame Corp. was a provider
of open architecture gaming software primarily focused on the delivery of central server-based slot games and centrally managed sports betting.

On November 28, 2005, we acquired EndX, a global gaming management systems software company headquartered in the United Kingdom, for approximately $29.9 million in cash, including transaction costs. EndX had been one of our key
strategic partners for over three years.

On March 5, 2007, we announced that
we appointed Roth Capital Partners to provide advisory services in connection with a potential sale of our table games route and other related assets including the Caribbean Stud® and Texas
Holdem Bonus® table games, with full consideration of related agreements and partnerships tied to the felt and electronic table games. We expect that we would retain our rights and
agreements related to wireless, server-based and peer to peer systems, content, applications and certain other assets related to the table games route.

Financing and Other Matters

Debt Retirement. During 2003, we completed a private placement for approximately
$45.0 million from selling 8.4 million shares of our Common Stock at a price of $5.34 per share and warrants to acquire an additional 2.1 million shares at an exercise price of $5.875 per share. Proceeds from the transaction were used
to repurchase and retire $40.0 million of the Companys 11.875% senior secured notes due 2008, or the Notes, and



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to pay the associated fees and costs. This transaction will reduce our annual interest expense by approximately $4.0 million. This refinancing resulted
in the incurrence of $9.5 million of non-cash charges ($5.3 million related to the write-off of unamortized bond discounts and $4.2 million related to the implied fair value of warrants issued in the refinancing), including
$3.4 million of transaction fees and expenses.

We retired $20.0 million of our Notes during 2005. We recognized a loss on early
retirement of $3.0 million, comprising $1.8 million of non-cash charges related to the write-off of unamortized bond discounts and unamortized debt issue costs, and a call premium of $1.2 million paid in cash.

Equity Offering. During 2005, we completed a public equity offering of approximately 8.3 million shares of our Common Stock at a price
of $9.25 per share. Proceeds from the transaction were approximately $70.0 million, and were used to repurchase and retire $20.0 million of the Companys Notes, fund strategic developments and acquisitions, including the acquisition
of EndX, and provide working capital and for other general corporate purposes.

Debt.On April 20, 2006, we completed
the first of two phases of securing a credit facility for completion of our minority investment in Magellan Technology Pty., Ltd., and for general working capital purposes. The first phase included an arrangement for a $10 million senior
secured term loan due April 19, 2007. Outstanding principal under the facility bore interest at the prime rate of interest plus 2.25%. Underwriting fees related to the facility equaled 3.5% of the total principal and warrants to purchase
200,000 shares of our common stock. This loan was paid off in August 2006 as discussed below.

On August 4, 2006, we completed the
final phase of our credit facility with an affiliate of Cerberus Capital Management, L.P., Ableco Finance LLC (Cerberus). The $22.5 million, three-year revolving credit facility due August 2009 is intended for general working capital
purposes and replaced the existing $10 million facility completed in the first stage of the financing. Outstanding principal under the $22.5 million facility bears interest at the prime rate of interest plus an applicable margin (currently 11.75%)
or a LIBOR rate plus an applicable margin. Underwriting fees related to the facility equal 2.0% of the total principal and warrants to purchase 150,000 shares of our common stock. The terms of the Cerberus facility require us to comply with certain
financial covenants covering senior debt leverage ratio, total debt leverage ratio, minimum EBITDA, minimum cash plus availability, minimum interest coverage, and certain negative covenants.

In March 2007, we entered into an amendment to our existing facility with Cerberus. Under the amendment Cerberus waived certain financial covenant
requirements for the quarters ended December 31, 2006 and the quarter ended March 31, 2007. We were required to pay an amendment fee of $225,000 and the interest rate charged by Cerberus under the facility was increased by 50 basis points.
We will retain full use of the facility, in accordance with the terms of the related agreement.

On March 5, 2007, we announced that
we had appointed bankers to explore the sale of the table route. We expect to use the proceeds from this potential sale to repay debt. If this potential sale does not occur at all, or in the timeframe expected, we would consider other alternatives
to refinance some or all of our debt.

Amounts disclosed in the accompanying tables are rounded to the nearest thousand while amounts
included in text are disclosed in actual amounts. All percentages reported are based on those rounded numbers.



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Results of Operations

Revenues and Cost of Revenues



|                       |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|---------------------- |  | ----------------------- | ------ | ----------------- | - | ------ |  | --------- | ------ |  | --------- | -- |  | ----- | --
|                       |  | Year Ended December 31, |        | Percentage Change |  
|                       |  | 2006                    |        | 2005              |   | 2004   |  | 06 vs. 05 |        |  | 05 vs. 04 |   
|Revenues:              |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|Slot and table games   |  | $                       | 16,700 |                   | $ | 33,670 |  | $         | 40,560 |  | (50.4     | )% |  | (17.0 | )%
|Interior signage       |  |                         |       |                   |   | 5,252  |  |           | 20,014 |  |          |    |  | (73.8 | )%
|Systems                |  |                         | 52,809 |                   |   | 39,299 |  |           | 35,800 |  | 34.4      | %  |  | 9.8   | % 
|                       |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|Total revenues         |  | $                       | 69,509 |                   | $ | 78,221 |  | $         | 96,374 |  | (11.1     | )% |  | (18.8 | )%
|                       |  |                         |        |                   |  
|Cost of revenues:      |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|Slot and table games   |  | $                       | 12,946 |                   | $ | 12,677 |  | $         | 11,999 |  | 2.1       | %  |  | 5.7   | % 
|Interior signage       |  |                         |       |                   |   | 3,832  |  |           | 12,335 |  |          |    |  | (68.9 | )%
|Systems                |  |                         | 21,213 |                   |   | 19,597 |  |           | 18,548 |  | 8.2       | %  |  | 5.7   | % 
|                       |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|Total cost of revenues |  | $                       | 34,159 |                   | $ | 36,106 |  | $         | 42,882 |  | (5.4      | )% |  | (15.8 | )%
|                       |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   
|Gross profit           |  | $                       | 35,350 |                   | $ | 42,115 |  | $         | 53,492 |  | (16.1     | )% |  | (21.3 | )%
|                       |  |                         |        |                   |   |        |  |           |        |  |           |    |  |       |   

Overview. In December 2004, we announced our intent to focus our business on game
content and technology and have completed several strategic transactions since this decision. These transactions have provided us with new products and intellectual property necessary to enable us to focus on our strategic initiatives. Historically,
our product revenues consisted of the sale of custom interior signage and daily fees from slot and table leases. The majority of our revenues today are generated from modular and integrated management systems for slot, table, sports and other types
of legalized wagering in casino gambling venues.

Key business metrics used by Company management include:



|(i) | Slot and table management system installed base, representing the number of slot machines or table games that are connected to the Companys systems products.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) | Win per device per day, representing the net revenues the Company earns from each gaming device or system.
|---- | ----------------------------------------------------------------------------------------------------------



|(iii) | Slot machine and table games installed base, representing the number of slot games or table games devices that generate fixed or daily fees for the Company.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iv) | Daily fees per slot machine or table game installed base, representing the daily fee we earn per game.
|---- | ------------------------------------------------------------------------------------------------------

Systems. During the fiscal year ended December 31, 2006, our systems revenues
were $52.8 million, representing an increase of 34.4% as compared to 2005. This improvement in 2006 compared to 2005 was primarily due to increased demand for our systems, fueling a 50.5% increase in upfront fees, and a 109.3% increase in recurring
daily fees. During 2006 our table management installed base, which includes our legacy TableLink® system and Table iD grew by approximately 48.8% compared to 2005 levels. Our slot
management installed base, which includes our Casinolink® Jackpot System product and our Casinolink® systems, showed an
18.7% growth in fiscal 2006 compared to fiscal 2005.

During the fiscal year ended
December 31, 2005, our systems revenues were $39.3 million, representing an increase of 9.8% as compared to 2004. This improvement was primarily due to increased demand for our Casinolink® Enterprise Edition products. Our table management installed base grew approximately 80% over 2004. We continued to report consistent increases in our slot management installed base, including an 18% growth in fiscal 2005 compared
to fiscal 2004. Maintenance revenues also increased year-over-year as we continued to grow our installed base of both Casinolink® and TableLink.



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Slot and table games. Slot and table
game revenues for 2006 decreased by 50.4% compared to 2005. The decrease is primarily attributable to a decline in slot and table revenues under daily fee arrangements, and a decrease in one-time intellectual property licensing fees. Overall, table
game revenues declined primarily as a result of lower daily fees under our lease arrangements. The Company expects revenues from table games to increase in fiscal 2007 as a result of continued popularity of our Caribbean Stud® poker game in Macau, and through new installations of and conversions of existing installations to the progressive version of the Texas Hold Em Bonus® / World Series of Poker® table game, which is now approved in all major gaming jurisdictions and is expected to earn higher daily fees.

Slot and table game revenues for 2005 decreased by 17% compared to 2004. Slot revenues decreased 42.4% for the year ended December 31, 2005,
primarily as a result of a decrease in the installed base, and table revenues decreased 27.6 % for the same period due primarily to lower daily fees from the Texas Hold Em Bonus felt game comprising a larger portion of our table route.

During 2005, we announced our intent to dispose of our legacy slot route to allow us to focus on central-server based gaming technology.
In September 2005, we licensed our legacy slot operating system to a third party as more fully described in Note 1 in the accompanying financial statements. As a result of these events, our legacy slot revenues declined in 2005 and 2006.

During March 2007, we announced that we appointed Roth Capital Partners to provide
advisory services in connection with a potential sale of our table games route and other related assets including the Caribbean Stud® and Texas Holdem Bonus® table games, with full consideration of related agreements and partnerships tied to the felt and electronic table games. We expect that we would retain our rights and agreements related to
wireless, server-based and peer to peer systems, content, applications and certain other assets related to the table games route.

Included
in systems revenues and slot and table games revenues are one-time licensing arrangements. For the fiscal years ended December 31, 2006 and 2005, revenues from these arrangements totaled approximately $14 million and $13.8 million,
respectively. In the fourth quarter of 2006, we publicly announced that we will no longer include one-time intellectual property license revenues in our planned estimates.

Interior signage. The interior signage segment, which was sold in the second quarter of 2005, manufactured and sold interior casino signage
and related products. The interior signage operation previously was combined with the electronic jackpot and mystery systems in the Products Segment. In 2005, we revised our segment information to be more consistent with our new business model. We
now report our revenues in two segments: (1) slot and table games and (2) systems and electronic jackpot and mystery systems. As a result of this change, we have reclassified our 2004 and 2005 revenues to conform to the current segment
presentation.

Gross profit. Our gross profit margin decreased by approximately $6.8 million in 2006 as compared to 2005 due
primarily to a lower revenue base with a constant level of fixed costs. Our gross profit percentage decreased slightly from 53.8% in 2005 to 50.9% in 2006. Gross profit decreased in 2005 versus 2004 due to higher systems hardware sales in 2005
compared to 2004.



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Condensed Statement of Operations



|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|------------------------------------------ |  | ----------------------- | ------- | - | ----------------- | - | ------ | ---- |  | - | --------- | - |  | --------- | -- |  | -------- | --
|                                           |  | Year Ended December 31, |         |   | Percentage Change |  
|                                           |  | 2006                    |         |   | 2005              |   |        | 2004 |  |   | 06 vs. 05 |   |  | 05 vs. 04 |   
|Total revenue                              |  | $                       | 69,509  |   |                   | $ | 78,221 |      |  | $ | 96,374    |   |  | (11.1     | )% |  | (18.8    | )%
|Cost of revenue                            |  |                         | 34,159  |   |                   |   | 36,106 |      |  |   | 42,882    |   |  | (5.4      | )% |  | (15.8    | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Gross profit                               |  |                         | 35,350  |   |                   |   | 42,115 |      |  |   | 53,492    |   |  | (16.1     | )% |  | (21.3    | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|SG&A expense                               |  | $                       | 41,836  |   |                   | $ | 28,652 |      |  | $ | 27,595    |   |  | 46.0      | %  |  | 3.8      | % 
|Slot rent expense                          |  |                         |        |   |                   |   |       |      |  |   | 1,204     |   |  |          |    |  | (100.0   | )%
|R&D expense                                |  |                         | 13,005  |   |                   |   | 8,060  |      |  |   | 6,102     |   |  | 61.4      | %  |  | 32.1     | % 
|Depreciation and amortization              |  |                         | 9,301   |   |                   |   | 4,894  |      |  |   | 8,908     |   |  | 90.0      | %  |  | (45.1    | )%
|Net gain on disposal of non-core assets    |  |                         |        |   |                   |   | (2,536 | )    |  |   |          |   |  | (100.0    | )% |  |         |   
|Gain on sale of core intellectual property |  |                         |        |   |                   |   | (2,500 | )    |  |   |          |   |  | (100.0    | )% |  |         |   
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Income from operations                     |  | $                       | (28,792 | ) |                   | $ | 5,545  |      |  | $ | 9,683     |   |  | (619.2    | )% |  | (42.7    | )%
|Interest expense, net                      |  |                         | (7,832  | ) |                   |   | (8,535 | )    |  |   | (9,489    | ) |  | (8.2      | )% |  | (10.1    | )%
|Loss on early retirement of debt           |  |                         |        |   |                   |   | (2,993 | )    |  |   |          |   |  | (100.0    | )% |  |         |   
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Income (loss) before income tax benefit    |  |                         | (36,624 | ) |                   |   | (5,983 | )    |  |   | 194       |   |  | (512.1    | )% |  | (3,184.0 | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Income tax benefit                         |  |                         |        |   |                   |   |       |      |  |   | 65        |   |  |          |    |  | (100.0   | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Net income (loss)                          |  | $                       | (36,624 | ) |                   | $ | (5,983 | )    |  | $ | 259       |   |  | (512.1    | )% |  | (2,410.0 | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   
|Net income (loss) per share                |  | $                       | (1.06   | ) |                   | $ | (0.24  | )    |  | $ | 0.01      |   |  | (341.7    | )% |  | (2,481.4 | )%
|                                           |  |                         |         |   |                   |   |        |      |  |   |           |   |  |           |    |  |          |   

Selling, general and administrative expense (SG&A). SG&A
expenses increased by approximately $13.2 million in the year ended December 31, 2006 compared to 2005. This increase was due primarily to additional legal and compliance costs necessary to continue to achieve regulatory approvals for our new
products, legal fees incurred in connection with ongoing litigation matters, legal settlements, relocation and restructuring charges for our international operations, and separation and post-employment agreement costs. In addition, non-cash charges
for stock compensation expense were approximately $5.3 million for 2006 compared with $0.7 million in 2005. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), using the modified prospective application, and therefore, results for prior periods have not been restated. SFAS No. 123(R) requires that all stock-based compensation, including stock and
stock-based awards to employees, be valued at fair value and recorded as a charge to income over the related service period.

SG&A
expenses increased by approximately $1.1 million in the year ended December 31, 2005 compared to 2004. The increase in 2005 compared to 2004 was due primarily to additional legal and compliance costs necessary to continue to achieve regulatory
approvals for our new products, costs incurred in connection with the documentation and testing of our business processes under the new corporate governance requirements and continued investments in upgrading our human capital.

Research and development expense (R&D). R&D consists primarily of personnel and related costs across all of our product
lines. During 2006, research and development expense increased by 61.4% over 2005, as a result of increased spending to meet our product development timelines and achieve our strategic objectives. We believe our R&D staffing is currently at
optimal levels, but we expect total R&D expense will continue to experience some variability due to third-party costs related to the submission and approval of new products. During 2005, R&D expense increased by 32.1% compared to the same
period in 2004 as a result of our shift toward a technology-based business model.

Depreciation and amortization.
Depreciation and amortization increased by approximately $4.4 million during the 2006 fiscal year compared to 2005. This increase is primarily the result of amortization expense for the acquisitions of EndX and VirtGame which were completed in late
2005, partially offset by a decrease in depreciation expense as a result of our slot write-down in mid-2005.



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Depreciation and amortization decreased 45.1% in 2005 compared to 2004 primarily due to a write-down of
our legacy slot hardware in June 2005.

Net gain on disposition of non-core assets. During 2005, we recognized a net
gain on disposition of non-core assets of $2.5 million as a result of completing two key strategic transactions. During the second quarter, we completed the sale of the interior sign division, which resulted in a gain of approximately
$7.4 million including transaction costs. Additionally, we commenced the process of repositioning our existing slot machine platform to focus on central-server based game and third party content development. In connection with this
repositioning, we entered into an asset purchase agreement to sell certain non-gaming slot hardware related to our existing platform. In connection with the repositioning, we recorded an impairment charge of $4.9 million equal to the amount by
which the carrying value exceeded the fair value determined by the selling price.

Gain on sale of core intellectual
property. During the third quarter of 2005, we completed a strategic licensing transaction, whereby we sold the remaining rights to certain intellectual property in a barter transaction, but retained a non-exclusive license in the
intellectual property for use in our operations.

Interest expense, net. Interest expense primarily includes interest costs
and amortization from our $45 million of 11.875% Senior Secured Notes due 2008 and our senior secured credit facility. Net interest expense decreased by approximately $0.7 million in 2006 as compared to 2005 as a result of the retirement of $20
million of the Senior Secured Notes during the fourth quarter of 2005, partially offset by interest expense on our senior secured credit facility. Net interest expense decreased $1 million during 2005 compared to 2004 due to the retirement of a
portion of the Senior Secured Notes during the fourth quarter, and due to the completion of amortizing certain debt issue costs.

Loss on early retirement of debt. During the fourth quarter of 2005, we recorded a $3.0 million loss on the early retirement of $20.0 million of our Senior Secured Notes. Of this charge, $1.2 million was a call
premium paid in cash, and $1.8 million was a non-cash charge related to writing off related debt discount and prepaid debt issue costs.

Income taxes. The Company did not recognize a tax benefit or provision related to its domestic operations for the years ended December 31, 2006, 2005 or 2004 due to the Companys net operating loss position. In 2004,
the income tax benefit recorded in the statement of operations related primarily to foreign tax credits and state income tax adjustments.

Earnings (loss) per share. Basic and diluted loss per share for the year ended December 31, 2006 was $(1.06) on approximately 34.5 million basic and diluted average common shares outstanding. Basic and diluted
loss per share for the year ended December 31, 2005 was $(0.24) on approximately 25.1 million basic and diluted average common shares outstanding. The basic and diluted earnings per share for the year ended December 31, 2004 was $0.01
on approximately 21.9 million basic and approximately 22.4 million diluted average common shares outstanding.

Liquidity and Capital
Resources

Net cash and cash equivalents at December 31, 2006 were approximately $7.2 million, a decrease of approximately $6.9
million compared to December 31, 2005. This change resulted from cash used in operations of $12.1 million, cash used in investing activities of $12.5 million, and cash provided by financing activities of $17.8 million, and the effect of
exchange rate changes on cash and cash equivalents of $0.1 million.

Significant components of cash flows from operations are as follows:



|                                        |  |   |       |  
|--------------------------------------- |  | - | ----- | -
|(Amounts in millions)                   |  |   |      
|Net loss                                |  | $ | (36.6 | )
|Non-cash items                          |  |   | 18.6  |  
|Other changes in assets and liabilities |  |   | 5.9   |  
|                                        |  |   |       |  
|Net cash used in operations             |  | $ | (12.1 | )
|                                        |  |   |       |  



8



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Other significant sources (uses) of cash during 2006 were $17.6 million proceeds from our senior debt
facility, $1.6 million of proceeds from the issuance of common stock, $(6.7) million used for the purchase of a minority investment and business operations, $(2.2) million used for purchases of property and equipment and inventory leased to others,
$(3.6) million used for investments in intellectual property and intangible assets, and $(1.4) million used for corporate development including debt repayments, debt issuance costs, residual costs of our 2005 equity offering, and purchases of
treasury stock.

The following table summarizes the Companys contractual obligations for long-term debt, capital leases, interest
expense, operating leases, license fees and employment agreements for the periods shown:



|                          |  |       |         |                 |   |            |  |            |        |               |   |       |  |   |      
|------------------------- |  | ----- | ------- | --------------- | - | ---------- |  | ---------- | ------ | ------------- | - | ----- |  | - | -----
|(Amount in thousands)     |  | Total |         | Less than1 year |   | 1  3Years |  | 4  5Years |        | After 5 Years
|Contractual Obligations   |  |       |         |                 |   |            |  |            |        |               |   |       |  |   |      
|Long-term debt            |  | $     | 62,749  |                 | $ | 113        |  | $          | 62,636 |               | $ |      |  | $ |     
|Capital lease obligations |  |       | 15      |                 |   | 15         |  |            |       |               |   |      |  |   |     
|Interest expense          |  |       | 14,645  |                 |   | 7,553      |  |            | 7,092  |               |   |      |  |   |     
|Operating leases          |  |       | 8,725   |                 |   | 2,710      |  |            | 4,305  |               |   | 1,710 |  |   |     
|License / development     |  |       | 20,652  |                 |   | 7,947      |  |            | 6,935  |               |   | 3,672 |  |   | 2,098
|Employment agreements     |  |       | 456     |                 |   | 304        |  |            | 152    |               |   |      |  |   |     
|                          |  |       |         |                 |   |            |  |            |        |               |   |       |  |   |      
|Total                     |  | $     | 107,242 |                 | $ | 18,642     |  | $          | 81,120 |               | $ | 5,382 |  | $ | 2,098
|                          |  |       |         |                 |   |            |  |            |        |               |   |       |  |   |      

The table above excludes accretion of debt discount of $0.6 million for the periods shown.

We have generated net losses of $36.6 million, $6 million and net income of $0.3 million for the years ended December 31, 2006, 2005
and 2004, respectively, and have an accumulated deficit of $150.5 million at December 31, 2006. We have used cash from operating activities of $12.1 million, $21.3 million and generated cash from operations of $8.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. We have generated cash from financing activities of $17.8 million, $59.6 million and $0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. We have total cash of
$7.2 million and net working capital of $19.7 million at December 31, 2006. We have also announced that we will explore a potential sale of our table games route and other related assets. Based on our current operating plan, we believe existing
cash, cash forecasted by us to be generated by operations, potential sales of assets, and borrowings from our credit facility will be sufficient to meet our working capital and capital requirements through at least December 31, 2007. However,
if events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to
achieve our intended business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on
acceptable terms, or available at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

In February 2007, we received a judgment related to a recent jury verdict in the case entitled Derek Webb, et al v. Mikohn Gaming Corporation for $39 million, plus the cost of the suit including reasonable
attorneys fees. In accordance with the applicable law, our payment obligations with respect to the judgment are stayed until a denial of our post-trial motion for a new trial. Although we cannot guarantee the outcome of any of our
litigation matters, based on opinions from our external counsel and our own internal assessment, we believe that it is probable that either the motion for a new trial or motion for judgment as a matter of law will be granted and as a result the jury
verdict will be vacated and overturned. Otherwise, we believe it is probable that the jury verdict will be overturned on appeal. As a result, as of December 31, 2006, no amounts have been accrued for this matter other than legal defense fees.
While we cannot predict with precision the length of time it will take the Court to rule on post trial motions, we believe, and outside counsel concurs, that it is remote that the post trial motion process will be concluded before December 31,
2007, and the Court would render its decisions on these



9



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motions. Accordingly, other than normal legal expenses, we do not expect the jury verdict to impact our financial position, results of operations or cash
flows during the year ended December 31, 2007. If the post trial motions are unsuccessful, we may be required to post a bond for $43.7 million representing the full amount of the verdict, including plaintiffs attorneys fees and
costs. The requirement to post a bond of this magnitude could therefore have a material adverse effect on our financial position, results of operations and liquidity, up to and including impacting our ability to continue as a going concern or
forcing us to seek protection under Federal Bankruptcy laws.

Employment Agreements

We have entered into employment contracts with our corporate officers and certain other key employees. Significant contract provisions include minimum
annual base salaries, healthcare benefits, life insurance benefits, bonus compensation if performance measures are achieved, changes in control (CIC), grants of restricted stock, incentive stock options and non-compete provisions. These contracts
are primarily at will employment agreements, under which we or the employee may terminate employment. If we terminate any of these employees without cause, then we are obligated to pay the employee severance benefits as specified in
their individual contract.

Purchase Commitments

From time to time, we enter into commitments with our vendors to purchase inventory at fixed prices or in guaranteed quantities. From time to time we also enter into certain intellectual property license arrangements
that require upfront payments upon signing and/or additional payments upon our election to renew the licenses. In addition, we may choose to negotiate and renew licenses upon their normal expiration. No assurances can be given as to the terms of
such renewals, if any.

In August 2004, we signed a license and development agreement with IGT to license segments of our patent
portfolio of technology and to develop video slot games based on our content, for a term continuing until the last to expire of the patent rights under the agreement. The new games are to be developed on IGTs game platform and distributed by
us. Pursuant to this agreement, IGT also licenses aspects of its intellectual property to us for its games and we are committed to purchase from IGT a minimum of 600 slot machines carrying our game content on them over the life of the agreement. We
will be required to pay for the slot machines through a daily fee arrangement whereby IGT will receive an amount equal to 25% of our gross revenue derived from the slot machines, with a minimum of $12.50 per day per machine, as defined in the
agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements with unconsolidated entities or other persons.

Capital Expenditures and Other

During 2006, we spent approximately $1.8 million for purchases of property and equipment, primarily all of which relates to a new enterprise-wide
software system, and $0.4 million for purchases of inventory leased to others. We expect our spending for capital expenditures to be less in 2007.

On June 16, 2006, we entered into a separation agreement with our former CFO, resulting in charges of $0.9 million for severance and $0.9 million for stock compensation expense.

Share Repurchase Plan

On August 13, 2002 our
Board of Directors authorized the purchase of up to $2.0 million of our common stock. The purchases may be made from time to time in the open market. The timing and actual number of shares to be purchased will depend on market conditions.
Through December 31, 2006, we have purchased 175,800 shares of our common stock for approximately $0.5 million.



10



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Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of our accounting policies require that we apply significant estimates,
judgments and assumptions, that we believe are reasonable, in calculating the reported amounts of certain assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates are
subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of known industry trends, and information available from outside sources, as appropriate. On a regular
basis, we evaluate our estimates including those related to lives assigned to our assets, the determination of bad debts, inventory valuation reserves, asset impairment and self-insurance reserves. There can be no assurance that actual results will
not differ from our estimates.

We have identified the following policies as critical to our business operations and the understanding of
our results of operations: revenue recognition, receivables and allowance for doubtful accounts, inventories and obsolescence, long-lived asset impairment, and stock-based compensation. To provide an understanding of the methodology we apply these
and other significant accounting policies discussed below and where appropriate in the notes to our consolidated financial statements.

Revenue Recognition

The Company recognizes revenue as follows:

Slot and Table Games. We lease and sell proprietary slot and table games to casino customers. Table game lease contracts are typically for a
36-month period with a 30-day cancellation clause. The lease revenue is recognized on a monthly basis. Slot machine lease contracts are either on revenue participation or a fixed-rental basis. Slot machine lease contracts are typically for a
month-to-month period with a 30-day cancellation clause. On a participation basis, we earn a share of the revenue that the casino earns from these slot machines. On a fixed-rental basis, we charge a fixed amount per slot machine per day. Revenues
from both types of lease arrangements are recognized on the accrual basis. The sales agreements for proprietary table games and slot games consist of the sale of hardware and a perpetual license for the proprietary intellectual property. Slot and
table game sales are executed by a signed contract or a customer purchase order. We generally recognize revenues for these sales agreements when the hardware and intellectual property is delivered to the customer.

Systems. System sales consist of a suite of products (some of which are sold separately) that enable gaming entities to track customer gaming
activity, account for slot machine activity and operate progressive jackpot systems. There are proprietary hardware and software components to the systems. We account for system sales in accordance with Statement of Position 97-2Software
Revenue Recognition (SOP 97-2). System sales are considered multiple element arrangements because they include hardware, software, installation, training and post-sale customer support. System sales are evidenced by a signed contract.
Follow-up spare parts and hardware-only sales are evidenced by a purchase order. Revenue for system sales is recognized when: (i) there is a signed contract with a fixed determinable price; (ii) collectibility of the sale is probable; and
(iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred. Not all systems contracts require installation. Examples include sales of hardware only to (i) previous customers that
are expanding their systems, (ii) customers that have multiple locations and do the installation themselves and require an additional software license and hardware and (iii) customers purchasing spare parts.

Postcontract Customer Support. Maintenance and support for substantially all of our products are sold under agreements with established
vendor-specific objective evidence of fair value in accordance with the applicable accounting literature. These contracts are generally for a period of three years and revenue is recognized ratably over the contract service period. Further training
is also sold under agreements with established vendor-specific objective evidence of price, which is based on daily rates and is recognized as the services are provided.

License Arrangements. A significant portion of our revenues are generated from the license of intellectual property, software and game content. These licenses are sold on a stand-alone basis or in multiple
element arrangements. We recognize revenues from these transactions in accordance with the applicable accounting



11



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literature. Revenues under perpetual license arrangements are generally recognized when the license is delivered. Revenues under fixed term arrangements are
generally recognized over the term of the arrangement or in a manner consistent with the earnings process. For arrangements with multiple deliverables, revenue is generally recognized as the elements are delivered so long as the undelivered elements
have established fair values as required in the applicable accounting literature.

Interior Signage. Product sales are executed by a
signed contract or customer purchase order. Revenue is recognized when the completed product is delivered. If the agreement calls for the Company to perform an installation after delivery, revenue related to the installation is recognized when the
installation has been completed and accepted by the customer.

Inventory and Obsolescence

We routinely evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted
sales or usage, estimated service period, product end of life dates, estimated current and future market values, service inventory requirements and new product introductions, as well as other factors. Purchasing requirements and alternative usage
avenues are explored within these processes to mitigate inventory exposure. Raw materials and work in progress with quantities in excess of forecasted usage are reviewed at least quarterly by our engineering and operating personnel for obsolescence.
Such raw material and work in progress write-downs are typically caused by engineering change orders or product end of life adjustments. Finished goods are reviewed at least quarterly by product marketing and operating personnel to determine if
inventory carrying costs exceed market selling prices. Service inventory is systematically reserved for based on the estimated remaining service life of the inventory. We record reserves for inventory based on the above factors and take into account
worldwide quantities and demand in our analysis. In 2005 and 2004, we reduced our reserves through write-offs of obsolete inventories and adjusted the level of reserves in accordance with our accounting policies. In the second quarter of 2006, we
increased our reserves by approximately $0.9 million due primarily to charges resulting from the European Unions adoption of the Restriction of Hazardous Substances in electronic equipment (RoHS) initiative on July 1, 2006 and due to
charges resulting from slot machine parts deemed no longer saleable. If circumstances related to our inventories change, our estimates of the realizability of inventory could materially change.

Effective January 1, 2006, we adopted the provisions of SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4. The amendment clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production facilities. The adoption of this amendment did not have a material impact to our overall results of operations or financial position.

Long-Lived Asset Impairment

Long-lived assets and intangible assets with determinable lives are reviewed for impairment quarterly or whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by
the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets
based upon our estimates of the future cash flows we expected the assets to generate. In response to changes in industry and market conditions, we may be required to strategically realign our resources in the future, which could result in an
impairment of long-lived assets.

For indefinite-lived assets including perpetual licenses and goodwill, a valuation is performed at least
annually to determine if any impairment has occurred.



12



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Stock-Based Compensation

Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)) which establishes
standards for accounting for transactions in which a company exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that is based on the fair value of the entitys equity instruments or
that may be settled by the issuance of those equity instruments. The primary focus of this pronouncement is on issuing share-based payments for services provided by employees. This pronouncement also requires recognition of compensation expense for
new equity instruments awarded or for modifications, cancellations or repurchases of existing awards starting January 1, 2006. Compensation expense for new equity awards, in most cases, will be based on the fair value of the stock on the date
of grant and will be recognized over the vesting service period. An award of a liability instrument, as defined by this pronouncement, will initially be recorded at fair value and will be adjusted each reporting period to the new fair value through
the date of settlement. Additionally, we have adopted the guidance in SAB 107,Share-Based Payment, which provides interpretive guidance on SFAS No. 123(R) valuation methods, assumptions used in valuation models, and the interaction of
SFAS No. 123(R) with existing SEC guidance. SAB 107 also requires the classification of stock compensation expense to the same financial statement line item as cash compensation, and therefore, may impact cost of sales and service, related
gross profits and margins, selling, general and administrative expenses and research and development expenses.

We elected the modified
prospective application method contained in SFAS No. 123(R) to account for share-based payments. Prior to the adoption of SFAS No. 123(R), we accounted for share-based payments under the recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB No. 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

The principal effects of adopting SFAS No. 123(R) are:



| |  |  | The fair value of unvested outstanding options at the beginning of first quarter 2006 will be expensed over the remaining service period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Forfeitures over the expected term of the award are estimated at the date of grant and the estimates adjusted to reflect actual subsequent forfeitures. Previously,
we had reflected forfeitures as they occurred. The effect of this change was not significant.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any tax benefits recognized as a result of the exercise of employee stock options would be classified as a financing cash flow. The Company has not recognized any
tax benefits related to stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Adoption of this new pronouncement did not change the methodology we use to determine the fair value of our share-based compensation arrangements. We use
the Black-Scholes-Merton option-pricing model for stock options and the grant date fair value of our common stock for restricted stock awards.

Recently Issued Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (FIN 48). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax
position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax
position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a



13



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valuation allowance as a substitute for derecognition of tax positions and it has expanded disclosure requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We are evaluating FIN 48 and have not yet determined the impact the
adoption will have on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new
fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for us on January 1, 2008. We are currently evaluating the impact of adopting SFAS
No. 157 on our financial position, cash flows, and results of operations.

In September 2006, the Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides
interpretive guidance on the SECs views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for the fiscal year
ended December 31, 2006. The application of SAB 108 did not have a material effect on our financial position, cash flows, and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). SFAS No. 159 permits entities to choose to measure at
fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS
No. 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently assessing the effect of implementing this guidance, which depends on the nature and extent of items elected to be measured at fair value, upon initial application of the standard on January 1, 2008.



14



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|Item 8. | Consolidated Financial Statements and Supplementary Data
|------- | --------------------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2006, 2005, and 2004



|                                                                                                                          |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting                     |  | 16
|Reports of Independent Registered Public Accounting Firms on the Consolidated Financial Statements                        |  | 17
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                              |  | 19
|Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004                                |  | 20
|Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2006, 2005 and 2004               |  | 21
|Consolidated Statements of Changes in Stockholders Equity (Deficit) for the Years Ended December 31, 2006, 2005 and 2004 |  | 22
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004                                |  | 23
|Notes to Consolidated Financial Statements                                                                                |  | 25
|Quarterly Results of Operations (Unaudited)                                                                               |  | 60

All other schedules are omitted because of the absence of conditions under which they are required
or because the information is included in the financial statements or the notes thereto.



15



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Progressive Gaming
International Corporation:

We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting included in Item 9A, that Progressive Gaming International Corporation and Subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31,
2006, 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. Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of 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, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and 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, managements assessment that the Company maintained effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, 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 sheet of the Company as of December 31, 2006, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity, and cash flows for the year ended December 31, 2006 and our
report dated March 20, 2007 expressed an unqualified opinion thereon.



|                        
|------------------------
|/s/    Ernst & Young LLP
|Las Vegas, Nevada       
|March 20, 2007          



16



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Progressive Gaming
International Corporation:

We have audited the accompanying consolidated balance sheet of Progressive Gaming International Corporation
and Subsidiaries (the Company) as of December 31, 2006, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity and cash flows for the year then ended. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
as of December 31, 2006 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on criteria established inInternal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 20, 2007 expressed an unqualified opinion thereon.



|                        
|------------------------
|/s/    Ernst & Young LLP
|Las Vegas, Nevada       
|March 20, 2007          



17



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Progressive Gaming International
Corporation

Las Vegas, Nevada

We have
audited the accompanying consolidated balance sheet of Progressive Gaming International Corporation (the Company) as of December 31, 2005 and the related consolidated statements of operations, comprehensive income (loss),
stockholders equity and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position of Progressive Gaming International Corporation as of December 31, 2005, and the results of its operations and its cash flows for the two years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.



|                       
|-----------------------
|/s/    BDO Seidman, LLP
|Los Angeles, California
|March 28, 2006         



18



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                      |  |              |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                      |  | December 31, |         
|(Amounts in thousands, except share and per share data)                                                               |  | 2006         |          |   | 2005 |  
|ASSETS                                                                                                                |  |              |          |   |      |   |          |  
|Current assets:                                                                                                       |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                             |  | $            | 7,183    |   |      | $ | 14,081   |  
|Accounts receivable, net of allowance for doubtful accounts of $943 and $805                                          |  |              | 17,818   |   |      |   | 12,919   |  
|Contract sales receivable, net of allowance for doubtful accounts of $1,529 and $1,529                                |  |              | 6,407    |   |      |   | 15,670   |  
|Inventories, net of reserves of $1,040 and $1,157                                                                     |  |              | 11,486   |   |      |   | 10,534   |  
|Prepaid expenses                                                                                                      |  |              | 4,447    |   |      |   | 3,582    |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total current assets                                                                                                  |  |              | 47,341   |   |      |   | 56,786   |  
|Contract sales and notes receivable, net                                                                              |  |              | 164      |   |      |   | 2,089    |  
|Property and equipment, net                                                                                           |  |              | 5,456    |   |      |   | 4,417    |  
|Intangible assets, net                                                                                                |  |              | 62,376   |   |      |   | 61,951   |  
|Goodwill                                                                                                              |  |              | 58,014   |   |      |   | 57,173   |  
|Other assets                                                                                                          |  |              | 12,835   |   |      |   | 3,430    |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total assets                                                                                                          |  | $            | 186,186  |   |      | $ | 185,846  |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                  |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                  |  |              |          |   |      |   |          |  
|Trade accounts payable                                                                                                |  | $            | 11,047   |   |      | $ | 7,681    |  
|Customer deposits                                                                                                     |  |              | 2,113    |   |      |   | 1,224    |  
|Current portion of long-term debt and notes payable                                                                   |  |              | 128      |   |      |   | 287      |  
|Accrued liabilities                                                                                                   |  |              | 10,038   |   |      |   | 5,552    |  
|Deferred revenues and license fees                                                                                    |  |              | 4,332    |   |      |   | 7,620    |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                             |  |              | 27,658   |   |      |   | 22,364   |  
|Long-term debt and notes payable, net of unamortized discount of $585 and $954                                        |  |              | 62,051   |   |      |   | 44,071   |  
|Other long-term liabilities                                                                                           |  |              | 694      |   |      |   |         |  
|Deferred tax liability                                                                                                |  |              | 11,856   |   |      |   | 14,856   |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total liabilities                                                                                                     |  |              | 102,259  |   |      |   | 81,291   |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Commitments and contingencies (Note 13)                                                                               |  |              |          |   |      |   |          |  
|Stockholders equity:                                                                                                 |  |              |          |   |      |   |          |  
|Preferred stock, $0.10 par value, 5,000,000 shares authorized, none issued and outstanding                            |  |              |         |   |      |   |         |  
|Common stock, $0.10 par value, 100,000,000 shares authorized, 34,774,154 and 34,355,943 shares issued and outstanding |  |              | 3,477    |   |      |   | 3,436    |  
|Additional paid-in capital                                                                                            |  |              | 229,048  |   |      |   | 217,075  |  
|Other comprehensive income (loss)                                                                                     |  |              | 3,601    |   |      |   | (744     | )
|Accumulated deficit                                                                                                   |  |              | (150,510 | ) |      |   | (113,886 | )
|                                                                                                                      |  |              |          |   |      |   |          |  
|Subtotal                                                                                                              |  |              | 85,616   |   |      |   | 105,881  |  
|Less treasury stock, 293,692 and 254,174 shares, at cost                                                              |  |              | (1,689   | ) |      |   | (1,326   | )
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                                            |  |              | 83,927   |   |      |   | 104,555  |  
|                                                                                                                      |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                            |  | $            | 186,186  |   |      | $ | 185,846  |  
|                                                                                                                      |  |              |          |   |      |   |          |  

See notes to consolidated financial statements.



19



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |        
|(Amounts in thousands, except per share amounts) |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Revenues:                                        |  |                         |         |   |      |   |        |      |  |   |        |  
|Slot and table games                             |  | $                       | 16,700  |   |      | $ | 33,670 |      |  | $ | 40,560 |  
|Interior signage                                 |  |                         |        |   |      |   | 5,252  |      |  |   | 20,014 |  
|Systems                                          |  |                         | 52,809  |   |      |   | 39,299 |      |  |   | 35,800 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Total revenues                                   |  |                         | 69,509  |   |      |   | 78,221 |      |  |   | 96,374 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Cost of revenues:                                |  |                         |         |   |      |   |        |      |  |   |        |  
|Slot and table games                             |  |                         | 12,946  |   |      |   | 12,677 |      |  |   | 11,999 |  
|Interior signage                                 |  |                         |        |   |      |   | 3,832  |      |  |   | 12,335 |  
|Systems                                          |  |                         | 21,213  |   |      |   | 19,597 |      |  |   | 18,548 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Total cost of revenues                           |  |                         | 34,159  |   |      |   | 36,106 |      |  |   | 42,882 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Gross profit                                     |  |                         | 35,350  |   |      |   | 42,115 |      |  |   | 53,492 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Operating expenses:                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Selling, general and administrative expense      |  |                         | 41,836  |   |      |   | 28,652 |      |  |   | 27,595 |  
|Slot rent expense                                |  |                         |        |   |      |   |       |      |  |   | 1,204  |  
|Research and development                         |  |                         | 13,005  |   |      |   | 8,060  |      |  |   | 6,102  |  
|Depreciation and amortization                    |  |                         | 9,301   |   |      |   | 4,894  |      |  |   | 8,908  |  
|Net gain on disposition of non-core assets       |  |                         |        |   |      |   | (2,536 | )    |  |   |       |  
|Gain on sale of core intellectual property       |  |                         |        |   |      |   | (2,500 | )    |  |   |       |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Total operating expenses                         |  |                         | 64,142  |   |      |   | 36,570 |      |  |   | 43,809 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Operating income (loss)                          |  |                         | (28,792 | ) |      |   | 5,545  |      |  |   | 9,683  |  
|Interest expense, net                            |  |                         | (7,832  | ) |      |   | (8,535 | )    |  |   | (9,489 | )
|Loss on early retirement of debt                 |  |                         |        |   |      |   | (2,993 | )    |  |   |       |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss) before income tax benefit          |  |                         | (36,624 | ) |      |   | (5,983 | )    |  |   | 194    |  
|Income tax benefit                               |  |                         |        |   |      |   |       |      |  |   | 65     |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                                |  | $                       | (36,624 | ) |      | $ | (5,983 | )    |  | $ | 259    |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Weighted average common shares:                  |  |                         |         |   |      |   |        |      |  |   |        |  
|Basic                                            |  |                         | 34,527  |   |      |   | 25,124 |      |  |   | 21,884 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Diluted                                          |  |                         | 34,527  |   |      |   | 25,124 |      |  |   | 22,359 |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Basic and diluted earnings (loss) per share:     |  | $                       | (1.06   | ) |      | $ | (0.24  | )    |  | $ | 0.01   |  
|                                                 |  |                         |         |   |      |   |        |      |  |   |        |  

See notes to consolidated financial statements.



20



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



|                                               |  |                         |         |   |      |   |        |      |  |   |    
|---------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ---
|                                               |  | Year Ended December 31,
|(Amounts in thousands)                         |  | 2006                    |         |   | 2005 |   |        | 2004
|Net income (loss)                              |  | $                       | (36,624 | ) |      | $ | (5,983 | )    |  | $ | 259
|Other comprehensive income (loss), net of tax: |  |                         |         |   |      |   |        |      |  |   |    
|Foreign currency translation gains (losses)    |  |                         | 4,345   |   |      |   | (599   | )    |  |   | 108
|                                               |  |                         |         |   |      |   |        |      |  |   |    
|Comprehensive income (loss)                    |  | $                       | (32,279 | ) |      | $ | (6,582 | )    |  | $ | 367
|                                               |  |                         |         |   |      |   |        |      |  |   |    

See notes to consolidated financial statements.



21



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(DEFICIT)



|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|---------------------------------- |  | ------------ |  | ------------------------ | ----- |  | ------------------------------- | ------- | - | ------------------ | - | ----- | ------------- |  | - | -------- | - |  | - | ------ | - |  | - | ------- | -
|                                   |  | Common Stock |  | AdditionalPaid-InCapital |       |  | OtherComprehensiveIncome (Loss) |         |   | AccumulatedDeficit |   |       | TreasuryStock |  |   | Total    |  
|(Amounts in thousands)             |  | Shares       |  | Amount                   |       |  |                                 |         |  
|Balance, December 31, 2003         |  | 21,911       |  | $                        | 2,191 |  | $                               | 114,325 |   |                    | $ | (253  | )             |  | $ | (108,162 | ) |  | $ | (712   | ) |  | $ | 7,389   |  
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Net income                         |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   | 259      |   |  |   |        |   |  |   | 259     |  
|Currency translation adjustments   |  |              |  |                          |       |  |                                 |         |   |                    |   | 108   |               |  |   |          |   |  |   |        |   |  |   | 108     |  
|Stock options exercised            |  | 436          |  |                          | 44    |  |                                 | 1,855   |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 1,899   |  
|Employee stock purchase plan       |  | 87           |  |                          | 9     |  |                                 | 407     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 416     |  
|Employee stock incentive plan      |  |              |  |                          |       |  |                                 | 345     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 345     |  
|Issuance of restricted stock       |  | 64           |  |                          | 6     |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 6       |  
|Purchase of treasury stock         |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   | (181   | ) |  |   | (181    | )
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2004         |  | 22,498       |  |                          | 2,250 |  |                                 | 116,932 |   |                    |   | (145  | )             |  |   | (107,903 | ) |  |   | (893   | ) |  |   | 10,241  |  
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Net loss                           |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   | (5,983   | ) |  |   |        |   |  |   | (5,983  | )
|Currency translation adjustments   |  |              |  |                          |       |  |                                 |         |   |                    |   | (599  | )             |  |   |          |   |  |   |        |   |  |   | (599    | )
|Stock options exercised            |  | 626          |  |                          | 63    |  |                                 | 3,063   |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 3,126   |  
|Stock warrants exercised           |  | 1,518        |  |                          | 152   |  |                                 | 8,000   |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 8,152   |  
|Employee stock purchase plan       |  | 14           |  |                          | 1     |  |                                 | 117     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 118     |  
|Employee stock incentive plan      |  |              |  |                          |       |  |                                 | 736     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 736     |  
|Issuance of restricted stock       |  | 131          |  |                          | 13    |  |                                 | (13     | ) |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |        |  
|Purchase of treasury stock         |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   | (433   | ) |  |   | (433    | )
|Issuance of common stock for cash  |  | 8,298        |  |                          | 830   |  |                                 | 69,094  |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 69,924  |  
|Common stock issued in acquisition |  | 1,271        |  |                          | 127   |  |                                 | 19,146  |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 19,273  |  
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2005         |  | 34,356       |  |                          | 3,436 |  |                                 | 217,075 |   |                    |   | (744  | )             |  |   | (113,886 | ) |  |   | (1,326 | ) |  |   | 104,555 |  
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Net loss                           |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   | (36,624  | ) |  |   |        |   |  |   | (36,624 | )
|Currency translation adjustments   |  |              |  |                          |       |  |                                 |         |   |                    |   | 4,345 |               |  |   |          |   |  |   |        |   |  |   | 4,345   |  
|Stock options exercised            |  | 102          |  |                          | 10    |  |                                 | 489     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 499     |  
|Stock warrants exercised           |  | 180          |  |                          | 18    |  |                                 | 791     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 809     |  
|Employee stock purchase plan       |  | 26           |  |                          | 2     |  |                                 | 260     |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 262     |  
|Employee stock incentive plan      |  |              |  |                          |       |  |                                 | 6,921   |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 6,921   |  
|Issuance of restricted stock       |  | 110          |  |                          | 11    |  |                                 | (11     | ) |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |        |  
|Issuance of stock warrants         |  |              |  |                          |       |  |                                 | 3,674   |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | 3,674   |  
|Purchase of treasury stock         |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   | (363   | ) |  |   | (363    | )
|Residual costs of equity offering  |  |              |  |                          |       |  |                                 | (151    | ) |                    |   |       |               |  |   |          |   |  |   |        |   |  |   | (151    | )
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2006         |  | 34,774       |  | $                        | 3,477 |  | $                               | 229,048 |   |                    | $ | 3,601 |               |  | $ | (150,510 | ) |  | $ | (1,689 | ) |  | $ | 83,927  |  
|                                   |  |              |  |                          |       |  |                                 |         |   |                    |   |       |               |  |   |          |   |  |   |        |   |  |   |         |  

See notes to consolidated financial statements.



22



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                          |  | Year Ended December 31, |        
|(Amounts in thousands)                                                                    |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Cash flows from operating activities:                                                     |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income (loss)                                                                         |  | $                       | (36,624 | ) |      | $ | (5,983  | )    |  | $ | 259    |  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |        |  
|Depreciation                                                                              |  |                         | 1,796   |   |      |   | 2,594   |      |  |   | 6,999  |  
|Amortization                                                                              |  |                         | 7,505   |   |      |   | 2,300   |      |  |   | 1,909  |  
|Provision for (recovery of) bad debts                                                     |  |                         | 228     |   |      |   | (49     | )    |  |   | 149    |  
|Provision for (recovery of) obsolete inventory                                            |  |                         | 942     |   |      |   | (85     | )    |  |   | (912   | )
|Amortization of debt discount and debt issue costs                                        |  |                         | 1,467   |   |      |   | 1,147   |      |  |   | 1,576  |  
|Loss (gain) on disposition of property and equipment                                      |  |                         | 30      |   |      |   | 44      |      |  |   | (6     | )
|Net gain on disposition of non-core assets                                                |  |                         |        |   |      |   | (2,536  | )    |  |   |       |  
|Loss on early retirement of debt                                                          |  |                         |        |   |      |   | 2,993   |      |  |   |       |  
|Stock-based compensation                                                                  |  |                         | 6,921   |   |      |   | 736     |      |  |   | 344    |  
|Unrealized foreign currency transaction gains                                             |  |                         | (272    | ) |      |   |        |      |  |   |       |  
|Other                                                                                     |  |                         |        |   |      |   |        |      |  |   | (33    | )
|Changes in assets and liabilities:                                                        |  |                         |         |   |      |   |         |      |  |   |        |  
|Accounts receivable                                                                       |  |                         | (1,903  | ) |      |   | (1,503  | )    |  |   | (3,083 | )
|Contract sales and notes receivable                                                       |  |                         | 8,423   |   |      |   | (9,633  | )    |  |   | (2,801 | )
|Inventories                                                                               |  |                         | (1,639  | ) |      |   | (1,404  | )    |  |   | (1,548 | )
|Prepaid expenses and other assets                                                         |  |                         | (4,716  | ) |      |   | (6,607  | )    |  |   | (419   | )
|Trade accounts payable                                                                    |  |                         | 3,721   |   |      |   | (1,829  | )    |  |   | 3,376  |  
|Accrued expenses                                                                          |  |                         | 4,160   |   |      |   | (3,306  | )    |  |   | 341    |  
|Customer deposits, deferred revenue and other liabilities                                 |  |                         | (2,169  | ) |      |   | 1,793   |      |  |   | 2,320  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                         | (12,130 | ) |      |   | (21,328 | )    |  |   | 8,471  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash flows from investing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |        |  
|Purchase of property and equipment                                                        |  |                         | (1,815  | ) |      |   | (1,923  | )    |  |   | (792   | )
|Purchase of inventory leased to others                                                    |  |                         | (355    | ) |      |   | (862    | )    |  |   | (5,097 | )
|Proceeds from sales of property and equipment                                             |  |                         | 35      |   |      |   | 145     |      |  |   | 69     |  
|Proceeds from sale of non-core assets                                                     |  |                         |        |   |      |   | 11,402  |      |  |   |       |  
|Purchases of minority investments                                                         |  |                         | (6,000  | ) |      |   | (38     | )    |  |   |       |  
|Purchases of business operations, net of cash acquired                                    |  |                         | (744    | ) |      |   | (36,165 | )    |  |   |       |  
|Increase in intangible assets                                                             |  |                         | (3,636  | ) |      |   | (8,769  | )    |  |   | (245   | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash used in investing activities                                                     |  |                         | (12,515 | ) |      |   | (36,210 | )    |  |   | (6,065 | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash flows from financing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |        |  
|Principal payments on notes payable and long-term debt                                    |  |                         | (262    | ) |      |   | (20,061 | )    |  |   | (108   | )
|Call premium on early retirement of debt                                                  |  |                         |        |   |      |   | (1,188  | )    |  |   |       |  
|Principal payments on capital leases                                                      |  |                         | (14     | ) |      |   | (60     | )    |  |   | (587   | )
|Principal payments of deferred license fees                                               |  |                         |        |   |      |   |        |      |  |   | (535   | )
|Purchase of treasury stock                                                                |  |                         | (363    | ) |      |   | (433    | )    |  |   | (181   | )
|Proceeds from long-term debt and notes payable                                            |  |                         | 17,636  |   |      |   |        |      |  |   |       |  
|Debt issuance costs                                                                       |  |                         | (569    | ) |      |   |        |      |  |   |       |  
|Residual costs of equity offering                                                         |  |                         | (151    | ) |      |   |        |      |  |   |       |  
|Proceeds from issuance of common stock and warrants                                       |  |                         | 1,570   |   |      |   | 81,320  |      |  |   | 2,352  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash provided by financing activities                                                 |  |                         | 17,847  |   |      |   | 59,578  |      |  |   | 941    |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                         | (100    | ) |      |   | (264    | )    |  |   | 275    |  
|Increase (decrease) in cash and cash equivalents                                          |  |                         | (6,898  | ) |      |   | 1,776   |      |  |   | 3,622  |  
|Cash and cash equivalents, beginning of year                                              |  |                         | 14,081  |   |      |   | 12,305  |      |  |   | 8,683  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents, end of year                                                    |  | $                       | 7,183   |   |      | $ | 14,081  |      |  | $ | 12,305 |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |        |  

See notes to consolidated financial statements.



23



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



|                                                                                 |  |                         |       |      |   |        |  |   |      
|-------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ |  | - | -----
|                                                                                 |  | Year Ended December 31,
|(Amounts in thousands)                                                           |  | 2006                    |       | 2005 |   | 2004  
|Supplemental disclosure of cash flows information:                               |  |                         |       |      |   |        |  |   |      
|Cash paid for interest                                                           |  | $                       | 6,151 |      | $ | 8,467  |  | $ | 9,685
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Cash paid for state and federal taxes                                            |  | $                       | 49    |      | $ | 170    |  | $ | 46   
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Issuance of warrants                                                             |  | $                       | 3,674 |      |   |        |  |   |      
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Transfer equipment to inventory                                                  |  |                         |       |      |   |        |  | $ | 198  
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Gaming equipment leased to others acquired through capital lease                 |  |                         |       |      |   |        |  | $ | 670  
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Acquisitions:                                                                    |  |                         |       |      |   |        |  |   |      
|Fair value of assets acquired, net of cash received                              |  |                         |       |      | $ | 22,234 |  |   |      
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Liabilities assumed                                                              |  |                         |       |      | $ | 2,266  |  |   |      
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Fair value of common stock, warrants and options issued in business combinations |  |                         |       |      | $ | 19,273 |  |   |      
|                                                                                 |  |                         |       |      |   |        |  |   |      
|Goodwill recognized                                                              |  | $                       | 744   |      | $ | 35,508 |  |   |      
|                                                                                 |  |                         |       |      |   |        |  |   |      

See notes to consolidated financial statements.



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PROGRESSIVE GAMING INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts disclosed in the accompanying footnote tables are shown in thousands while amounts included in text are disclosed in actual amounts.

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Progressive Gaming International Corporation
(referred throughout these notes, together with its subsidiaries as Progressive or the Company) was incorporated in May 1986 in Nevada. Progressive develops, acquires, and markets (i) proprietary branded slot
machine and table games, including the Caribbean Stud® table game, and (ii) electronic player tracking, game monitoring/accounting and progressive jackpot and mystery systems for slot
and table game operations. The Companys current facilities are in North America, the Netherlands, the United Kingdom, Macau, Estonia, and Australia. The Companys customers include casinos, other gaming suppliers, operators of wide-area
gaming networks and lottery authorities. Progressives gaming products are found in almost every major gaming jurisdiction worldwide.

The Companys worldwide operations are concentrated in two principal business segments: slot and table games, and systems.

Slot and Table Games. The Company established its slot and table game business unit in 1993 to develop, acquire, and distribute proprietary games. The Company owns or licenses the rights to several categories of proprietary
games, which it places in casinos under lease arrangements. These leases provide for license fees, fixed rental payments or a participation in the games operating results.

Systems. The Company sells or leases software and electronic components for player tracking and slot machine and table game
monitoring/accounting systems along with progressive jackpot and mystery systems to casino operators and governmental agencies.

Interior Signage. In connection with its focus on games content and technology, the Company sold its interior sign division through a private buy-out of the divisions employees during 2005.

Acquisitions / Divestitures

In December 2004, the Company entered into two strategic transactions to enhance its table games and table systems products. First, the Company agreed to acquire the table games management system, PitTrak®, including its existing customer base from Hotel Systems Pty, Ltd. of Sydney, Australia. PitTrak® has a similar functionality as the
Companys TableLink® product and provided the Company with an existing installed base of over 400 tables and access to sell its management solutions worldwide. The purchase of
PitTrak® was completed in January 2005. The Company also purchased patents related to player card image based recognition (IBR) and licensed the exclusive rights to develop and
distribute an IBR card recognition shoe. These transactions were completed in January 2005.

In connection with its focus on games
content and technology the Company sold its interior sign division during 2005. The newly formed entity retained the Mikohn brand. Accordingly, the Company filed fictitious name filings in all jurisdictions in which it does business to allow it to
do business as Progressive Gaming International Corporation effective January 2005. In addition, the Company changed its NASDAQ ticker symbol to PGIC, effective January 5, 2005. The Company changed its legal name to Progressive Gaming
International Corporation in March, 2006. The Company retained a minority interest in the sign business and as a result did not present the reporting unit as a discontinued operation in accordance with Statement of Financial Accounting Standard
(SFAS) No. 144 Long Lived Assets and Assets to be Disposed Of.



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On October 7, 2005, the Company completed its acquisition of VirtGame Corp. (VirtGame), a provider
of open architecture gaming software primarily focused on the delivery of a central-server based slot games and centrally managed sports betting. The Company will issue a total of approximately 1.8 million shares of its common stock for all of
the outstanding common stock, preferred stock, warrants and options of VirtGame. The Company also provided VirtGame with a secured credit facility of $2.5 million to bridge their operations until the acquisition was complete. At
December 31, 2004, the Company had advanced $0.3 million to VirtGame under this credit facility.

On November 28, 2005, the Company acquired EndX Group, Ltd. (EndX), a global gaming management systems software company headquartered in the United Kingdom, for $29.9 million in cash, including
transaction costs. EndX had been one of the Companys key strategic partners for over three years. The EndX Intelligence product suite is currently installed in over 175 gaming centers in approximately 20 countries worldwide, including centers
operated by the three major gaming operators located in the United Kingdom. The EndX product has been integrated as a part of CasinoLink® Enterprise Edition. The modules of EndX include
cage and cash management, player marketing, table games accounting, and surveillance and alerts monitoring. In addition, we and EndX previously created a version of TableLink® for the
international market. Significant North American multi-site installations that have been completed or are in the process of being installed include 17 sites for the British Columbia Lottery Corporation and four sites for the Saskatchewan
Indian Gaming Authority.

Summary of Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts for the Company and all of its majority-owned subsidiaries and are maintained in accordance with accounting
principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated.

Liquidity and Capital Resources. The Company has generated net losses of $36.6 million, $6 million and net income of $0.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, and has an accumulated
deficit of $150.5 million at December 31, 2006. The Company has used cash from operating activities of $12.1 million, $21.3 million and generated cash from operations of $8.5 million for the years ended December 31, 2006, 2005, and 2004,
respectively. The Company has generated cash from financing activities of $17.8 million, $59.6 million and $0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company has total cash, cash equivalents and
restricted cash of $7.2 million and net working capital of $19.7 million at December 31, 2006. The Company has also announced that it will explore a potential sale of its table games route and other related assets. Based on the
Companys current operating plan, management believes existing cash, cash forecasted by management to be generated by operations, potential sales of assets, and borrowings from the Companys credit facility will be sufficient to meet the
Companys working capital and capital requirements through at least December 31, 2007. However, if events or circumstances occur such that the Company does not meet its operating plans as expected, the Company may be required to seek
additional capital and/or to reduced certain discretionary spending, which could have a material adverse effect on the Companys ability to achieve its intended business objectives. The Company may seek additional financing, which may include
debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, or available at all. Any equity financing may result in dilution to existing
stockholders and any debt financing may include restrictive covenants.

As more fully described in Note 13, the Company is a defendant
in the matter Derek Webb et al vs. Mikohn Gaming Corporation. On February 21, 2007, the Company received an adverse jury verdict. The Company has filed post trial motions and if necessary, will initiate the appeals process. While the
Company cannot predict with precision the length of time it will take the Court to rule on post trial motions, it believes, and outside counsel concurs, that it is remote that the post trial motion process will be concluded before December 31,
2007, and the Court would render its decisions on these motions. Accordingly, other than normal



26



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legal expenses, the Company does not expect the jury verdict to impact its financial position, results of operations or cash flows during the year ended
December 31, 2007. If the post trial motions are unsuccessful, the Company may be required to post a bond for $43.7 million representing the full amount of the verdict, including plaintiffs attorneys fees and costs. The
requirement to post a bond of this magnitude could therefore have a material adverse effect on the Companys financial position, results of operations and liquidity, up to and including impacting its ability to continue as a going concern or
forcing the Company to seek protection under the Federal Bankruptcy laws.

Cash and Cash Equivalents. Cash and cash
equivalents include cash on hand, demand deposits, and short-term investments with original maturities of less than ninety (90) days. The Company places its cash and temporary investments with financial institutions. At December 31, 2006,
the Company had deposits with financial institutions in excess of FDIC insured limits by $7.1 million.

Receivables and Allowance for
Doubtful Accounts. The Company regularly evaluates the collectibility of its trade receivable balances based on a combination of factors. When a customers account becomes past due, dialogue is initiated with the customer to determine
the cause. If it is determined that the customer will be unable to meet its financial obligation to the Company, such as in the case of a bankruptcy filing, deterioration in the customers operating results or financial position or other
material events impacting their business, a specific reserve is recorded for bad debt to reduce the related receivable to the amount the Company expects to recover given all information presently available. The Company also records reserves for bad
debt for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. If circumstances related to specific customers change, the
Companys estimates of the recoverability of receivables could materially change.

Inventories. Inventories are stated
at the lower of cost (determined using the first-in, first-out method) or market.

Long-Lived Assets. Property and equipment
are stated at cost and are depreciated by the straight-line method over the useful lives of the assets, which range from 3 to 15 years. Costs of major improvements are capitalized; costs of normal repairs and maintenance are charged to expense
as incurred. Management requires long-lived assets that are held and used by the Company to be reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from
related future undiscounted cash flows.

Patents and Trademarks. The Company capitalizes the cost of registering and
defending patents and trademarks. These costs are amortized over the useful life of the patent or trademark.

Intangible
Assets. Intangible assets consist of patent and trademark rights, goodwill, intellectual property rights, covenants not to compete, software costs, license fees and a perpetual license. They are recorded at cost and are amortized, except
goodwill and perpetual license, on a straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which range from 5 to 40 years.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) effective January 1, 2002.
Under SFAS No. 142, goodwill and indefinite life intangible assets, such as the Companys perpetual license, are no longer amortized but are subject to periodic impairment tests. Other intangible assets with finite lives, such as patents,
software development costs, trademark and proprietary property rights and license and non-compete agreements will continue to be amortized over their useful lives. Management performs impairment reviews annually or whenever events or circumstances
occur that would indicate the assets may be impaired.

Deferred Revenues. Deferred revenues consist primarily of arrangements
for which revenues will be recognized in future periods.



27



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Deposits. Deposit liabilities represent payments and payment obligations collected in
advance from customers pursuant to agreements under which the related sale of inventory has not been completed.

Other
Assets. Other long-term assets represent primarily unamortized loan fees, minority investments, and security deposits for building and equipment leases and other services. The Companys minority investments in non-public companies are
accounted for using the cost method, and are regularly reviewed for impairment. When facts and circumstances indicate that an impairment has occurred that is other-than-temporary, the Company records an impairment charge and reduces the carrying
value of the investment.

Litigation and Other Contingencies. The Company is involved in various legal matters, litigation
and claims of various types in the ordinary course of its business operations. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these
contingencies. The status of significant claims is summarized in Note 13.

GAAP requires that liabilities for contingencies be recorded
when its is probable that a liability has been incurred and that the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to
predict. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss.

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).

Nonmonetary Exchanges.
The Company adopted SFAS No. 153 Exchanges of Non-Monetary Assets (SFAS No. 153) for the quarter ended September 30, 2005. SFAS No. 153 addresses the measurement for the exchange of non-monetary assets.
SFAS No. 153 requires that exchanges be recorded at fair value provided that fair value is determinable and other qualifying criteria are met as described in the standard. If fair value is not determinable or if the other qualifying criteria
are not met, the exchange is recorded at cost.

In September 2005, the Company entered into separate transactions involving the
licensing of intellectual property and content. The first involved the license of the Companys legacy slot operating system of which the Company had previously acquired a portion of the rights to, made significant modifications and
enhancements and obtained regulatory approval in numerous jurisdictions. We also acquired unique intellectual property content primarily for use in the Companys server-based wagering growth initiative from this party who licensed our operating
system. These transactions were accounted for as non-monetary exchanges in accordance with SFAS No. 153 and have been recorded at cost in the accompanying consolidated balance sheets.

The second transaction involved obtaining the rights to execute the license of the slot operating system from the current owner. The current owner also
purchased core intellectual property from us. These transactions were recorded as non-monetary exchanges in accordance with SFAS No. 153 and recorded at fair value in the accompanying consolidated statement of operations.

Revenue Recognition. The Company recognizes revenue depending on the line of business as follows:

Slot and Table Games. The Company leases and sells proprietary slot and table games to casino customers. Table game lease contracts are typically
for a 36-month period with a 30-day cancellation clause. The lease revenue is recognized on a monthly basis. Slot machine lease contracts are either on revenue participation or a fixed-rental basis. Slot machine lease contracts are typically for a
month-to-month period with a 30-day cancellation clause. On a participation basis, the Company earns a share of the revenue that the casino earns from



28



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these slot machines. On a fixed-rental basis, the Company charges a fixed amount per slot machine per day. Revenues from both types of lease arrangements are
recognized on the accrual basis. The sales agreements for proprietary table games and slot games consist of the sale of hardware and a perpetual license for the proprietary intellectual property. Slot and table game sales are executed by a signed
contract or a customer purchase order. Revenues for these sales agreements are generally recognized when the hardware and intellectual property is delivered to the customer.

Systems. System sales consist of a suite of products (some of which are sold separately) that enable gaming entities to track customer gaming
activity, account for slot machine activity and operate progressive jackpot systems. There are proprietary hardware and software components to the systems. The Company accounts for system sales in accordance with Statement of Position 97- 2,
Software Revenue Recognition (SOP 97-2). System sales are considered multiple element arrangements because they include hardware, software, installation, training and post-sale customer support. System sales are evidenced by
a signed contract. Follow-up spare parts and hardware-only sales are evidenced by a purchase order. Revenue for system sales is recognized when: (i) there is a signed contract with a fixed determinable price; (ii) collectibility of the
sale is probable; and (iii) the hardware and software have been delivered, installed, training has been completed and acceptance has occurred.

Not all systems contracts require installation. Examples include sales of hardware only to (i) previous customers that are expanding their systems, (ii) customers that have multiple locations and do the installation themselves and
require an additional software license and hardware and (iii) customers purchasing spare parts.

Postcontract Customer Support.
Maintenance and support for substantially all of the Companys products are sold under agreements with established vendor-specific objective evidence of fair value in accordance with the applicable accounting literature. These contracts are
generally for a period of three years and revenue is recognized ratably over the contract service period. Further training is also sold under agreements with established vendor-specific objective evidence of price, which is based on daily rates and
is recognized as the services are provided.

License Arrangements. A significant portion of the Companys revenues are
generated from the license of intellectual property, software and game content. These licenses are sold on a stand-alone basis or in multiple element arrangements. Revenue is recognized from these transactions in accordance with the applicable
accounting literature. Revenues under perpetual license arrangements are generally recognized when the license is delivered. Revenues under fixed term arrangements are generally recognized over the term of the arrangement or in a manner consistent
with the earnings process. For arrangements with multiple deliverables, revenue is generally recognized as the elements are delivered so long as the undelivered elements have established fair values as required in the applicable accounting
literature.

Interior Signage. Product sales are executed by a signed contract or customer purchase order. Revenue is recognized
when the completed product is delivered. If the agreement calls for the Company to perform an installation after delivery, revenue related to the installation is recognized when the installation has been completed and accepted by the customer.

Stock-Based Compensation.Beginning January 2006, the Company adopted the modified prospective application method contained
in SFAS No. 123 (revised December 2004), Share-Based Payment (SFAS No. 123(R)),to account for share-based payments. As a result, the Company applies this pronouncement to new awards or modifications of
existing awards in 2006 and thereafter. Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based payments under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, no
compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.



29



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The principal effects of adopting SFAS No. 123(R) are:



| |  |  | The fair value of unvested outstanding options at the beginning of first quarter 2006 will be expensed over the remaining service period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Forfeitures over the expected term of the award are estimated at the date of grant and the estimates adjusted to reflect actual subsequent forfeitures. Previously,
the Company had reflected forfeitures as they occurred. The effect of this change was not significant.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any tax benefits recognized as a result of the exercise of employee stock options would be classified as a financing cash flow. The Company has not recognized any
tax benefits related to stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Adoption of this new pronouncement did not change the methodology the Company uses to determine the fair value of its share-based compensation
arrangements. The Company uses the Black-Scholes-Merton option- pricing model for stock options and the grant date fair value of our common stock for restricted stock awards.

Equity Instruments Issued to Outside Parties. The Companys accounting policy for equity instruments issued to outside parties in
exchange for goods and services follows the provisions of Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services and EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees. The measurement date for the fair value of the equity instruments issued is determined at the
earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendors performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized as a charge to the statement of operations over the term of the consulting agreement. The number of uncancelled options issued to consultants at December 31, 2006, was 98,000,
with a range of exercise prices from $4.38 to $7.75 per share, and an unamortized fair value of less than $0.1 million.

During the year
ended December 31, 2006, the Company issued warrants to purchase an aggregate of 350,000 shares of the Companys common stock to Ableco Holding LLC representing a portion of the debt issue costs related to the Companys long-term debt
arrangements. Upon issuance, the fair value of these warrants was recorded as a prepaid loan fee, and is being recognized as a charge to the statement of operations on the straight-line method over the term of the debt facility. At December 31,
2006, the number of shares issuable under uncancelled warrants held by Ableco Holding LLC was 350,000. The exercise price for 200,000 of the shares is $8.47 per share, 75,000 of the shares are exercisable at $8.42 per share, and the remaining 75,000
shares have a variable strike price to be determined on or before August 4, 2007 in accordance with the terms of the warrant. The term of the warrants is seven years.

From 1998 to 2000, the Company licensed rights to intellectual property, including rights to develop and market gaming devices and associated equipment
under certain Ripley and Hasbro trademarks, in exchange for warrants to purchase shares of the Companys common stock. During the year ended December 31, 2006, the Company licensed certain intellectual property rights from Harrahs in
exchange for 325,000 warrants to purchase shares of the Companys common stock at an exercise price of $7.50 per share. These warrants were valued using the Black-Scholes-Merton option-pricing model using volatility of 60%, expected life of six
years, risk free rate of 4.79%, and expected dividends of zero.

At December 31, 2006, the number of uncancelled warrants issued in
exchange for license agreements was 547,500, with a weighted average exercise price of $7.70 per share.

Software Development
Capitalization. The Company capitalizes costs related to the development of certain software products that meet the criteria under SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed.



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Income Taxes. The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, pursuant to which the Company records deferred income taxes for temporary differences that are reported in different years for financial reporting and for income tax purposes. Such deferred tax liabilities
and assets are classified into current and non-current amounts based on the classification of the related assets and liabilities.

Guarantees. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34, which disclosures are effective for financial statements issued after December 15, 2002. While the
Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, the Company believes these guarantees would only result in immaterial increases in future costs, and do not represent
significant or contingent liabilities of the indebtedness of others.

Use of Estimates and Assumptions. The Companys
consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of the Companys accounting policies require that management apply significant estimates, judgments and
assumptions, that it believes are reasonable, in calculating the reported amounts of certain assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates are subject to an
inherent degree of uncertainty. Managements judgments are based on historical experience, terms of existing contracts, observance of known industry trends, and information available from outside sources, as appropriate. On a regular basis,
management evaluates its estimates including those related to lives assigned to the Companys assets, the determination of bad debts, inventory valuation reserves, asset impairment and self-insurance reserves. There can be no assurance that
actual results will not differ from those estimates.

Related Party Transactions. On May 2, 2005, the Company sold
substantially all the assets of its sign and graphics manufacturing business to a third party, retaining less than 1% equity interest. The Company and Mikohn Signs and Graphics, LLC (MSG), signed a Transition Services Agreement and a
Manufacturers Supply Agreement upon completion of the transaction.

The Transition Services Agreement had a term of six months ending
on November 2, 2005 that required certain services to be performed by both parties during the separation. The Company was obligated to provide administrative support, customer service and compliance assistance, whereas MSG was obligated to
provide electronic assembly and warehousing services during the term of the agreement.

Both parties entered into a three year
Manufacturers Supply Agreement at the close of the transaction, whereby MSG would purchase electronics from the Company at its standard OEM pricing. For the year ended December 31, 2006, MSG purchased $0.3 million in electronic
displays and related products from the Company.

In addition, under the Manufacturers Supply Agreement, MSG will provide the Company
assembly, testing, shipping and warehousing services at MSGs warehouse at hours worked plus any overhead associated with providing these services, multiplied by 110%. On January 3, 2006, the Company terminated this portion of the
agreement and is currently using a third party contract manufacturer in Las Vegas, Nevada to provide these same services.

From time to
time, the Company purchases signage and sign related products from MSG in conjunction with its progressive jackpot systems. During the twelve months ended December 31, 2006, the Company purchased $0.5 million from MSG.

In June 2005, the Company entered into a worldwide exclusive license with Magellan Technology Pty Limited (Magellan). The Company
licensed, on an exclusive basis, Magellans rights to its RFID reader, tag and related intellectual property for any gaming applications for $3.1 million. The Company also completed the



31



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purchase of a minority interest in Magellan in 2006. In connection with the Companys exclusive global master license to use Magellans RFID
technology in gaming worldwide, the Company purchased $0.9 million of inventory from Magellan during the year ended December 31, 2006.

Reclassifications.Certain balance sheet and income statement amounts reported in the prior years have been reclassified to follow the Companys current years reporting practice.

Recently Issued Accounting Standards. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (FAS 159). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent
changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS No. 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the effect of implementing this guidance, which depends on the nature and extent of
items elected to be measured at fair value, upon initial application of the standard on January 1, 2008.

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for the Company on January 1, 2008. The Company
is currently evaluating the impact of adopting SFAS No. 157 on its financial position, cash flows, and results of operations.

In
September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB No. 108). SAB No. 108 provides interpretive guidance on the SECs views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The provisions of SAB No. 108 were effective for the Company for the fiscal year ended December 31, 2006. The adoption of SAB No. 108 had no effect on the Companys financial statements for the year
ended December 31, 2006.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (FIN 48). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously
recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition
of tax positions and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning
balance of retained earnings. The Company is evaluating FIN 48 and has not yet determined the impact the adoption will have on the consolidated financial statements.

2. Acquisitions

In 2005 the Company completed three business acquisitions. For each of the
acquisitions, the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The estimated fair values were based on independent appraisals,
discounted cash flow analysis and estimates made by management. To the extent that the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill.



32



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VirtGame

On October 7, 2005, the Company completed it acquisition of VirtGame Corp. in a stock swap in which the Company will issue a total of approximately 1.3 million shares of common stock in exchange for all of the outstanding shares
of VirtGames common and preferred stock, as well as approximately 0.5 million shares issuable in the future upon the exercise of options and warrants. VirtGame is a provider of open architecture gaming software primarily focused on the
delivery of central server-based games and centrally managed sports betting. The cost of the acquisition was $21.2 million, comprising $19.3 million in common stock and $1.9 million in cash transaction costs.

The value of the common stock to be issued was determined based on the average market price of the Companys common stock over a period of days
surrounding the measurement date, in accordance with the applicable accounting literature. The estimated fair value of the options and warrants issued in the transaction were determined using the Black-Scholes option pricing model.

The following table summarizes the final allocation of the purchase price to estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition:



|                            |  |   |      |  
|--------------------------- |  | - | ---- | -
|Net current assets          |  | $ | (0.8 | )
|Property and equipment, net |  |   | 0.2  |  
|Goodwill                    |  |   | 18.1 |  
|Intangible assets           |  |   | 9.5  |  
|Working capital loan        |  |   | (2.4 | )
|Deferred tax liability      |  |   | (3.4 | )
|                            |  |   |      |  
|Net assets acquired         |  | $ | 21.2 |  
|                            |  |   |      |  

Of the $9.5 million in intangible assets, $9.3 million has been assigned to developed
core technology (six-year life) and $0.2 million has been assigned to customer lists (three-year life).

The $18.1 million of
goodwill was assigned to the systems segment, and the Company anticipates this goodwill will not be deductible for tax purposes.

EndX

On November 28, 2005, the Company acquired EndX, a global gaming management systems software company headquartered in the United Kingdom, in a
cash purchase transaction. The cost of the acquisition was $29.9 million including $2.7 million in transaction costs.

The
following table summarizes the final allocation of the purchase price to estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:



|                            |  |   |      |  
|--------------------------- |  | - | ---- | -
|Net current assets          |  | $ | 0.1  |  
|Property and equipment, net |  |   | 0.1  |  
|Goodwill                    |  |   | 22.2 |  
|Intangible assets           |  |   | 10.7 |  
|Deferred tax liability      |  |   | (3.2 | )
|                            |  |   |      |  
|Net assets acquired         |  | $ | 29.9 |  
|                            |  |   |      |  

Of the $10.7 million in intangible assets, $9.2 million has been assigned to developed
core technology (six-year life) and $1.5 million has been assigned to customer lists (three-year life).



33



---

The $22.2 million of goodwill was assigned to the systems segment, and the Company anticipates this
goodwill will not be deductible for tax purposes.

PitTrak

On January 5, 2005, the Company acquired substantially all the assets of PitTrak®, a table games management system. PitTrak® has similar functionality as TableLink® and provides the Company with an existing installed base of over 400 tables and access to sell its management solutions worldwide. The total purchase consideration of $2.8 million was allocated to intangible
assets, including goodwill of $2.6 million, software costs, patents, trademarks, and customer lists totaling $0.4 million, and net current liabilities of $0.2 million. The goodwill of $2.6 million was assigned to the systems
segment, and the Company anticipates this goodwill will not be deductible for tax purposes.

Pro Forma Results (unaudited)

The results of operations of the entities acquired in the PitTrak, EndX and VirtGame acquisitions, and the effects of related financing, have been
included in our consolidated financial statements since their respective January 5, 2005, October 7, 2005, and November 28, 2005, dates of acquisition. The following unaudited pro forma consolidated financial information has been
prepared assuming that the following transactions had occurred at the beginning of 2005 and 2004:



| |  |  | The acquisition of PitTrak, as if it occurred on January 1, 2004 and 2005;
| | - |  | --------------------------------------------------------------------------



| |  |  | The acquisition of EndX , as if it occurred on January 1, 2004 and 2005;
| | - |  | ------------------------------------------------------------------------



| |  |  | The acquisition of VirtGame as if it occurred on January 1, 2004 and 2005, and the related issuance of approximately 1.2 million shares of common stock in
exchange for the outstanding common and preferred stock of VirtGame.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                 |  |      |         |   |      |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Amounts in thousands)           |  | 2005 |         |   | 2004 |  
|Net revenues                     |  | $    | 82,079  |   |      | $ | 101,812 |  
|                                 |  |      |         |   |      |   |         |  
|Income (loss) from operations    |  | $    | (757    | ) |      | $ | 5,165   |  
|                                 |  |      |         |   |      |   |         |  
|Net loss                         |  | $    | (12,117 | ) |      | $ | (4,692  | )
|                                 |  |      |         |   |      |   |         |  
|Loss per sharebasic and diluted |  | $    | (0.46   | ) |      | $ | (0.20   | )
|                                 |  |      |         |   |      |   |         |  

Other Acquisitions

During 2006 the Company purchased an 11% minority investment in a non-public entity for $6 million in cash. This investment is accounted for using the cost method, and is periodically reviewed for impairment. No
impairment of this investment was recognized during the year ended December 31, 2006.

3. Fair Values of Financial Instruments

The following table presents the carrying amount and estimated fair market value of financial instruments at December 31, 2006:



|                       |  |                |        |                           |   |       
|---------------------- |  | -------------- | ------ | ------------------------- | - | ------
|(Amounts in thousands) |  | CarryingAmount |        | EstimatedFair MarketValue
|Senior Notes           |  | $              | 44,415 |                           | $ | 45,731

The carrying values of contract sales and notes receivable, capital leases, and the secured
working capital line of credit approximate fair values. The estimated fair value of fixed rate long-term debt was determined by using quoted market prices and where quoted market prices are not available the fair value was calculated utilizing the
present value of estimated future cash flows and applying discount rates commensurate with the risks involved.



34



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4. Receivables

Accounts receivable at December 31, 2006 and 2005 consist of the following:



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Amounts in thousands)                |  | 2006 |        |   | 2005 |  
|Trade accounts                        |  | $    | 15,531 |   |      | $ | 12,874 |  
|Other                                 |  |      | 3,230  |   |      |   | 850    |  
|                                      |  |      |        |   |      |   |        |  
|Subtotal                              |  |      | 18,761 |   |      |   | 13,724 |  
|Less: allowance for doubtful accounts |  |      | (943   | ) |      |   | (805   | )
|                                      |  |      |        |   |      |   |        |  
|Net                                   |  | $    | 17,818 |   |      | $ | 12,919 |  
|                                      |  |      |        |   |      |   |        |  

Contract and notes receivable at December 31, 2006 and 2005 consist of the following:



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Amounts in thousands)                |  | 2006 |        |   | 2005 |  
|Contract sales and notes receivable   |  | $    | 8,100  |   |      | $ | 19,288 |  
|Less: allowance for doubtful accounts |  |      | (1,529 | ) |      |   | (1,529 | )
|                                      |  |      |        |   |      |   |        |  
|Net                                   |  | $    | 6,571  |   |      | $ | 17,759 |  
|                                      |  |      |        |   |      |   |        |  
|Current portion                       |  | $    | 6,407  |   |      | $ | 15,670 |  
|                                      |  |      |        |   |      |   |        |  

Changes in the allowance for doubtful accounts for the years ended December 31, 2006, 2005
and 2004 are as follows:



|                                          |  |      |       |   |      |   |       |      |  |   |        |  
|----------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|(Amounts in thousands)                    |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Allowance for doubtful accountsbeginning |  | $    | 2,334 |   |      | $ | 2,429 |      |  | $ | 3,496  |  
|Provision for bad debts (recoveries)      |  |      | 228   |   |      |   | (49   | )    |  |   | 149    |  
|Write-offs                                |  |      | (90   | ) |      |   | (46   | )    |  |   | (1,216 | )
|                                          |  |      |       |   |      |   |       |      |  |   |        |  
|Allowance for doubtful accountsending    |  | $    | 2,472 |   |      | $ | 2,334 |      |  | $ | 2,429  |  
|                                          |  |      |       |   |      |   |       |      |  |   |        |  

Included in other receivables at December 31, 2006 is $2.8 million receivable from an
insurance company related to a settlement of a class action lawsuit (See Note 13.)

5. Inventories

Inventories at December 31, 2006 and 2005 consist of the following:



|                                     |  |      |        |   |      |   |        |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|(Amounts in thousands)               |  | 2006 |        |   | 2005 |  
|Raw materials                        |  | $    | 7,752  |   |      | $ | 7,384  |  
|Finished goods                       |  |      | 4,759  |   |      |   | 4,303  |  
|Work-in-progress                     |  |      | 15     |   |      |   | 4      |  
|                                     |  |      |        |   |      |   |        |  
|Subtotal                             |  |      | 12,526 |   |      |   | 11,691 |  
|Less: reserve for obsolete inventory |  |      | (1,040 | ) |      |   | (1,157 | )
|                                     |  |      |        |   |      |   |        |  
|Total                                |  | $    | 11,486 |   |      | $ | 10,534 |  
|                                     |  |      |        |   |      |   |        |  

Changes in the reserve for obsolete inventory for the years ended December 31, 2006, 2005 and
2004 are as follows:



|                                         |  |      |        |   |      |   |       |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|(Amounts in thousands)                   |  | 2006 |        |   | 2005 |   |       | 2004 | 
|Reserve for obsolete inventorybeginning |  | $    | 1,157  |   |      | $ | 1,332 |      |  | $ | 4,479  |  
|Provision for obsolete inventory         |  |      | 942    |   |      |   | (85   | )    |  |   | (912   | )
|Write-offs                               |  |      | (1,059 | ) |      |   | (90   | )    |  |   | (2,235 | )
|                                         |  |      |        |   |      |   |       |      |  |   |        |  
|Reserve for obsolete inventoryending    |  | $    | 1,040  |   |      | $ | 1,157 |      |  | $ | 1,332  |  
|                                         |  |      |        |   |      |   |       |      |  |   |        |  



35



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On July 1, 2006, the European Union adopted the RoHS initiative (restriction of the use of certain
hazardous substances in electrical and electronic equipment). This initiative is expected to be adopted in other jurisdictions, including the United States, during 2007. As a result of the adoption of this initiative, the Company completed a
comprehensive analysis of its inventories during the second quarter of 2006. As a result of this review, the Company recorded an additional reserve for obsolete inventory of $0.9 million.

6. Property and Equipment

Property and equipment at
December 31, 2006 and 2005 consist of the following:



|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|(Amounts in thousands)               |  | 2006 |         |   | 2005 |  
|Buildings and leasehold improvements |  | $    | 1,125   |   |      | $ | 977     |  
|Machinery and equipment              |  |      | 10,021  |   |      |   | 7,452   |  
|Equipment leased to others           |  |      | 3,949   |   |      |   | 4,228   |  
|Furniture and fixtures               |  |      | 1,790   |   |      |   | 1,773   |  
|Transportation equipment             |  |      | 662     |   |      |   | 677     |  
|                                     |  |      |         |   |      |   |         |  
|Subtotal                             |  |      | 17,547  |   |      |   | 15,107  |  
|Less: accumulated depreciation       |  |      | (12,091 | ) |      |   | (10,690 | )
|                                     |  |      |         |   |      |   |         |  
|Total                                |  | $    | 5,456   |   |      | $ | 4,417   |  
|                                     |  |      |         |   |      |   |         |  

Depreciation expense for property and equipment was $1.8 million, $2.6 million and
$7.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

7. Goodwill and Intangible Assets

Intangible assets at December 31, 2006 and 2005 consist of the following:



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Amounts in thousands)                       |  | 2006 |         |   | 2005 |  
|Perpetual license                            |  | $    | 35,762  |   |      | $ | 35,762  |  
|Patent and trademark rights                  |  |      | 16,698  |   |      |   | 15,769  |  
|Covenants not to compete                     |  |      |        |   |      |   | 377     |  
|Software development costs                   |  |      | 4,359   |   |      |   | 1,905   |  
|Licensed technology                          |  |      | 5,483   |   |      |   | 3,940   |  
|Core technology and other proprietary rights |  |      | 22,613  |   |      |   | 21,100  |  
|                                             |  |      |         |   |      |   |         |  
|Subtotal                                     |  |      | 84,915  |   |      |   | 78,853  |  
|Less: accumulated amortization               |  |      | (22,539 | ) |      |   | (16,902 | )
|                                             |  |      |         |   |      |   |         |  
|Total                                        |  | $    | 62,376  |   |      | $ | 61,951  |  
|                                             |  |      |         |   |      |   |         |  

During 2005 the Company reclassified $12.4 million of the perpetual license to goodwill and
adjusted the related deferred tax liability by $6.9 million.

In accordance with SFAS No. 144, the Company performs an impairment
analysis on all of its long-lived and definite life intangible assets on an annual basis, or whenever events or circumstances occur that would indicate the assets may be impaired. In accordance with SFAS No. 142, for indefinite lived assets
including perpetual licenses and goodwill, the Companys management oversees the performance of an annual valuation to determine if any impairment has occurred. Valuation tests as of September 30, 2006 and 2005 did not indicate any
impairment.



36



---

The net carrying value of goodwill and other intangible assets as of December 31, 2006 by segment
consists of the following:



|                                                     |  |                                 |        |         |   |        |  |   |        
|---------------------------------------------------- |  | ------------------------------- | ------ | ------- | - | ------ |  | - | -------
|                                                     |  | Net Amount Allocated by Segment
|(Amounts in thousands)                               |  | Slot and TableGames             |        | Systems |   | Total 
|Goodwill                                             |  | $                               | 14,838 |         | $ | 43,176 |  | $ | 58,014 
|Indefinite life intangible asset (perpetual license) |  |                                 | 31,276 |         |   |       |  |   | 31,276 
|Definite life intangible assets (detail below)       |  |                                 | 11,033 |         |   | 20,067 |  |   | 31,100 
|                                                     |  |                                 |        |         |   |        |  |   |        
|Total                                                |  | $                               | 57,147 |         | $ | 63,243 |  | $ | 120,390
|                                                     |  |                                 |        |         |   |        |  |   |        

The net carrying value of goodwill ($58.0 million) as of December 31, 2006 is included in the
geographic operations of North America ($29.6 million), Europe ($25.4 million), and Australia / Asia ($3.0 million).

Definite life intangible assets as of December 31, 2006, subject to amortization, are comprised of the following:



|                                             |  |                       |        |                          |   |         |     |  |   |       
|-------------------------------------------- |  | --------------------- | ------ | ------------------------ | - | ------- | --- |  | - | ------
|(Amounts in thousands)                       |  | Gross Carrying Amount |        | Accumulated Amortization |   |         | Net
|                                             |  |                      
|Patent and trademark rights                  |  | $                     | 16,698 |                          | $ | (11,097 | )   |  | $ | 5,601 
|Software development costs                   |  |                       | 4,359  |                          |   | (797    | )   |  |   | 3,562 
|Licensed technology                          |  |                       | 5,482  |                          |   | (965    | )   |  |   | 4,517 
|Core technology and other proprietary rights |  |                       | 22,612 |                          |   | (5,192  | )   |  |   | 17,420
|                                             |  |                       |        |                          |   |         |     |  |   |       
|Total                                        |  | $                     | 49,151 |                          | $ | (18,051 | )   |  | $ | 31,100
|                                             |  |                       |        |                          |   |         |     |  |   |       

Amortization expense for definite life intangible assets was $7.5 million, $2.3 million and
$1.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. Annual estimated amortization expense for each of the five succeeding fiscal years is as follows:



|                       |  |   |       
|---------------------- |  | - | ------
|(Amounts in thousands) |  |  
|2007                   |  | $ | 7,485 
|2008                   |  |   | 7,053 
|2009                   |  |   | 6,625 
|2010                   |  |   | 6,308 
|Thereafter             |  |   | 3,629 
|                       |  |   |       
|Total                  |  | $ | 31,100
|                       |  |   |       

8. Other Assets

Other assets at December 31, 2006 and 2005 consist of the following:



|                       |  |      |        |      |   |      
|---------------------- |  | ---- | ------ | ---- | - | -----
|(Amounts in thousands) |  | 2006 |        | 2005
|Slot content           |  | $    |       |      | $ | 431  
|Deposits               |  |      | 803    |      |   | 569  
|Debt issue costs       |  |      | 4,518  |      |   | 1,245
|Minority investments   |  |      | 6,038  |      |   | 38   
|Other                  |  |      | 1,476  |      |   | 1,147
|                       |  |      |        |      |   |      
|Total                  |  | $    | 12,835 |      | $ | 3,430
|                       |  |      |        |      |   |      



37



---

9. Accrued Liabilities

Accrued liabilities at December 31, 2006 and 2005 consist of the following:



|                                    |  |      |        |      |   |      
|----------------------------------- |  | ---- | ------ | ---- | - | -----
|(Amounts in thousands)              |  | 2006 |        | 2005
|Payroll and related costs           |  | $    | 3,153  |      | $ | 1,461
|Interest                            |  |      | 1,341  |      |   | 863  
|Royalties                           |  |      | 374    |      |   | 524  
|Restructuring and severance expense |  |      | 512    |      |   | 308  
|Liability for intellectual property |  |      |       |      |   | 1,500
|Legal and tax                       |  |      | 4,227  |      |   | 457  
|Other                               |  |      | 431    |      |   | 439  
|                                    |  |      |        |      |   |      
|Total                               |  | $    | 10,038 |      | $ | 5,552
|                                    |  |      |        |      |   |      

Included in accrued liabilities at December 31, 2006 is $2.8 million related to a settlement
of a class action lawsuit (See Note 13.)

During the second quarter of 2006, the Company recorded charges for certain legal and tax
matters, severance for a former executive officer and the restructuring of its international offices. On June 16, 2006, the Company entered into a separation agreement with its former CFO, resulting in charges of $0.9 million for severance and
$0.9 million for stock compensation expense. Due to the proliferation of gaming in Asia, particularly Macau, the Company has realigned its international operations to respond to changing market opportunities in this region of the world. As a result
of this restructuring, the Company has commenced the closure of its office in Oxford, England and is in the process of relocating certain key employees to Macau. The Company recognized $0.3 million of charges related to this restructuring during the
quarter ended June 30, 2006. During the second quarter of 2006 the Company recorded $1.5 million of charges related to certain legacy legal and tax matters in accordance with SFAS No. 5 Accounting for Contingencies.

10. Net Gain on Disposition of Non-core Assets

During the second quarter of 2005, the Company completed the sale of its interior sign division, which resulted in a gain of $7.4 million, including transaction costs. Additionally, the Company commenced the process of repositioning
its existing slot machine platform to focus on central-server based games and third party content development. In connection with this repositioning, the Company entered into an asset purchase agreement to sell certain non-gaming slot hardware
related to its existing platform. In connection with the repositioning, the Company recorded an impairment charge of $4.9 million equal to the amount by which the carrying value exceeded fair value determined by the selling price.

11. Gain on Sale of Core Intellectual Property

During the third quarter of 2005, the Company completed a $2.5 million strategic licensing transaction by selling the remaining rights to certain intellectual property through a nonmonetary transaction, but retained a non-exclusive right to
use the intellectual property in the Companys operations. This gain was based upon the fair value of intellectual property sold in the exchange.



38



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12. Debt

Long-term debt at December 31, 2006 and 2005 consists of the following:



|                                                                                                                                                                                                        |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Amounts in thousands)                                                                                                                                                                                  |  | 2006 |        |   | 2005 |  
|11.875% Senior Secured Notes due August 15, 2008, net of unamortized discount of $585 and $954                                                                                                          |  | $    | 44,415 |   |      | $ | 44,046 |  
|Capital leases secured by transportation, gaming and manufacturing equipment, interest rates between 4.1% and 13.19% and due through 2006. The
related capitalized cost for these leases is $0 and $69. |  |      |       |   |      |   | 2      |  
|Unsecured promissory note to TAB, Ltd. bearing interest at 5%, principal and interest due currently                                                                                                     |  |      | 113    |   |      |   | 284    |  
|Notes payable secured by transportation and office equipment, interest rates between 0% to 12% due through 2007                                                                                         |  |      | 15     |   |      |   | 26     |  
|Secured revolving working capital line of credit of $22.5 million. Interest at prime rate plus 3.5% (currently 11.75%), interest payable
monthly, due 2009.                                             |  |      | 17,636 |   |      |   |       |  
|                                                                                                                                                                                                        |  |      |        |   |      |   |        |  
|Total                                                                                                                                                                                                   |  |      | 62,179 |   |      |   | 44,358 |  
|Less: current portion                                                                                                                                                                                   |  |      | (128   | ) |      |   | (287   | )
|                                                                                                                                                                                                        |  |      |        |   |      |   |        |  
|Long-term portion                                                                                                                                                                                       |  | $    | 62,051 |   |      | $ | 44,071 |  
|                                                                                                                                                                                                        |  |      |        |   |      |   |        |  

The following is the long-term debt maturity schedule:



|                       |  |   |       
|---------------------- |  | - | ------
|(Amounts in thousands) |  |  
|2007                   |  | $ | 128   
|2008                   |  |   | 45,000
|2009                   |  |   | 17,636
|2010                   |  |   |      
|2011                   |  |   |      
|                       |  |   |       
|Total                  |  | $ | 62,764
|                       |  |   |       

On April 20, 2006, the Company completed the first of two phases of securing a credit
facility for completion of its minority investment in Magellan Technology Pty., Ltd., and for general working capital purposes. The first phase included an arrangement for a $10 million senior secured term loan due April 19, 2007.
Outstanding principal under the facility bore interest at the prime rate of interest plus 2.25%. Underwriting fees related to the facility equaled 3.5% of the total principal and warrants to purchase 200,000 shares of the Companys common
stock. The warrants were valued using the Black-Scholes method using expected volatility of 60%, expected term of seven years, risk free rate of 4.97%, and expected dividends of zero. The fair value of these warrants is classified in Other Assets in
the accompanying balance sheet.

On August 4, 2006, the Company completed the final phase of its credit facility with an affiliate of
Cerberus Capital Management, L.P., Ableco Finance LLC (Cerberus). The $22.5 million, three-year revolving credit facility is intended for general working capital purposes and replaced the existing $10 million facility completed in the
first stage of the financing. Outstanding principal under the $22.5 million facility will bear interest at the prime rate of interest plus an applicable margin (currently 11.75%) or a LIBOR rate plus an applicable margin. Underwriting fees related
to the facility equal 2.0% of the total principal and warrants to purchase 150,000 shares of the Companys common stock. The warrants were valued using a binomial lattice model and a Monte Carlo model using volatility of 69.64%, derived service
period of one year, risk free rate of 5.05%, and expected dividends of zero. The fair value of these warrants is classified in Other Assets in the accompanying balance sheet. The terms of the Cerberus facility require the Company to comply with
certain financial covenants covering senior debt leverage ratio, total debt leverage ratio, minimum EBITDA, minimum cash plus availability, minimum interest coverage, and certain negative covenants.



39



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On March 20, 2007, the Company and Cerberus entered into an amendment to their existing facility.
Under the amendment Cerberus waived certain financial covenant requirements for the quarters ended December 31, 2006 and the quarter ended March 31, 2007. The Company was required to pay an amendment fee of $225,000 and the interest rate
charged by Cerberus under the facility was increased by 50 basis points. The Company will retain full use of its facility, in accordance with the agreement, in future periods. The amendment fee was accrued as of December 31, 2006 and is
reflected in the accompanying financial statements.

As of December 31, 2006, the Company is in compliance with all debt covenants,
after considering the waiver described above.

In connection with the Companys December 2005 retirement of $20.0 million of
its Senior Secured Notes (Notes), the Company incurred a loss for the early retirement of debt, totaling $3.0 million. The loss includes a charge of $1.2 million for the premium paid on the repurchase of the Notes and non-cash
charges to write-off $1.8 million representing the unamortized bond issue costs and unamortized discount on the Notes retired.

On
November 9, 2005, the Company completed its sale of 8.3 million shares of its Common Stock at a price of $9.25 per share. Proceeds from the transaction were used to fund strategic developments and acquisitions, repurchase and retire
$20.0 million of the Companys Notes, provide working capital and for other general corporate purposes.

On August 22, 2001,
the Company completed the private placement of $105.0 million of its 11.875% Senior Secured Notes (Notes) due 2008 and warrants to purchase an aggregate of 420,000 shares of its common stock at a price of $7.70 per share. Interest
payments are due on May 1 and November 1 until 2008. The Notes are secured by a security interest in certain of the Companys assets and certain assets of its subsidiaries. On or after August 15, 2005, the Company has the right
to redeem all or some of the Notes at a price that decreased over time from 105.938% of the principal amount in 2005 to 100.0% of the principal amount in 2007, plus accrued and unpaid interest. The Notes include, among other covenants, a requirement
that the Company maintain cash and cash equivalents and unused availability equal to $5.0 million (as defined in the Indenture to the Senior Secured Notes). The Company was in compliance with this covenant as of December 31, 2006 and 2005.
Each warrant issued entitles the holder to purchase four shares of the Companys common stock at a price of $7.70. The warrants expire on August 15, 2008. The fair market value of the warrants at date of issue was recorded as additional
paid in capital.

The covenants governing the Companys indebtedness restrict its ability to pay and declare dividends without the
consent of the applicable lenders.

13. Commitments and Contingencies

The Company leases certain of its facilities and equipment under various agreements for periods through the year 2012. The following schedule shows the future minimum rental payments required under these operating
leases, which have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2006:



|                       |  |                  |      
|---------------------- |  | ---------------- | -----
|(Amounts in thousands) |  | Minimum Payments
|                      
|2007                   |  | $                | 2,710
|2008                   |  |                  | 2,382
|2009                   |  |                  | 1,923
|2010                   |  |                  | 1,263
|2011                   |  |                  | 447  
|Thereafter             |  |                  |     
|                       |  |                  |      
|Total                  |  | $                | 8,725
|                       |  |                  |      



40



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Rent expense, net of sublease rentals, was $2.7 million, $2.4 million and $3.9 million for
the years ended December 31, 2006, 2005 and 2004, respectively.

Other Commitments and Contingencies

A lease agreement for a building in Las Vegas, Nevada was terminated during 2005 and a $1.0 million letter of credit securing rent payments was
released from escrow.

In August 2004, the Company signed a five-year strategic partnership agreement with International Game
Technology (IGT) to license segments of its patent portfolio of technology and to develop video slot games based on Progressive content. The new games will be developed on IGTs game platform and distributed by Progressive. IGT also
licensed aspects of its intellectual property to the Company for its games as well as for certain joint development. Under this agreement, the Company is committed to purchase from IGT a minimum of 600 slot machines with the Companys game
content ported on them over the life of the agreement. The Company will be required to pay for the slot machines through a daily fee arrangement whereby IGT will receive an amount equal to 25% of the Companys gross revenue derived from the
slot machines, with a minimum of $12.50 per day per machine, as defined in the agreement.

Legal Matters

The Company was sued by Derek Webb and related plaintiffs in the U.S. District Court, Southern District of Mississippi, Jackson Division, in a case filed
on December 27, 2002. The plaintiffs alleged state law interference with business relations claims and federal antitrust violations and contended that the Company illegally restrained trade and attempted to monopolize the proprietary table game
market in the United States. At trial, Plaintiffs sought monetary damages, penalties and attorneys fees in excess of several million dollars based on the attempted monopolization claim only. Trial on this case was held in January and February,
2007. In a jury verdict, the plaintiff was awarded the sum of $13 million for his claims, which amount was trebled in accordance with applicable law. As a result, on or about February 21, 2007, judgment was entered in favor of plaintiffs in the
amount of $39 million, plus the costs of suit, including a reasonable attorneys fee. Plaintiffs claim that costs of suit and attorneys fees together exceed $4.6 million. The Company has filed post-trial claims for relief (including a
motion for a new trial and a motion for a judgment as a matter of law) and, if necessary, it intends to initiate the appeals process. The enforcement of the judgment that has awarded the damages in this case is stayed during the pendency of the
motion for a new trial. Although the Company cannot guarantee the outcome of any of its litigation matters, based on opinions from its external counsel and its own internal assessment, the Company believes that it is probable that either the motion
for a new trial or motion for judgment as a matter of law will be granted and as a result the jury verdict will be vacated and overturned. Otherwise, the Company believes it is probable that the jury verdict will be overturned on appeal. As a
result, as of December 31, 2006, no amounts have been accrued for this matter other than legal defense fees. While the Company cannot predict with precision the length of time it will take the Court to rule on post trial motions, it believes,
and outside counsel concurs, that it is remote that the post trial motion process will be concluded before December 31, 2007, and the Court would render its decisions on these motions. Accordingly, other than normal legal expenses, the Company
does not expect the jury verdict to impact its financial position, results of operations or cash flows during the year ended December 31, 2007. If the post trial motions are unsuccessful, the Company may be required to post a bond for $43.7
million representing the full amount of the verdict, including plaintiffs attorneys fees and costs. The requirement to post a bond of this magnitude could therefore have a material adverse effect on the Companys financial position,
results of operations and liquidity, up to and including impacting its ability to continue as a going concern or forcing the Company to seek protection under Federal Bankruptcy laws.

The Company is currently in a dispute with Hasbro, Inc. that was filed in the U.S. District Court in Rhode Island centering primarily around the
calculation of royalty payments from 1999-2002 on the sale and license of certain of Progressives branded slot machines. Hasbro is seeking monetary damages, which could be in excess of several million dollars.



41



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The Company received a complaint from Olaf Vancura, a former employee, on July 18, 2005, alleging
various claims associated with allegations of breach of employment agreement. A claim for the return of patents assigned to the Company has also been made. Under the Companys agreement with Mr. Vancura, the matter is required to be
handled through binding arbitration. Arbitration has been set for June 5, 2007. The Company believes that it has exercised due care in satisfying all obligations under this employment agreement and will continue to defend this claim.

On or about May 8, 2006, the Company was served with a First Amended Complaint
by Gregory F. Mullally in regards to a case pending in the United States District Court for the District of Nevada. Mr. Mullallys First Amended Complaint added the Company and over ten other defendants in a case that has been pending
since 2005. The case makes various legal claims relating to an allegation that Mr. Mullally owns the Internet rights to the proprietary table games known as Caribbean Stud® and 21
Superbucks. The Company believes this case is without merit and intends to defend this claim vigorously.

Commencing on November 28,
2005, four similar purported class action complaints were filed in the United States District Court for the District of Nevada naming the Company and two of the Companys officers as defendants, and seeking unspecified money damages under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints all alleged that during a class period beginning in early 2005 and ending on October 19, 2005, the defendants misled the Companys investors
concerning the prospective application of SFAS No. 153 to the Companys financial statements for the third quarter of 2005. The complaints were consolidated into a single action, and plaintiffs filed their amended complaint on
April 13, 2006, which also asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Defendants filed a motion to dismiss the amended complaint. On August 31, 2006, the court denied the motions with
regard to the Sections 11 and 15 claims, but dismissed the other claims, with leave to amend. The parties have reached a tentative settlement, subject to the completion of confirmatory discovery and court approval, and as a result, the court
has stayed plaintiffs filing of a second amended complaint. The court has ordered the parties to submit settlement documentation for preliminary approval by March 2, 2007. On March 7, 2007, the Court preliminarily
approved the settlement between the parties. Under the terms of the settlement, the plaintiffs agree to dismiss with prejudice all claims against all defendants, including the Company and its current and former officers and directors, in exchange
for a payment in the amount of $2.8 million, virtually all of which is being provided pursuant to the Companys insurance coverage. The Court is expected to hold a hearing on June 6, 2007 to render a final ruling on the settlement.
Virtually all of the tentative settlement is being provided pursuant to the Companys insurance coverage. The Companys financial statements for the year ended December 31, 2006 reflect substantially all of the costs related to this
litigation, as well as a current liability for the settlement amount and a corresponding current receivable from the insurance company.

In
December 2005, Interactive Systems Worldwide Inc. (ISWI) filed an action against the Company in the Federal District Court for New Jersey, alleging that the Companys Rapid Bet Live and
Primeline products infringe U.S. Patent Nos. 5,573,244 and 5,842,921. In March 2006, the Federal District Court for New Jersey transferred this action to the Federal District Court for Nevada. The Company and ISWI are
currently in settlement discussions. The Company does not expect the settlement of this claim will have a material impact on its financial position, liquidity or results of operations.

On or about August 1, 2006, the Company was served with a Complaint by DTK, LLC in regards to a case pending in the Circuit Court of Harrison
County, Mississippi, First Judicial District. The Complaint makes various legal claims surrounding allegations that Progressive is responsible for damages caused by Hurricane Katrina to its former facility in Gulfport. Trial on this case has been
set to occur within a three week period starting on September 10, 2007. The Company intends to defend this claim vigorously.

In
August 2004, the Company sued Paltronics, Inc. for patent infringement in the United States District Court for the District of Nevada. In November 2005, the Company elected to no longer pursue the lawsuit, and on June 1, 2006, the Court
dismissed the case with prejudice. However, still pending before the Court are Paltronics, Inc.s requests for approximately $0.5 million in attorneys fees and costs related to the litigation.



42



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The Company was sued by Paltronics, Inc. in the U.S. District Court District of Nevada in a case filed
on August 26, 2006. Paltronics alleges patent infringement in regards to an embodiment of multi screen presentations that Progressive sells as an-add on module for slot machines. The Company believes it is well positioned to defend against
this claim. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case vigorously.

On or about February 14, 2007, the Company was served with a complaint by CEI Holding, Inc. in regards to a case pending in the Eighth Judicial District Court, Clark County Nevada (Case Number: A535019). CEI
Holding claims that Progressive allegedly failed to pay the accounts payable obligations of Casino Excitement, Inc. pursuant to a 2002 stock purchase agreement wherein Casino Excitement, Inc. (the Companys former exterior sign business) was
sold by the Company. This case is still in the early stages and the Company cannot currently make an assessment of the outcome, but intends to defend this case vigorously.

From time to time the Company is also involved in other legal matters, litigation and claims of various types in the ordinary course of its business
operations, including matters involving bankruptcies of debtors, collection efforts, disputes with former employees and other matters. Except as noted above, no significant accruals have been recorded for legal matters.

14. Income Taxes

Income (loss) from continuing
operations before tax consisted of the following:



|                       |  |      |         |   |      |   |        |      |  |   |     |  
|---------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | --- | -
|(Amounts in thousands) |  | 2006 |         |   | 2005 |   |        | 2004 | 
|U.S.                   |  | $    | (31,948 | ) |      | $ | (7,504 | )    |  | $ | 219 |  
|Foreign                |  |      | (4,676  | ) |      |   | 1,521  |      |  |   | (25 | )
|                       |  |      |         |   |      |   |        |      |  |   |     |  
|Total                  |  | $    | (36,624 | ) |      | $ | (5,983 | )    |  | $ | 194 |  
|                       |  |      |         |   |      |   |        |      |  |   |     |  

The (provision) benefit for income taxes for the years ended December 31, 2006, 2005 and
2004 consist of:



|                          |  |      |      |   |      |   |      |  |   |   
|------------------------- |  | ---- | ---- | - | ---- | - | ---- |  | - | --
|(Amounts in thousands)    |  | 2006 |      |   | 2005 |   | 2004
|Current                   |  | $    | (283 | ) |      | $ |     |  | $ | 65
|Deferred                  |  |      | 283  |   |      |   |     |  |   |  
|                          |  |      |      |   |      |   |      |  |   |   
|Total provision           |  | $    |     |   |      | $ |     |  | $ | 65
|                          |  |      |      |   |      |   |      |  |   |   
|Continuing operations     |  | $    |     |   |      | $ |     |  | $ | 65
|Discontinued operations   |  |      |     |   |      |   |     |  |   |  
|                          |  |      |      |   |      |   |      |  |   |   
|Total benefit (provision) |  | $    |     |   |      | $ |     |  | $ | 65
|                          |  |      |      |   |      |   |      |  |   |   

The (provision) benefit for income taxes for the years ended December 31, 2006, 2005 and 2004
differs from the amount computed at the federal income tax statutory rate as a result of the following:



|                                  |  |      |         |   |   |       |    |      |   |        |   |  |       |      |  |   |      |   |  |        |   
|--------------------------------- |  | ---- | ------- | - | - | ----- | -- | ---- | - | ------ | - |  | ----- | ---- |  | - | ---- | - |  | ------ | --
|(Amounts in thousands)            |  | 2006 |         |   | % |       |    | 2005 |   |        | % |  |       | 2004 |  |   | %    |  
|Amounts at statutory rate         |  | $    | 12,818  |   |   | 35.0  | %  |      | $ | 2,094  |   |  | 35.0  | %    |  | $ | (68  | ) |  | (35.0  | )%
|Adjustments:                      |  |      |         |   |   |       |    |      |   |        |   |  |       |      |  |   |      |   |  |        |   
|Foreign subsidiaries tax, net     |  |      | (252    | ) |   | (0.7  | )% |      |   | (76    | ) |  | (1.3  | )%   |  |   | 55   |   |  | 28.3   | % 
|State income tax                  |  |      | 380     |   |   | 1.0   | %  |      |   | 87     |   |  | 1.5   | %    |  |   | 60   |   |  | 31.0   | % 
|Non-deductible expenses and other |  |      | 1,117   |   |   | 3.1   | %  |      |   | (73    | ) |  | (1.2  | )%   |  |   | 285  |   |  | 146.7  | % 
|Valuation allowance               |  |      | (14,063 | ) |   | (38.4 | )% |      |   | (2,032 | ) |  | (34.0 | )%   |  |   | (267 | ) |  | (137.6 | )%
|                                  |  |      |         |   |   |       |    |      |   |        |   |  |       |      |  |   |      |   |  |        |   
|Total benefit (provision)         |  | $    |        |   |   | 0.0   | %  |      | $ |       |   |  | 0.0   | %    |  | $ | 65   |   |  | 33.5   | % 
|                                  |  |      |         |   |   |       |    |      |   |        |   |  |       |      |  |   |      |   |  |        |   



43



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The components of the net deferred tax liability at December 31, 2006 and 2005 consist of the
following:



|                                 |  |      |         |   |      |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Amounts in thousands)           |  | 2006 |         |   | 2005 |  
|Deferred tax assets:             |  |      |         |   |      |   |         |  
|Current:                         |  |      |         |   |      |   |         |  
|Inventory book / tax differences |  | $    | 1,007   |   |      | $ | 1,010   |  
|Prepaid expenses and other       |  |      | 1,584   |   |      |   | 1,183   |  
|Valuation allowance              |  |      | (2,591  | ) |      |   | (2,193  | )
|                                 |  |      |         |   |      |   |         |  
|Subtotal                         |  |      |        |   |      |   |        |  
|                                 |  |      |         |   |      |   |         |  
|Noncurrent:                      |  |      |         |   |      |   |         |  
|Deferred revenue                 |  |      | 1,226   |   |      |   | 1,052   |  
|Tax credits                      |  |      | 2,247   |   |      |   | 1,930   |  
|Intangible assets and other      |  |      | 6,149   |   |      |   | 2,745   |  
|Property and equipment and other |  |      |        |   |      |   | 2,090   |  
|Net operating loss carryforward  |  |      | 50,608  |   |      |   | 39,137  |  
|Valuation allowance              |  |      | (54,079 | ) |      |   | (43,828 | )
|                                 |  |      |         |   |      |   |         |  
|Subtotal                         |  |      | 6,151   |   |      |   | 3,126   |  
|                                 |  |      |         |   |      |   |         |  
|Total deferred tax assets        |  |      | 6,151   |   |      |   | 3,126   |  
|                                 |  |      |         |   |      |   |         |  
|Deferred tax liabilities:        |  |      |         |   |      |   |         |  
|Current:                         |  |      |        |   |      |   |        |  
|Noncurrent:                      |  |      |         |   |      |   |         |  
|Perpetual license                |  |      | (16,996 | ) |      |   | (17,982 | )
|Property and equipment and other |  |      | (1,011  | ) |      |   |        |  
|                                 |  |      |         |   |      |   |         |  
|Subtotal                         |  |      | (18,007 | ) |      |   | (17,982 | )
|                                 |  |      |         |   |      |   |         |  
|Total deferred tax liabilities   |  |      | (18,007 | ) |      |   | (17,982 | )
|                                 |  |      |         |   |      |   |         |  
|Net deferred tax liability       |  | $    | (11,856 | ) |      | $ | (14,856 | )
|                                 |  |      |         |   |      |   |         |  

Changes in the deferred tax valuation allowance for the years ended December 31, 2006, 2005
and 2004 were as follows:



|                                |  |      |        |   |      |   |        |  |   |       
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------
|(Amounts in thousands)          |  | 2006 |        |   | 2005 |   | 2004  
|Beginning balance               |  | $    | 46,021 |   |      | $ | 37,510 |  | $ | 37,243
|Additions (deductions)          |  |      | 14,063 |   |      |   | 2,032  |  |   | 267   
|Purchase accounting adjustments |  |      | (3,414 | ) |      |   | 6,479  |  |   |      
|                                |  |      |        |   |      |   |        |  |   |       
|Ending balance                  |  | $    | 56,670 |   |      | $ | 46,021 |  | $ | 37,510
|                                |  |      |        |   |      |   |        |  |   |       

At December 31, 2006, the Company had federal net operating loss carryforwards of $131.7
million, which will begin to expire after the year ended December 31, 2016. The Company also had General Business and AMT tax credit carryforwards of $2.0 million and $0.3 million, respectively. At December 31, 2006, a valuation
allowance was recorded to reduce the deferred tax asset because management believes that the recognition of the tax benefit could not be assured. The Company acquired $20.1 million of net operating loss carryforwards from the acquisition of
VirtGame. A full valuation allowance was provided on these net operating losses. The future utilization of these net operating losses will reduce the goodwill recorded in the VirtGame acquisition. Under Federal Tax Law IRC Section 382, certain
significant changes in ownership that the Company is currently undertaking may restrict the future utilization of these tax loss carryforwards.

As discussed in Note 7, during 2005 the Company reclassified a portion of the perpetual license to goodwill and has decreased the related deferred tax liability by $6.9 million accordingly. For purposes of comparability, a similar
reclassification and adjustment is reflected in 2004 amounts.



44



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15. Earnings Per Share

The following table provides a reconciliation of basic and diluted earnings (loss) per share for the years ended December 31, 2006, 2005 and 2004:



|                                                  |  |      |         |   |      |   |        |      |  |   |       
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------
|(Amounts in thousands except per share amounts)   |  | 2006 |         |   | 2005 |   |        | 2004
|Net income (loss)                                 |  | $    | (36,624 | ) |      | $ | (5,983 | )    |  | $ | 259   
|                                                  |  |      |         |   |      |   |        |      |  |   |       
|Weighted average shares outstanding               |  |      | 34,527  |   |      |   | 25,124 |      |  |   | 21,884
|Dilutive stock options and warrants outstanding   |  |      |        |   |      |   |       |      |  |   | 475   
|                                                  |  |      |         |   |      |   |        |      |  |   |       
|Weighted average and potential shares outstanding |  |      | 34,527  |   |      |   | 25,124 |      |  |   | 22,359
|                                                  |  |      |         |   |      |   |        |      |  |   |       
|Basic earnings (loss) per share                   |  | $    | (1.06   | ) |      | $ | (0.24  | )    |  | $ | 0.01  
|                                                  |  |      |         |   |      |   |        |      |  |   |       
|Diluted earnings (loss) per share                 |  | $    | (1.06   | ) |      | $ | (0.24  | )    |  | $ | 0.01  
|                                                  |  |      |         |   |      |   |        |      |  |   |       

Dilutive stock options and warrants of 0.9 million and 2.4 million for the years ended
December 31, 2006 and 2005, respectively, have not been included in the computation of diluted loss per share as their effect would be antidilutive.

16. Benefit Plans

The Company adopted a savings plan (the 401(k) Plan) qualified under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all employees who are not covered by a collective bargaining unit. The Companys matching contributions for 2006, 2005 and 2004 were $0.4 million,
$0.2 million and $0.2 million, respectively.

17. Stock-Based Compensation Plans

At December 31, 2006, the Company has stock-based employee and director compensation plans, which are described below. On January 1, 2006, PGIC
adopted the fair value recognition provision of SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)). Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and
measurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with APB No. 25,
no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant. The compensation cost charged against operating income (loss) for
stock-based compensation was $6.9 million, $0.7 million, and $0.3 million for the years ended December 31, 2006, 2005, and 2004, respectively, and no stock-based compensation cost was capitalized in inventory during those years. The Company
adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation cost recognized in future interim and annual reporting periods includes: a) compensation cost for all share-based payments granted prior to, but not
yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The results for the prior periods have not been restated. The Company generally issues new shares to settle stock option exercises and vested
stock awards.

SFAS No. 123(R) requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Prior to the adoption of SFAS No. 123(R), excess tax benefits would have been classified as operating cash inflows. The Company has
not recognized, and does not expect to recognize in the near future, any tax benefit related to stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets and its net operating loss carryforwards.



45



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As a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys loss from
continuing operations, loss before income taxes, and net loss for the year ended December 31, 2006, are $3.7 million greater than if it had continued to account for share-based compensation under SFAS No. 123. Basic and diluted loss per
share for the year ended December 31, 2006 would have been $0.95 if the Company had not adopted SFAS No. 123(R), compared to reported basic and diluted loss per share of $1.05. The adoption of SFAS No. 123(R) had no effect on cash
flows from operations or cash flows from financing activities for the year ended December 31, 2006.

The following table illustrates
the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123(R) to stock-based compensation granted under the Companys plans for the years ended December 31, 2005 and
2004. For purposes of this pro forma disclosure, the fair value of option grants is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the vesting periods.



|                                                                                  |  |      |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Amounts in thousands, except per share amounts)                                  |  | 2005 |        |   | 2004 |  
|Net income (loss), as reported                                                    |  | $    | (5,983 | ) |      | $ | 259    |  
|Add: Total stock-based compensation expense included in net income                |  |      | 736    |   |      |   | 344    |  
|Deduct: Total stock-based compensation expense determined under fair value method |  |      | (3,032 | ) |      |   | (1,368 | )
|                                                                                  |  |      |        |   |      |   |        |  
|Pro forma net loss                                                                |  | $    | (8,279 | ) |      | $ | (765   | )
|                                                                                  |  |      |        |   |      |   |        |  
|Earnings (loss) per share:                                                        |  |      |        |   |      |   |        |  
|As reportedBasic and diluted                                                     |  | $    | (0.24  | ) |      | $ | 0.01   |  
|                                                                                  |  |      |        |   |      |   |        |  
|Pro formaBasic and diluted                                                       |  | $    | (0.33  | ) |      | $ | (0.03  | )
|                                                                                  |  |      |        |   |      |   |        |  

Recognition and Measurement

The fair value of each stock-based award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjective assumptions, and changes
in assumptions used can materially affect the fair value estimates. The Company estimates the expected life of the award by taking into consideration the vesting period, contractual term, historical exercise data, expected volatility, blackout
periods and other relevant factors. Volatility is estimated by evaluating the volatility implied by market prices of the Companys exchange-traded financial instruments along with historical volatility data. The risk-free interest rate at the
date of grant is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award. The Company historically has not paid dividends, nor does it expect to pay dividends in the foreseeable future, therefore the
expected dividend rate is zero.

The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton
option-pricing model for the valuation of stock options granted during the years ended December 31, 2006, 2005 and 2004:



|                         |  |                         |   |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------ |  | ----------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | Year Ended December 31, |  
|                         |  | 2006                    |   |  | 2005 |   |  | 2004 |  
|Range of values:         |  | Low                     |   |  | High |   |  | Low  |   |  | High |   |  | Low  |   |  | High |  
|                         |  |                         |   |  |     
|Expected volatility      |  | 60                      | % |  | 60   | % |  | 60   | % |  | 60   | % |  | 60   | % |  | 60   | %
|Expected dividends       |  |                        |   |  |     |   |  |     |   |  |     |   |  |     |   |  |     |  
|Expected term (in years) |  | 4.5                     |   |  | 4.5  |   |  | 7.0  |   |  | 7.0  |   |  | 10.0 |   |  | 10.0 |  
|Risk free rate           |  | 4.1                     | % |  | 5.2  | % |  | 3.8  | % |  | 4.6  | % |  | 2.9  | % |  | 4.1  | %



46



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The Company recognizes share-based compensation expense for all service-based awards with graded vesting
schedules on a straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are
revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For awards with service and market conditions and graded vesting that were granted prior to the adoption of SFAS No. 123(R), the Company estimates
the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on a straight-line basis over the estimated requisite service period. Estimated requisite service periods for awards with
market conditions are periodically reviewed, and are adjusted if the market conditions and other factors indicate that the award is likely to vest more quickly than previously estimated. Adjustments to compensation expense as a result of revising
the estimated requisite service period are recognized prospectively. Upon forfeiture of awards with market conditions, previously recognized compensation cost is reversed only if the forfeiture is a result of the employees failure to render
the requisite service. Compensation expense is not reversed for awards that are forfeited solely because a market condition is not satisfied.

2005
Equity Incentive Plan

The 2005 Equity Incentive Plan provides for the grant of
incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonus awards, stock purchase awards, stock unit awards and other stock awards to the Companys employees, directors and consultants. Options issued under the
plan are generally granted with an exercise price equal to the fair market value on the date of grant, become exercisable at the rate of 1/48thper
month, and have a term of seven years. Restricted stock awards granted under the plan typically vest at the rate of one-third per year on each of the first through third anniversaries of the date of grant. The 2005 Equity Incentive Plan, which was
adopted during 2005, is intended as the successor to the Companys Stock Option Plan, Employee Stock Incentive Plan, and New Hire Equity Inventive Plan (the predecessor plans). As of December 31, 2006, the aggregate number of
shares of the Companys common stock that may be issued under the 2005 Equity Incentive Plan is 1,742,384, subject to certain increases from time to time as set forth in that plan.

At December 31, 2006, the Company had outstanding restricted stock awards which were granted under the 2005 Equity Incentive Plan and the
predecessor plans. Restricted stock awards granted under the 2005 Equity Incentive Plan typically vest ratably over a service period of three years, and compensation expense is based upon the grant date fair value, calculated as the quoted market
price of the Companys stock on the grant date times the number of shares expected to vest. Restricted stock awards granted under the predecessor plans generally vest ratably over a period of three years, subject to the achievement of target
market prices for the Companys stock, and have a term of ten years. Compensation cost for these awards is based upon the number of shares expected to vest, times the quoted market price of the Companys stock on the accounting measurement
date, which is typically the date on which both the service condition and target market price condition have been met.



47



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A summary of activity under the 2005 Equity Incentive Plan and the predecessor plans as of
December 31, 2006, and changes during the year then ended is presented below:



|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|-------------------------------- |  | --------------- | - |  | ------------------------------------ | ----- | ----------------------------------------------- | --- | ----------------------------- | - | -----
|(Share amounts in thousands)     |  | Number ofShares |   |  | WeightedAverageExercisePrice         |       | Wtd. AverageRemainingContractual Life(in years) |     | AggregateIntrinsicValue($000)
|Options:                         |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|Outstanding at December 31, 2005 |  | 2,274           |   |  | $                                    | 7.55  |                                                 |     |                               |   |      
|Granted                          |  | 814             |   |  |                                      | 7.04  |                                                 |     |                               |   |      
|Exercised                        |  | (95             | ) |  |                                      | 5.23  |                                                 |     |                               |   |      
|Forfeited or expired             |  | (454            | ) |  |                                      | 6.45  |                                                 |     |                               |   |      
|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|Outstanding at December 31, 2006 |  | 2,539           |   |  | $                                    | 7.67  |                                                 | 6.1 |                               | $ | 5,929
|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|Exercisable at December 31, 2006 |  | 1,212           |   |  | $                                    | 6.97  |                                                 | 5.1 |                               | $ | 3,487
|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|                                 |  |                 |   | 
|(Share amounts in thousands)     |  | Number ofShares |   |  | WeightedAverageGrant Date Fair Value |       |                                                 |     |                              
|Restricted Stock Awards:         |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|Outstanding at December 31, 2005 |  | 392             |   |  | $                                    | 11.33 |                                                 |     |                               |   |      
|Granted                          |  | 204             |   |  |                                      | 8.61  |                                                 |     |                               |   |      
|Vested                           |  | (110            | ) |  |                                      | 11.36 |                                                 |     |                               |   |      
|Forfeited or cancelled           |  | (142            | ) |  |                                      | 12.79 |                                                 |     |                               |   |      
|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      
|Outstanding at December 31, 2006 |  | 344             |   |  | $                                    | 9.10  |                                                 |     |                               |   |      
|                                 |  |                 |   |  |                                      |       |                                                 |     |                               |   |      

On September 30, 2006, the Company cancelled 142,000 restricted share awards granted under
the predecessor plans and issued an equal number of replacement awards under the 2005 Equity Incentive Plan that vest one-third annually over a three year period. As a result of this exchange, the Company will recognize incremental compensation cost
of $0.3 million over the three year vesting period of the replacement awards.

In June 2006, the terms of approximately 328,000 employee
stock options and restricted share awards were modified in accordance with the terms of the Severance Agreement entered into between the Company and its former Chief Financial Officer. As a result of this modification, the Company recorded
compensation expense of $0.9 million for the year ended December 31, 2006.

Director Stock Option Plan

The Director Stock Option Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. Under this plan, each
non-employee director receives each year, immediately following the Companys annual meeting of stockholders, a ten year option (vesting as to 1/48 of the optioned shares, cumulatively, each month following the grant) to purchase at one hundred
percent (100%) of the fair market value at the date of grant 15,000 shares of the Companys common stock.



48



---

A summary of option activity under the Director Stock Option Plan as of December 31, 2006, and
changes during the year then ended is presented below:



|                                 |  |                 |  |                              |      |                                                    |     |                               |   |      
|-------------------------------- |  | --------------- |  | ---------------------------- | ---- | -------------------------------------------------- | --- | ----------------------------- | - | -----
|(Share amounts in thousands)     |  | Number ofShares |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractual Life(in years) |     | AggregateIntrinsicValue($000)
|Outstanding at December 31, 2005 |  | 357             |  | $                            | 6.68 |                                                    |     |                               |   |      
|Granted                          |  | 95              |  |                              | 8.50 |                                                    |     |                               |   |      
|Exercised                        |  |                |  |                              |     |                                                    |     |                               |   |      
|Forfeited or expired             |  |                |  |                              |     |                                                    |     |                               |   |      
|                                 |  |                 |  |                              |      |                                                    |     |                               |   |      
|Outstanding at December 31, 2006 |  | 452             |  | $                            | 7.06 |                                                    | 6.5 |                               | $ | 1,289
|                                 |  |                 |  |                              |      |                                                    |     |                               |   |      
|Exercisable at December 31, 2006 |  | 316             |  | $                            | 5.86 |                                                    | 5.3 |                               | $ | 1,140
|                                 |  |                 |  |                              |      |                                                    |     |                               |   |      

Additional Share-Based Compensation Information



|                                                                                    |  |      |       |      |   |       |  |   |     
|----------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----
|(Amounts in thousands, except per share amounts)                                    |  | 2006 |       | 2005 |   | 2004 
|2005 Equity Incentive Plan and predecessor plans:                                   |  |      |       |      |   |       |  |   |     
|Weighted average grant date fair value per share of options granted during the year |  | $    | 4.22  |      | $ | 7.40  |  | $ | 3.69
|Total fair value of options that vested during the year                             |  |      | 3,887 |      |   | 2,240 |  |   | 915 
|Total intrinsic value of options exercised during the year                          |  |      | 338   |      |   | 3,946 |  |   | 894 
|Director Stock Option Plan:                                                         |  |      |       |      |   |       |  |   |     
|Weighted average grant date fair value per share of options granted during the year |  |      | 4.54  |      |   | 8.43  |  |   | 3.23
|Total fair value of options that vested during the year                             |  |      | 408   |      |   | 284   |  |   | 204 
|Total intrinsic value of options exercised during the year                          |  |      |      |      |   | 604   |  |   |    

Cash received during the years ended December 31, 2006 and 2005 from option exercises under
all share-based payment arrangements was $0.5 million and $3.1 million, respectively.

The total unrecognized compensation cost related to
nonvested options and restricted stock awards under all share-based compensation plans at December 31, 2006 was $8.0 million. That cost is expected to be recognized over a weighted-average period of 1.5 years.

Warrants Issued to Vendors

Along with the above-discussed stock option plans, the Company may from time to time grant stock warrants to various licensors as well as other individuals with whom the Company does business. From 1998 to 2000, the
Company entered into various licensing agreements with Hasbro, Inc. and Hasbro International, Inc. (together, Hasbro) which granted the Company rights to intellectual property, including rights to develop and market gaming devices and
associated equipment under the trademarks Battleship® , Clue® and Trivial Pursuit® . In exchange for these license agreements, the Company granted Hasbro warrants to purchase up to 125,000 shares of the Companys common stock for each license at an average exercise price of $6.13 per share. At
December 31, 2006, 187,500 of these warrants remain outstanding and exercisable, and they expire in 2009.

From 1998 to 2000, the Company entered into a licensing agreement with Ripley Entertainment which granted the Company rights to intellectual property, including rights to develop and market gaming devices and
associated equipment under the trademark for Ripleys Believe It® or Not!® , in exchange for which the Company granted
Ripleys Entertainment a warrant to purchase up to 35,000 shares of the Companys common stock at an exercise price of $6.75 per share. This warrant remains outstanding and exercisable at December 31, 2006, and expires on
December 31, 2009.



49



---

During the year ended December 31, 2006, the Company licensed certain intellectual property rights
from Harrahs License Company, LLC in exchange for 325,000 warrants to purchase shares of the Companys common stock at an exercise price of $7.50 per share. These warrants were valued using the Black-Scholes-Merton option-pricing model
using volatility of 60%, expected life of six years, risk free rate of 4.79%, and expected dividends of zero. These warrants remain outstanding and exercisable at December 31, 2006.

At December 31, 2006, the total number of uncancelled warrants issued in exchange for license agreements was 547,500, with a weighted average
exercise price of $7.70 per share.

During 2006, the Company also issued a total of 350,000 stock purchase warrants to Ableco Finance LLC
in connection with financing arrangements, as more fully described in Note 12.

No warrants were granted during the years ended
December 31, 2005 and 2004.

A summary of the status of the Companys warrants issued to vendors at December 31, 2006, 2005
and 2004 and changes during the years then ended is presented in the table below:



|                                                |  |          |   |  |                       |      |      |          |      |   |                       |   |          |  |                       |  |   |     
|----------------------------------------------- |  | -------- | - |  | --------------------- | ---- | ---- | -------- | ---- | - | --------------------- | - | -------- |  | --------------------- |  | - | ----
|                                                |  | 2006     |   |  | 2005                  |      | 2004
|(Amounts in thousands except per share amounts) |  | Warrants |   |  | Wtd. AveExercisePrice |      |      | Warrants |      |   | Wtd. AveExercisePrice |   | Warrants |  | Wtd. AveExercisePrice
|Warrants, beginning of year                     |  | 348      |   |  | $                     | 6.76 |      |          | 660  |   |                       | $ | 5.90     |  | 660                   |  | $ | 5.90
|Granted                                         |  | 675      |   |  |                       | 7.94 | (1)  |          |     |   |                       |   |         |  |                      |  |   |    
|Exercised                                       |  | (125     | ) |  |                       | 4.56 |      |          | (312 | ) |                       |   | 4.94     |  |                      |  |   |    
|Cancelled                                       |  |         |   |  |                       |     |      |          |     |   |                       |   |         |  |                      |  |   |    
|                                                |  |          |   |  |                       |      |      |          |      |   |                       |   |          |  |                       |  |   |     
|Warrants, end of year                           |  | 898      |   |  | $                     | 7.95 | (1)  |          | 348  |   |                       | $ | 6.76     |  | 660                   |  | $ | 5.90
|                                                |  |          |   |  |                       |      |      |          |      |   |                       |   |          |  |                       |  |   |     
|Exercisable at end of year                      |  | 823      |   |  | $                     | 7.95 |      |          | 348  |   |                       | $ | 6.76     |  | 660                   |  | $ | 5.90
|                                                |  |          |   |  |                       |      |      |          |      |   |                       |   |          |  |                       |  |   |     

---

|(1) | The weighted average exercise price excludes 75,000 warrants for which the exercise price has not yet been set in accordance with the warrant agreement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

The costs charged to operating income (loss) for the years ended December 31, 2006, 2005 and 2004 related to warrants issued to vendors were $0.4
million, $0.1 million and $0.3 million, respectively.

Warrants and Options Assumed in Acquisition

In connection with the Companys acquisition of VirtGame, the Company assumed all outstanding options and warrants to purchase VirtGame common stock.
In accordance with the merger agreement, the assumed options and warrants were subject to the same terms and conditions as set forth in the applicable plans and/or agreements under which they were issued. The number of shares and the per share
exercise price for the shares of the Companys common stock issuable upon exercise of the assumed options and warrants shown below were determined using the exchange ratio applicable to the VirtGame common stock, which was 0.028489 to 1. At the
date of acquisition, all of the acquired options and warrants were fully vested and exercisable. These options and warrants expire at various dates through 2010.



50



---

Following is a summary of the status of these options and warrants at December 31, 2006 and changes
during the year then ended:



|                                                 |  |                 |   |  |                              |       |                                                 |     |                               |   |  
|------------------------------------------------ |  | --------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------------- | - | -
|(Share amounts in thousands)                     |  | Number ofShares |   |  | WeightedAverageExercisePrice |       | Wtd. AverageRemainingContractual Life(in years) |     | AggregateIntrinsicValue($000)
|Options and Warrants assumed:                    |  |                 |   |  |                              |       |                                                 |     |                               |   |  
|Outstanding at December 31, 2005                 |  | 487             |   |  | $                            | 15.11 |                                                 |     |                               |   |  
|Granted                                          |  |                |   |  |                              |      |                                                 |     |                               |   |  
|Exercised                                        |  | (24             | ) |  |                              | 5.53  |                                                 |     |                               |   |  
|Forfeited or expired                             |  | (36             | ) |  |                              | 10.00 |                                                 |     |                               |   |  
|                                                 |  |                 |   |  |                              |       |                                                 |     |                               |   |  
|Outstanding and exercisable at December 31, 2006 |  | 427             |   |  | $                            | 16.10 |                                                 | 2.0 |                               | $ | 
|                                                 |  |                 |   |  |                              |       |                                                 |     |                               |   |  

During the year ended December 31, 2006, stock options and warrants to purchase 149,000
shares of the Companys common stock were exercised on a net exercise basis which resulted in the issuance of 82,000 net shares. The option and warrant activity tables above reflect the gross number of shares exercised, while the
accompanying statements of changes in stockholders equity reflect the net number of shares actually issued.

18. Concentrations of Credit Risk

The financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts and contracts
receivable. The Company performs credit evaluations of its customers, and typically requires advance deposits of approximately 50%.

At
December 31, 2006, net accounts and contracts receivable by region, as a percentage of total receivables, were as follows:



|                      |  |                    |   |  |                     |   |  |       |  
|--------------------- |  | ------------------ | - |  | ------------------- | - |  | ----- | -
|                      |  | AccountsReceivable |   |  | ContractsReceivable |   |  | Total |  
|Domestic region       |  | 75.8               | % |  | 86.3                | % |  | 78.6  | %
|International region: |  |                    |   |  |                     |   |  |       |  
|Australia / Asia      |  | 10.0               |   |  |                    |   |  | 7.3   |  
|Europe                |  | 14.2               |   |  | 13.7                |   |  | 14.1  |  
|                      |  |                    |   |  |                     |   |  |       |  
|Total International   |  | 24.2               |   |  | 13.7                |   |  | 21.4  |  
|                      |  |                    |   |  |                     |   |  |       |  
|Total                 |  | 100.0              | % |  | 100.0               | % |  | 100.0 | %
|                      |  |                    |   |  |                     |   |  |       |  



51



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19. Guarantor Financial Statements

The Companys domestic subsidiaries are 100% owned and have provided full and unconditional guarantees on a joint and several basis on the payment of 11.875% Senior Secured Notes due 2008. The consolidating
condensed financial statements for the guarantor subsidiaries are as follows:

CONSOLIDATING CONDENSED BALANCE SHEETS



|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|---------------------------------------------------- | ------ | ----------------- | ------- | --------------------- |  | - | ------------------------- | - | ------------ | - | ------ | ------------ | - | ------- | - |  | - | -------
|(Amounts in thousands)                               |        | December 31, 2006
|                                                     | Parent |                   |         | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   | Eliminations |   |        | Consolidated
|ASSETS                                               |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Current assets:                                      |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Cash and cash equivalents                            |        | $                 | 4,236   |                       |  | $ |                          |   |              | $ | 2,947  |              | $ |        |   |  | $ | 7,183  
|Accounts receivable, net                             |        |                   | 13,398  |                       |  |   | 101                       |   |              |   | 4,319  |              |   |        |   |  |   | 17,818 
|Contracts receivable, net                            |        |                   | 4       |                       |  |   | 5,505                     |   |              |   | 898    |              |   |        |   |  |   | 6,407  
|Inventories, net                                     |        |                   | 9,550   |                       |  |   |                          |   |              |   | 1,936  |              |   |        |   |  |   | 11,486 
|Other current assets                                 |        |                   | 4,032   |                       |  |   |                          |   |              |   | 415    |              |   |        |   |  |   | 4,447  
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Total current assets                                 |        |                   | 31,220  |                       |  |   | 5,606                     |   |              |   | 10,515 |              |   |        |   |  |   | 47,341 
|Contract sales and notes receivable, net             |        |                   |        |                       |  |   | 164                       |   |              |   |       |              |   |        |   |  |   | 164    
|Property and equipment, net                          |        |                   | 4,560   |                       |  |   | 131                       |   |              |   | 765    |              |   |        |   |  |   | 5,456  
|Goodwill and intangible assets, net                  |        |                   | 44,407  |                       |  |   | 37,696                    |   |              |   | 38,287 |              |   |        |   |  |   | 120,390
|Investments in and loans to subsidiaries             |        |                   | 61,182  |                       |  |   |                          |   |              |   |       |              |   | (55,145 | ) |  |   | 6,037  
|Other assets                                         |        |                   | 6,742   |                       |  |   | 53                        |   |              |   | 3      |              |   |        |   |  |   | 6,798  
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Total assets                                         |        | $                 | 148,111 |                       |  | $ | 43,650                    |   |              | $ | 49,570 |              | $ | (55,145 | ) |  | $ | 186,186
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Current liabilities                                  |        | $                 | 23,136  |                       |  | $ | 73                        |   |              | $ | 4,449  |              | $ |        |   |  | $ | 27,658 
|Intercompany transactions                            |        |                   | (29,860 | )                     |  |   | (3,595                    | ) |              |   | 33,455 |              |   |        |   |  |   |       
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Total current liabilities                            |        |                   | (6,724  | )                     |  |   | (3,522                    | ) |              |   | 37,904 |              |   |        |   |  |   | 27,658 
|Long-term debt, net                                  |        |                   | 62,051  |                       |  |   |                          |   |              |   |       |              |   |        |   |  |   | 62,051 
|Other liabilities, long term                         |        |                   | 621     |                       |  |   |                          |   |              |   | 73     |              |   |        |   |  |   | 694    
|Deferred tax liability                               |        |                   | 8,236   |                       |  |   |                          |   |              |   | 3,620  |              |   |        |   |  |   | 11,856 
|Stockholders equity (deficit)                       |        |                   | 83,927  |                       |  |   | 47,172                    |   |              |   | 7,973  |              |   | (55,145 | ) |  |   | 83,927 
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        
|Total liabilities and stockholders equity (deficit) |        | $                 | 148,111 |                       |  | $ | 43,650                    |   |              | $ | 49,570 |              | $ | (55,145 | ) |  | $ | 186,186
|                                                     |        |                   |         |                       |  |   |                           |   |              |   |        |              |   |         |   |  |   |        



52



---

CONSOLIDATING CONDENSED BALANCE SHEETS



|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|---------------------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | -------
|                                                     |  | December 31, 2005
|(Amounts in thousands)                               |  | Parent            |         |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated
|ASSETS                                               |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Current assets:                                      |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Cash and cash equivalents                            |  | $                 | 12,387  |   |                       | $ | (117   | )                         |  | $ | 1,811        |   |  | $            |        |   |  | $ | 14,081 
|Accounts receivable, net                             |  |                   | 9,311   |   |                       |   | 1,047  |                           |  |   | 2,561        |   |  |              |        |   |  |   | 12,919 
|Contracts receivable, net                            |  |                   | 7,761   |   |                       |   | 5,188  |                           |  |   | 2,721        |   |  |              |        |   |  |   | 15,670 
|Inventories, net                                     |  |                   | 6,017   |   |                       |   | 3,386  |                           |  |   | 1,131        |   |  |              |        |   |  |   | 10,534 
|Other current assets                                 |  |                   | 2,443   |   |                       |   | 807    |                           |  |   | 332          |   |  |              |        |   |  |   | 3,582  
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Total current assets                                 |  |                   | 37,919  |   |                       |   | 10,311 |                           |  |   | 8,556        |   |  |              |        |   |  |   | 56,786 
|Contract sales and notes receivable, net             |  |                   | 2,000   |   |                       |   | 89     |                           |  |   |             |   |  |              |        |   |  |   | 2,089  
|Property and equipment, net                          |  |                   | 3,437   |   |                       |   | 287    |                           |  |   | 693          |   |  |              |        |   |  |   | 4, 417 
|Goodwill and intangible assets, net                  |  |                   | 51,976  |   |                       |   | 32,098 |                           |  |   | 35,050       |   |  |              |        |   |  |   | 119,124
|Investments in and loans to subsidiaries             |  |                   | 73,427  |   |                       |   |       |                           |  |   |             |   |  |              | (73,427 | ) |  |   |       
|Other assets                                         |  |                   | 3,309   |   |                       |   | 144    |                           |  |   | (23          | ) |  |              |        |   |  |   | 3,430  
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Total assets                                         |  | $                 | 172,068 |   |                       | $ | 42,929 |                           |  | $ | 44,276       |   |  | $            | (73,427 | ) |  | $ | 185,846
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Current liabilities                                  |  | $                 | 15,731  |   |                       | $ | 3,447  |                           |  | $ | 3,186        |   |  | $            |        |   |  | $ | 22,364 
|Intercompany transactions                            |  |                   | (499    | ) |                       |   | (9,080 | )                         |  |   | 4,480        |   |  |              | 5,099   |   |  |   |       
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Total current liabilities                            |  |                   | 15,232  |   |                       |   | (5,633 | )                         |  |   | 7,666        |   |  |              | 5,099   |   |  |   | 22,364 
|Long-term debt, net                                  |  |                   | 44,045  |   |                       |   |       |                           |  |   | 26           |   |  |              |        |   |  |   | 44,071 
|Other long-term liabilities                          |  |                   |        |   |                       |   |       |                           |  |   | 22,307       |   |  |              | (22,307 | ) |  |   |       
|Deferred tax liability                               |  |                   | 8,236   |   |                       |   | 3,413  |                           |  |   | 3,207        |   |  |              |        |   |  |   | 14,856 
|Stockholders equity (deficit)                       |  |                   | 104,555 |   |                       |   | 45,149 |                           |  |   | 11,070       |   |  |              | (56,219 | ) |  |   | 104,555
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        
|Total liabilities and stockholders equity (deficit) |  | $                 | 172,068 |   |                       | $ | 42,929 |                           |  | $ | 44,276       |   |  | $            | (73,427 | ) |  | $ | 185,846
|                                                     |  |                   |         |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        



53



---

CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS



|                                                  |  |                              |         |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |         |  
|------------------------------------------------- |  | ---------------------------- | ------- | - | --------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                                  |  | Year Ended December 31, 2006 |        
|(Amounts in thousands)                            |  | Parent                       |         |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|Revenues                                          |  | $                            | 54,040  |   |                       | $ |       |                           |  | $ | 19,106       |   |  | $            | (3,637 | ) |  | $ | 69,509  |  
|Cost of sales                                     |  |                              | 28,628  |   |                       |   |       |                           |  |   | 9,168        |   |  |              | (3,637 | ) |  |   | 34,159  |  
|Operating expenses                                |  |                              | 49,284  |   |                       |   | 1,331  |                           |  |   | 13,527       |   |  |              |       |   |  |   | 64,142  |  
|                                                  |  |                              |         |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |         |  
|Operating loss                                    |  |                              | (23,872 | ) |                       |   | (1,331 | )                         |  |   | (3,589       | ) |  |              |       |   |  |   | (28,792 | )
|Equity in earnings (loss) of subsidiaries         |  |                              | (5,928  | ) |                       |   |       |                           |  |   |             |   |  |              | 5,928  |   |  |   |        |  
|Interest expense, net                             |  |                              | (6,824  | ) |                       |   | 79     |                           |  |   | (1,087       | ) |  |              |       |   |  |   | (7,832  | )
|                                                  |  |                              |         |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |         |  
|Income (loss) from operations before income taxes |  |                              | (36,624 | ) |                       |   | (1,252 | )                         |  |   | (4,676       | ) |  |              | 5,928  |   |  |   | (36,624 | )
|Income tax (provision) benefit                    |  |                              |        |   |                       |   |       |                           |  |   |             |   |  |              |       |   |  |   |        |  
|                                                  |  |                              |         |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |         |  
|Net income (loss)                                 |  | $                            | (36,624 | ) |                       | $ | (1,252 | )                         |  | $ | (4,676       | ) |  | $            | 5,928  |   |  | $ | (36,624 | )
|                                                  |  |                              |         |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |         |  

CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS



|                                                                      |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        |  
|--------------------------------------------------------------------- |  | ---------------------------- | ------ | - | --------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------ | -
|                                                                      | 
|                                                                      |  | Year Ended December 31, 2005 |       
|(Amounts in thousands)                                                |  | Parent                       |        |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |        
|Revenues                                                              |  | $                            | 41,235 |   |                       | $ | 21,393 |                           |  | $ | 15,593       |   |  | $            |        |   |  | $ | 78,221 |  
|Cost of sales                                                         |  |                              | 20,248 |   |                       |   | 9,364  |                           |  |   | 6,494        |   |  |              |        |   |  |   | 36,106 |  
|Operating expenses                                                    |  |                              | 32,996 |   |                       |   | 1,130  |                           |  |   | 7,480        |   |  |              |        |   |  |   | 41,606 |  
|Net gain on disposition of non-core assets                            |  |                              | (6,982 | ) |                       |   | 4,446  |                           |  |   |             |   |  |              |        |   |  |   | (2,536 | )
|Gain on sale of core intellectual property                            |  |                              |       |   |                       |   | (2,500 | )                         |  |   |             |   |  |              |        |   |  |   | (2,500 | )
|                                                                      |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        |  
|Operating income (loss)                                               |  |                              | (5,027 | ) |                       |   | 8,953  |                           |  |   | 1,619        |   |  |              |        |   |  |   | 5,545  |  
|Equity in earnings of subsidiaries                                    |  |                              | 10,474 |   |                       |   |       |                           |  |   |             |   |  |              | (10,474 | ) |  |   |       |  
|Interest expense, net                                                 |  |                              | (8,437 | ) |                       |   |       |                           |  |   | (98          | ) |  |              |        |   |  |   | (8,535 | )
|                                                                      |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        |  
|Income (loss) from operations before income taxes and debt retirement |  |                              | (2,990 | ) |                       |   | 8,953  |                           |  |   | 1,521        |   |  |              | (10,474 | ) |  |   | (2,990 | )
|Loss on early retirement of debt                                      |  |                              | (2,993 | ) |                       |   |       |                           |  |   |             |   |  |              |        |   |  |   | (2,993 | )
|Income tax (provision) benefit                                        |  |                              |       |   |                       |   |       |                           |  |   |             |   |  |              |        |   |  |   |       |  
|                                                                      |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        |  
|Net income (loss)                                                     |  | $                            | (5,983 | ) |                       | $ | 8,953  |                           |  | $ | 1,521        |   |  | $            | (10,474 | ) |  | $ | (5,983 | )
|                                                                      |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |         |   |  |   |        |  



54



---

CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS



|                                                  |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |        |  
|------------------------------------------------- |  | ---------------------------- | ------ | - | --------------------- | - | ------ | ------------------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------ | -
|                                                  | 
|                                                  |  | Year Ended December 31, 2004 |       
|(Amounts in thousands)                            |  | Parent                       |        |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|Revenues                                          |  | $                            | 58,255 |   |                       | $ | 26,987 |                           |  | $ | 13,616       |   |  | $            | (2,484 | ) |  | $ | 96,374 |  
|Cost of sales                                     |  |                              | 26,882 |   |                       |   | 10,150 |                           |  |   | 8,334        |   |  |              | (2,484 | ) |  |   | 42,882 |  
|Operating expenses                                |  |                              | 29,689 |   |                       |   | 8,681  |                           |  |   | 5,439        |   |  |              |       |   |  |   | 43,809 |  
|                                                  |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |        |  
|Operating income (loss)                           |  |                              | 1,684  |   |                       |   | 8,156  |                           |  |   | (157         | ) |  |              |       |   |  |   | 9,683  |  
|Equity in earnings of subsidiaries                |  |                              | 8,169  |   |                       |   |       |                           |  |   |             |   |  |              | (8,169 | ) |  |   |       |  
|Interest expense, net                             |  |                              | (9,585 | ) |                       |   | (36    | )                         |  |   | 132          |   |  |              |       |   |  |   | (9,489 | )
|                                                  |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |        |  
|Income (loss) from operations before income taxes |  |                              | 268    |   |                       |   | 8,120  |                           |  |   | (25          | ) |  |              | (8,169 | ) |  |   | 194    |  
|Income tax (provision) benefit                    |  |                              | (9     | ) |                       |   |       |                           |  |   | 74           |   |  |              |       |   |  |   | 65     |  
|                                                  |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |        |  
|Net income (loss)                                 |  | $                            | 259    |   |                       | $ | 8,120  |                           |  | $ | 49           |   |  | $            | (8,169 | ) |  | $ | 259    |  
|                                                  |  |                              |        |   |                       |   |        |                           |  |   |              |   |  |              |        |   |  |   |        |  

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS



|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------- | ------- | - | --------------------- | - | ---- | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                             |  | Year Ended December 31, 2006 |        
|(Amounts in thousands)                                       |  | Parent                       |         |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities          |  | $                            | (14,539 | ) |                       | $ | 117  |                           |  | $ | 2,292        |   |              | $ |  |  | $ | (12,130 | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows from investing activities:                        |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Purchases of minority investments                            |  |                              | (6,000  | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (6,000  | )
|Purchase of business operations, net of cash acquired        |  |                              | (56     | ) |                       |   |     |                           |  |   | (688         | ) |              |   |  |  |   | (744    | )
|Purchase of property and equipment                           |  |                              | (1,425  | ) |                       |   |     |                           |  |   | (390         | ) |              |   |  |  |   | (1,815  | )
|Purchase of inventory leased to others                       |  |                              | (355    | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (355    | )
|Proceeds from sale of property and equipment                 |  |                              |        |   |                       |   |     |                           |  |   | 35           |   |              |   |  |  |   | 35      |  
|Increase in intangible assets                                |  |                              | (3,636  | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (3,636  | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities                        |  |                              | (11,472 | ) |                       |   |     |                           |  |   | (1,043       | ) |              |   |  |  |   | (12,515 | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash flows from financing activities:                        |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Principal payments on long-term debt and capital leases      |  |                              | (263    | ) |                       |   |     |                           |  |   | (13          | ) |              |   |  |  |   | (276    | )
|Purchase of treasury stock                                   |  |                              | (363    | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (363    | )
|Proceeds from long-term debt and notes payable               |  |                              | 17,636  |   |                       |   |     |                           |  |   |             |   |              |   |  |  |   | 17,636  |  
|Debt issuance costs                                          |  |                              | (569    | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (569    | )
|Residual costs of equity offering                            |  |                              | (151    | ) |                       |   |     |                           |  |   |             |   |              |   |  |  |   | (151    | )
|Proceeds from issuance of common stock                       |  |                              | 1,570   |   |                       |   |     |                           |  |   |             |   |              |   |  |  |   | 1,570   |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities          |  |                              | 17,860  |   |                       |   |     |                           |  |   | (13          | ) |              |   |  |  |   | 17,847  |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Effect of exchange rate changes on cash and cash equivalents |  |                              |        |   |                       |   |     |                           |  |   | (100         | ) |              |   |  |  |   | (100    | )
|Increase (decrease) in cash and cash equivalents             |  |                              | (8,151  | ) |                       |   | 117  |                           |  |   | 1,136        |   |              |   |  |  |   | (6,898  | )
|Cash and cash equivalents, beginning of period               |  |                              | 12,387  |   |                       |   | (117 | )                         |  |   | 1,811        |   |              |   |  |  |   | 14,081  |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period                     |  | $                            | 4,236   |   |                       | $ |     |                           |  | $ | 2,947        |   |              | $ |  |  | $ | 7,183   |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |   |  |   |         |  



55



---

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS



|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------- | ------- | - | --------------------- | - | ---- | ------------------------- |  | - | ------------ | - | ------------ | - | --- |  | - | ------- | -
|                                                             | 
|                                                             |  | Year Ended December 31, 2005 |        
|(Amounts in thousands)                                       |  | Parent                       |         |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by (used in) operating activities          |  | $                            | (19,711 | ) |                       | $ | 584  |                           |  | $ | (2,201       | ) |              |   | $  |  | $ | (21,328 | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Cash flows from investing activities:                        |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Purchase of business operations, net of cash acquired        |  |                              | (36,203 | ) |                       |   |     |                           |  |   |             |   |              |   |    |  |   | (36,203 | )
|Purchase of property and equipment                           |  |                              | (1,418  | ) |                       |   | (29  | )                         |  |   | (476         | ) |              |   |    |  |   | (1,923  | )
|Purchase of inventory leased to others                       |  |                              | (189    | ) |                       |   | (673 | )                         |  |   |             |   |              |   |    |  |   | (862    | )
|Proceeds from sales of non-core assets                       |  |                              | 11,402  |   |                       |   |     |                           |  |   |             |   |              |   |    |  |   | 11,402  |  
|Proceeds from sale of property and equipment                 |  |                              | 96      |   |                       |   |     |                           |  |   | 49           |   |              |   |    |  |   | 145     |  
|Additions to intangible assets                               |  |                              | (8,769  | ) |                       |   |     |                           |  |   |             |   |              |   |    |  |   | (8,769  | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Net cash used in investing activities                        |  |                              | (35,081 | ) |                       |   | (702 | )                         |  |   | (427         | ) |              |   |    |  |   | (36,210 | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Cash flows from financing activities:                        |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Principal payments on long-term debt                         |  |                              | (20,000 | ) |                       |   |     |                           |  |   | (61          | ) |              |   |    |  |   | (20,061 | )
|Call premium on early retirement of debt                     |  |                              | (1,188  | ) |                       |   |     |                           |  |   |             |   |              |   |    |  |   | (1,188  | )
|Proceeds from issuance of common stock                       |  |                              | 81,320  |   |                       |   |     |                           |  |   |             |   |              |   |    |  |   | 81,320  |  
|Principal payments on capital leases                         |  |                              | (52     | ) |                       |   |     |                           |  |   | (8           | ) |              |   |    |  |   | (60     | )
|Purchase of treasury stock                                   |  |                              | (433    | ) |                       |   |     |                           |  |   |             |   |              |   |    |  |   | (433    | )
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Net cash provided by (used in) financing activities          |  |                              | 59,647  |   |                       |   |     |                           |  |   | (69          | ) |              |   |    |  |   | 59,578  |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Effect of exchange rate changes on cash and cash equivalents |  |                              |        |   |                       |   |     |                           |  |   | (264         | ) |              |   |    |  |   | (264    | )
|Increase (decrease) in cash and cash equivalents             |  |                              | 4,855   |   |                       |   | (118 | )                         |  |   | (2,961       | ) |              |   |    |  |   | 1,776   |  
|Cash and cash equivalents, beginning of period               |  |                              | 7,532   |   |                       |   | 1    |                           |  |   | 4,772        |   |              |   |    |  |   | 12,305  |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  
|Cash and cash equivalents, end of period                     |  | $                            | 12,387  |   |                       | $ | (117 | )                         |  | $ | 1,811        |   |              | $ |    |  | $ | 14,081  |  
|                                                             |  |                              |         |   |                       |   |      |                           |  |   |              |   |              |   |     |  |   |         |  



56



---

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS



|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------ | - | --------------------- | - | ------ | ------------------------- |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                             |  | Year Ended December 31, 2004 |       
|(Amounts in thousands)                                       |  | Parent                       |        |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Eliminations |   | Consolidated |  
|Net cash provided by operating activities                    |  | $                            | 3,115  |   |                       | $ | 3,156  |                           |  | $ | 2,200        |   |              | $ |  |  | $ | 8,471  |  
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Cash flows from investing activities:                        |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Purchase of property and equipment                           |  |                              | (475   | ) |                       |   | (168   | )                         |  |   | (149         | ) |              |   |  |  |   | (792   | )
|Purchase of inventory leased to others                       |  |                              | (2,067 | ) |                       |   | (2,902 | )                         |  |   | (128         | ) |              |   |  |  |   | (5,097 | )
|Proceeds from sale of equipment                              |  |                              | 127    |   |                       |   | (58    | )                         |  |   |             |   |              |   |  |  |   | 69     |  
|Other investing activities                                   |  |                              | (245   | ) |                       |   |       |                           |  |   |             |   |              |   |  |  |   | (245   | )
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in investing activities                        |  |                              | (2,660 | ) |                       |   | (3,128 | )                         |  |   | (277         | ) |              |   |  |  |   | (6,065 | )
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Cash flows from financing activities:                        |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Principal payments on long-term debt                         |  |                              | (99    | ) |                       |   |       |                           |  |   | (9           | ) |              |   |  |  |   | (108   | )
|Principal payments on deferred license                       |  |                              | (535   | ) |                       |   |       |                           |  |   |             |   |              |   |  |  |   | (535   | )
|Proceeds from issuance of common stock                       |  |                              | 2,352  |   |                       |   |       |                           |  |   |             |   |              |   |  |  |   | 2,352  |  
|Principal payments on capital leases                         |  |                              | (471   | ) |                       |   | (28    | )                         |  |   | (88          | ) |              |   |  |  |   | (587   | )
|Purchase of treasury stock                                   |  |                              | (181   | ) |                       |   |       |                           |  |   |             |   |              |   |  |  |   | (181   | )
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided by (used in) financing activities          |  |                              | 1,066  |   |                       |   | (28    | )                         |  |   | (97          | ) |              |   |  |  |   | 941    |  
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents |  |                              |       |   |                       |   |       |                           |  |   | 275          |   |              |   |  |  |   | 275    |  
|Increase in cash and cash equivalents                        |  |                              | 1,521  |   |                       |   |       |                           |  |   | 2,101        |   |              |   |  |  |   | 3,622  |  
|Cash and cash equivalents, beginning of period               |  |                              | 6,011  |   |                       |   | 1      |                           |  |   | 2,671        |   |              |   |  |  |   | 8,683  |  
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  
|Cash and cash equivalents, end of period                     |  | $                            | 7,532  |   |                       | $ | 1      |                           |  | $ | 4,772        |   |              | $ |  |  | $ | 12,305 |  
|                                                             |  |                              |        |   |                       |   |        |                           |  |   |              |   |              |   |   |  |   |        |  

20. Segment Reporting

The Companys business consists of two reportable segments: (i) slot and table games, and (ii) systems. The slot and table games business segment includes the development, licensing and distribution of
proprietary slot and table games. Revenues are derived from leases, revenue sharing arrangements, royalty and license fee arrangements with casinos and gaming suppliers. The systems business segment sells or leases electronic player tracking and
slot machine and table game monitoring systems and electronic components used in progressive jackpot systems, and gaming machines. The accounting policies of the segments are the same as those described in Note 1Description of Business and
Summary of Significant Accounting Policies. All inter-segment transactions have been eliminated.

With respect to the current segments, the
Company evaluates performance and allocates resources based upon profit or loss from operations before income taxes. Certain operating expenses, which are separately managed at the corporate level, are not allocated to the business segments. These
unallocated costs include primarily the costs associated with executive administration, finance, human resources, legal, general marketing and information systems. The depreciation and amortization expense of identifiable assets not allocated to the
business segments are also included in these costs.

During 2005, the Company re-aligned its reportable segments as a result of changes to
its operations. Prior to 2005, reportable segments included slot and table games, systems, and product sales, which comprised interior signage and electronics. As a result of the segment realignment, the Companys electronics business has been
reclassified to the systems segment. Segment data for 2004 has been restated to conform to the current period presentation.



57



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Business segment information for the years ended December 31, 2006, 2005 and 2004 consists of:



|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(Amounts in thousands)                                 |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Business Segments:                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Revenue:                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Slot and table games                                   |  | $    | 16,700  |   |      | $ | 33,670  |      |  | $ | 40,560  |  
|Interior signage                                       |  |      |        |   |      |   | 5,252   |      |  |   | 20,014  |  
|Systems                                                |  |      | 52,809  |   |      |   | 39,299  |      |  |   | 35,800  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 69,509  |   |      | $ | 78,221  |      |  | $ | 96,374  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Operating income (loss):                               |  |      |         |   |      |   |         |      |  |   |         |  
|Slot and table games                                   |  | $    | (497    | ) |      | $ | 11,771  |      |  | $ | 14,701  |  
|Interior signage                                       |  |      |        |   |      |   | 141     |      |  |   | 3,362   |  
|Systems                                                |  |      | 18,155  |   |      |   | 12,635  |      |  |   | 10,976  |  
|Corporate                                              |  |      | (46,450 | ) |      |   | (19,002 | )    |  |   | (19,356 | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | (28,792 | ) |      | $ | 5,545   |      |  | $ | 9,683   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization:                         |  |      |         |   |      |   |         |      |  |   |         |  
|Slot and table games                                   |  | $    | 2,356   |   |      | $ | 2,655   |      |  | $ | 6,439   |  
|Interior signage                                       |  |      |        |   |      |   | 115     |      |  |   | 526     |  
|Systems                                                |  |      | 4,463   |   |      |   | 265     |      |  |   | 149     |  
|Corporate                                              |  |      | 2,482   |   |      |   | 1,859   |      |  |   | 1,794   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 9,301   |   |      | $ | 4,894   |      |  | $ | 8,908   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total assets:                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Slot and table games                                   |  | $    | 69,588  |   |      | $ | 73,159  |      |  | $ | 64,897  |  
|Interior signage                                       |  |      |        |   |      |   |        |      |  |   | 1,529   |  
|Systems                                                |  |      | 60,308  |   |      |   | 62,123  |      |  |   | 20,995  |  
|Corporate                                              |  |      | 56,290  |   |      |   | 50,564  |      |  |   | 19,896  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 186,186 |   |      | $ | 185,846 |      |  | $ | 107,317 |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Capital expenditures / purchase of leased inventories: |  |      |         |   |      |   |         |      |  |   |         |  
|Slot and table games                                   |  | $    | 517     |   |      | $ | 1,011   |      |  | $ | 5,097   |  
|Interior signage                                       |  |      |        |   |      |   |        |      |  |   | 229     |  
|Systems                                                |  |      | 346     |   |      |   |        |      |  |   | 150     |  
|Corporate                                              |  |      | 1,307   |   |      |   | 1,774   |      |  |   | 413     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 2,170   |   |      | $ | 2,785   |      |  | $ | 5,889   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  



58



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The Company attributes revenue and expenses to a geographic area based on the location from which the
product was shipped or the service was performed. Geographic segment information for the years ended December 31, 2006, 2005 and 2004 consists of:



|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(Amounts in thousands)                                 |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Geographic Operations:                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Revenue:                                               |  |      |         |   |      |   |         |      |  |   |         |  
|North America                                          |  | $    | 50,404  |   |      | $ | 62,626  |      |  | $ | 83,008  |  
|Australia / Asia                                       |  |      | 8,461   |   |      |   | 6,592   |      |  |   | 4,453   |  
|Europe                                                 |  |      | 10,644  |   |      |   | 9,003   |      |  |   | 8,913   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 69,509  |   |      | $ | 78,221  |      |  | $ | 96,374  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Operating income (loss):                               |  |      |         |   |      |   |         |      |  |   |         |  
|North America                                          |  | $    | (25,202 | ) |      | $ | 3,925   |      |  | $ | 9,841   |  
|Australia / Asia                                       |  |      | 467     |   |      |   | 1,932   |      |  |   | (123    | )
|Europe                                                 |  |      | (4,057  | ) |      |   | (312    | )    |  |   | (35     | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | (28,792 | ) |      | $ | 5,545   |      |  | $ | 9,683   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization:                         |  |      |         |   |      |   |         |      |  |   |         |  
|North America                                          |  | $    | 6,647   |   |      | $ | 4,282   |      |  | $ | 8,700   |  
|Australia / Asia                                       |  |      | 332     |   |      |   | 317     |      |  |   | 71      |  
|Europe                                                 |  |      | 2,322   |   |      |   | 295     |      |  |   | 137     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 9,301   |   |      | $ | 4,894   |      |  | $ | 8,908   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Assets:                                                |  |      |         |   |      |   |         |      |  |   |         |  
|North America                                          |  | $    | 136,733 |   |      | $ | 141,570 |      |  | $ | 97,012  |  
|Australia / Asia                                       |  |      | 7,983   |   |      |   | 5,789   |      |  |   | 5,855   |  
|Europe                                                 |  |      | 41,470  |   |      |   | 38,487  |      |  |   | 4,450   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 186,186 |   |      | $ | 185,846 |      |  | $ | 107,317 |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Capital expenditures / purchase of leased inventories: |  |      |         |   |      |   |         |      |  |   |         |  
|North America                                          |  | $    | 1,750   |   |      | $ | 2,379   |      |  | $ | 5,610   |  
|Australia / Asia                                       |  |      | 268     |   |      |   | 142     |      |  |   | 166     |  
|Europe                                                 |  |      | 152     |   |      |   | 264     |      |  |   | 113     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 2,170   |   |      | $ | 2,785   |      |  | $ | 5,889   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  



59



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21. Subsequent Event (Unaudited)

On March 5, 2007, the Company announced that it appointed Roth Capital Partners to provide
advisory services in connection with a potential sale of its table games route and other related assets including the Caribbean Stud® and Texas Holdem Bonus® table games. The Company is in the process of assessing which assets will be sold and determining the related book value of these assets.

QUARTERLY RESULTS OF OPERATIONS (unaudited)



|                                                 |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|(Amounts in thousands, except per share amounts) |  | 1 ST |        |   | 2 ND |   |         | 3 RD |  |   | 4 TH   |  
|Revenues:                                        |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | 16,927 |   |      | $ | 15,254  |      |  | $ | 20,590 |   |  | $ | 16,738  |  
|2005                                             |  | $    | 22,908 |   |      | $ | 19,291  |      |  | $ | 16,837 |   |  | $ | 19,185  |  
|                                                 |  |      |        |  
|Gross profit:                                    |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | 9,564  |   |      | $ | 5,491   |      |  | $ | 13,040 |   |  | $ | 7,255   |  
|2005                                             |  | $    | 12,567 |   |      | $ | 11,574  |      |  | $ | 8,062  |   |  | $ | 9,912   |  
|                                                 |  |      |        |  
|Operating costs and expenses:                    |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | 24,243 |   |      | $ | 27,642  |      |  | $ | 21,731 |   |  | $ | 24,685  |  
|2005                                             |  | $    | 19,647 |   |      | $ | 15,120  |      |  | $ | 16,640 |   |  | $ | 21,269  |  
|                                                 |  |      |        |  
|Operating income (loss):                         |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | (7,316 | ) |      | $ | (12,388 | )    |  | $ | (1,141 | ) |  | $ | (7,947  | )
|2005                                             |  | $    | 3,261  |   |      | $ | 4,171   |      |  | $ | 197    |   |  | $ | (2,084  | )
|                                                 |  |      |        |  
|Net income (loss):                               |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | (8,849 | ) |      | $ | (14,359 | )    |  | $ | (3,251 | ) |  | $ | (10,165 | )
|2005                                             |  | $    | 957    |   |      | $ | 1,887   |      |  | $ | (1,983 | ) |  | $ | (6,844  | )
|                                                 |  |      |        |  
|Weighted average shares outstanding:             |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|Basic                                           |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  |      | 34,387 |   |      |   | 34,439  |      |  |   | 34,590 |   |  |   | 34,689  |  
|2005                                             |  |      | 22,567 |   |      |   | 23,287  |      |  |   | 24,507 |   |  |   | 30,662  |  
|Diluted                                         |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  |      | 34,387 |   |      |   | 34,439  |      |  |   | 34,590 |   |  |   | 34,689  |  
|2005                                             |  |      | 25,491 |   |      |   | 25,988  |      |  |   | 24,507 |   |  |   | 30,662  |  
|                                                 |  |      |        |  
|Basic earnings (loss) per share:                 |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | (0.26  | ) |      | $ | (0.42   | )    |  | $ | (0.09  | ) |  | $ | (0.29   | )
|2005                                             |  | $    | 0.04   |   |      | $ | 0.08    |      |  | $ | (0.08  | ) |  | $ | (0.22   | )
|                                                 |  |      |        |  
|Diluted earnings (loss) per share:               |  |      |        |   |      |   |         |      |  |   |        |   |  |   |         |  
|2006                                             |  | $    | (0.26  | ) |      | $ | (0.42   | )    |  | $ | (0.09  | ) |  | $ | (0.29   | )
|2005                                             |  | $    | 0.04   |   |      | $ | 0.07    |      |  | $ | (0.08  | ) |  | $ | (0.22   | )



60



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|Item 9A. | Controls and Procedures
|-------- | -----------------------

1. Evaluation of
Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) designed to ensure that it is able to collect the information it is required to
disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. These disclosure controls and procedures are designed and maintained by or under the
supervision of the Companys Chief Executive Officer and Chief Financial Officer, as required by the rules of the SEC. The Companys Chief Executive Officer and Chief Financial Officer are responsible for evaluating the effectiveness of
the disclosure controls and procedures. Based on their evaluation of the Companys disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive and Chief Financial Officers believe that the
disclosure controls and procedures were effective in enabling the Company to record, process, summarize and report information required to be included in the Companys periodic SEC filings.

2. Changes in Internal Control Over Financial Reporting. During the year ended December 31, 2006, there were changes made to enhance our
internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys financial reporting. We have taken the following steps to improve our internal control over documentation and
classification of revenues related to non-routine transactions.



| |  |  | Improved the documentation process for non-routine complex transactions
| | - |  | -----------------------------------------------------------------------



| |  |  | Improved the procedures related to non-routine complex transactions to ensure proper classification in the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

3. Managements Report on Internal Control Over Financial Reporting

Management is responsible for evaluating, establishing and maintaining adequate internal control over financial reporting for the Company. The
Companys internal control system was designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair presentation of published consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.

Management recognizes its responsibility for establishing
and maintaining a strong ethical climate so that the Companys affairs are conducted according to the highest standards of personal and corporate conduct.

The Companys internal control over financial reporting includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded properly to allow for the 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 the Board of Directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 consolidated financial statements; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance as to the detection of fraud.
| | - |  | ----------------------------------------------------------

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions,
effectiveness of internal control over financial reporting may vary over time. The Companys processes contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.



61



---

Management has assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006, based on criteria for effective internal control described in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that material
misstatement of the annual or interim financial statements will not be prevented or detected. No material weaknesses have been identified as of December 31, 2006.

Based on its assessments, management concluded that the Companys internal control over financial reporting was effective as of December 31, 2006.

Ernst & Young LLP, the independent registered public accounting firm that audited the 2006 consolidated financial statements included in this
Annual Report on Form 10-K, was engaged to attest to and report on managements assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2006. Its report is included herein.



|Item 9B. | Other Information
|-------- | -----------------

The audited financial statements
included in this Annual Report on Form 10-K contain updated information from that which the Company furnished on March 5, 2007, including an accrual for $225,000 related to a waiver for the Companys credit facility and an accrual for the
settlement of the Companys Class Action lawsuit with a corresponding receivable for the expected insurance proceeds. The accrual for the waiver fee is reflected as an expense in the Companys income statement for the year ended
December 31, 2006. The adjustment for the accrual and corresponding receivable related to the Class Action lawsuit had no impact to our consolidated income statement for the year ended December 31, 2006. This update resulted from the
Companys completion of the credit facility waiver on March 19, 2007 and from the Companys ongoing review of legal matters and the related insurance coverage. Corresponding updates have been made to the unaudited financial
information previously furnished by the Company for its Fourth Quarter and Fiscal Year ended December 31, 2006. These corresponding updates can be found on the Investor Relations page of the Companys website under Press
Releases.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

(a)(1) and
(2) Financial Statements and Schedules

The Financial Statements and Schedules filed as part of this report are listed in the Index
to Consolidated Financial Statements under Item 8.

(3) Exhibits

See the list in paragraph (b) below. Each management contract or compensatory plan or arrangement required to be identified by this item is so
designated in such list.

(b) Exhibits



|        |  |                                                                                                                                                                                                                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Document Description                                                                                                                                                                                                                                                                                      
|3.1     |  | Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Companys Registration Statement on Form S-1
(No. 33-69076).                                                                                                                           
|3.2     |  | Amendment to Amended and Restated Articles of Incorporation incorporated by reference to Exhibit 3.1 to the Companys Current Report on 8-K filed on March 28,
2006.                                                                                                                                      
|3.3     |  | Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Companys Registration Statement on Form S-1
(No. 33-69076).                                                                                                                                              
|3.4     |  | Certificate of Designation, Rights, Preferences, and Rights of Series A Junior Participating Preferred Stock of the Company, incorporated by reference to Exhibit A of Exhibit 3 to
the Registration Statement on Form 8-A filed on August 2, 2000.                                                       
|4.1     |  | Specimen Certificate of common stock of the Company, incorporated by reference to the Companys Registration Statement on Form S-1 (No. 33-69076).                                                                                                                                                        
|4.2     |  | Rights Agreement, dated June 14, 1999, by and between the Company and U.S. Stock Transfer Corporation, as the Rights Agent, incorporated by reference to Exhibit 3 to the Companys
Registration Statement on Form 8-A filed on August 2, 2000.                                                           
|4.3     |  | Form of Warrant, dated October 22, 2003, incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 dated January 9,
2004.                                                                                                                                              
|4.4     |  | Warrant Agreement, dated August 22, 2001, by and among the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.6 to the Companys Registration Statement on
Form S-3 filed on September 14, 2001.                                                                                      
|4.5     |  | Indenture, dated August 22, 2001, by and among the Company, Firstar Bank, N.A. and the Guarantors, incorporated by reference to Exhibit 4.8 of the Companys Registration Statement
on Form S-3 filed on September 14, 2001.                                                                              
|4.6     |  | Guarantee, dated August 22, 2001, by and among the Guarantors named therein, incorporated by reference to Exhibit 4.9 of the Companys Registration Statement on Form S-3
filed on September 14, 2001.                                                                                                    
|4.7     |  | Pledge and Security Agreement, dated August 22, 2001, by and among the Company, Firstar Bank, N.A. and the Guarantors named therein, incorporated by reference to Exhibit 4.10 of the
Companys Registration Statement on Form S-3 filed on September 14, 2001.                                           
|4.8     |  | Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents, dated August 22, 2001, by and among the Company, Stewart Title of Nevada and Firstar Bank, N.A., incorporated
by reference to Exhibit 4.11 of the Companys Registration Statement on Form S-3 filed on September 14, 2001.



63



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Document Description                                                                                                                                                                                                                                                                                                                                                                             
|4.9     |  | Trademark Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.12 of the Companys Registration
Statement on Form S-3 filed on September 14, 2001.                                                                                                                                                               
|4.10    |  | Patent Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.13 of the Companys Registration
Statement on Form S-3 filed on September 14, 2001.                                                                                                                                                                  
|4.11    |  | Copyright Security Agreement, dated August 22, 2001, by and between the Company and Firstar Bank, N.A., incorporated by reference to Exhibit 4.14 of the Companys Registration
Statement on Form S-3 filed on September 14, 2001.                                                                                                                                                               
|10.1    |  | Amended and Restated Financing Agreement, dated as of August 4, 2006, by and among the Company, the subsidiaries of the Company thereto, the Lenders from time to time party thereto, Ableco
Finance LLC, as Collateral Agent, and Ableco Finance LLC, as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q filed on August 9, 2006.
|*10.2   |  | Summary of the Companys 2nd Half 2006 Incentive Compensation Plan, incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on November 9,
2006.                                                                                                                                                                                                                    
|*10.3   |  | Summary of the Companys 2006 Sales Incentive Plan, incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q filed on November 9, 2006.                                                                                                                                                                                                                                    
|*10.4   |  | 2005 Equity Incentive Plan, incorporated by reference to Exhibit 10.17 to the Companys Current Report on Form 8-K filed on June 28, 2005.                                                                                                                                                                                                                                                       
|*10.5   |  | Form of Restricted Stock Bonus Award Grant Notice and Award Agreement under the Companys 2005 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 to the Quarterly Report
on Form 10-Q filed on November 9, 2006.                                                                                                                                                                  
|*10.6   |  | Form of Stock Option Agreement under the Companys 2005 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on November 9, 2006.                                                                                                                                                                                                         
|*10.7   |  | Director Stock Option Plan, as amended, incorporated by reference to Exhibit 10.18 to the Companys Current Report on Form 8-K filed on June 28, 2005.                                                                                                                                                                                                                                           
|*10.8   |  | Form of Stock Option Agreement under the Companys Director Stock Option Plan, incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q filed on November 9,
2006.                                                                                                                                                                                                         
|*10.9   |  | Stock Option Plan, as amended, incorporated by reference to the Companys Definitive Proxy Statement filed on July 19, 2004.                                                                                                                                                                                                                                                                     
|*10.10  |  | Employee Stock Incentive Plan, as amended, incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q filed on August 14, 2003.                                                                                                                                                                                                                                             
|*10.11  |  | New Hire Equity Incentive Plan, incorporated by reference to Exhibit 99.1 of the Companys Current Report Form 8-K filed on February 17, 2005.                                                                                                                                                                                                                                                   
|*10.12  |  | Amended and Restated Employment Agreement, dated January 1, 2005, by and between the Company and Russel H. McMeekin, incorporated by reference to Exhibit 99.2 of the Companys
Current Report Form 8-K filed on February 17, 2005.                                                                                                                                                              
|*10.13  |  | Severance Agreement and Release of All Claims dated June 15, 2006 by and between the Company and Michael A. Sicuro, incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K filed on June 21, 2006.                                                                                                                                                                
|*10.14  |  | Amended and Restated Employment Agreement, dated August 10, 2004, by and between the Company and Robert A. Parente, incorporated by reference to Exhibit 10.35 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.                                                                                                                                               
|*10.15  |  | Employment Agreement, dated July 1, 2005, by and between the Company and Neil Crossan, incorporated by reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2005.                                                                                                                                                                              



64



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|        |  |                                                                                                                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Document Description                                                                                                                                                                                                                                                                                                                              
|*10.16  |  | Employment Agreement, dated June 6, 2005, by and between the Company and Thomas Galanty, incorporated by reference to Exhibit 10.12 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2005.                                                                                                                             
|*10.17  |  | Employment Agreement, dated February 11, 2005, by and between the Company and Heather A. Rollo, incorporated by reference to the Companys Current Report on Form 8-K filed on
February 17, 2005.                                                                                                                                                 
|10.18   |  | Form of Indemnification Agreement by and between the Company and its directors and executive officers, incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the
Companys Registration Statement on Form S-1 (No. 33-69076).                                                                                                           
|10.19   |  | Letter Agreement, dated June 13, 2005, by and between the Company and IGT, incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed on
June 17, 2005.                                                                                                                                                          
|10.20  |  | Product Development and Integration Agreement, dated June 13, 2005, by and among the Company, Shuffle Master, Inc. and IGT, incorporated by reference to Exhibit 99.3 to the
Companys Current Report on Form 8-K/A filed on August 8, 2005.                                                                                                      
|10.21  |  | Binding Memorandum of Understanding, dated June 13, 2005, by and between the Company and IGT, incorporated by reference to Exhibit 99.1 to the Companys Current Report on
Form 8-K/A filed on August 8, 2005.                                                                                                                                    
|10.22  |  | Non-Exclusive Patent License, dated June 13, 2005, by and among the Company, Shuffle Master, Inc., and IGT, incorporated by reference to Exhibit 99.4 to the Companys Current
Report on Form 8-K filed on June 17, 2005.                                                                                                                         
|10.23   |  | Underwriting Agreement, dated November 4, 2005, by and among the Company, CIBC World Markets Corp., as representative of the underwriters named on Schedule I thereto, and the selling
stockholders named in Schedule II thereto, incorporated by reference to Exhibit 1.1 to the Companys Current Report on Form 8-K filed on November 10, 2005.
|10.24   |  | Consulting and Confidentiality Agreement, dated September 19, 2005, by and between the Company and Michael F. Dreitzer, incorporated by reference to Exhibit 10.19 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005.                                                                                              
|21.1    |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                     
|23.1+   |  | Consent of BDO Seidman, LLP.                                                                                                                                                                                                                                                                                                                      
|23.2+   |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                     
|31.1+   |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                               
|31.2+   |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                               
|32.1+   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                
|32.2+   |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                

---

|* | Management contracts and compensation plans.
|- | --------------------------------------------

| | Confidential treatment has been granted for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|+ | Filed herewith.
|- | ---------------



65



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SIGNATURES

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



|                 |  |                                             |  |                                                                
|---------------- |  | ------------------------------------------- |  | ---------------------------------------------------------------
|                 |  | PROGRESSIVE GAMING INTERNATIONALCORPORATION
|                 |  |                                            
|October 22, 2007 |  | By:                                         |  | /s/    HEATHER A.
ROLLO                                        
|                 |  |                                             |  | Heather A. Rollo                                               
|                 |  |                                             |  | Executive Vice President, Chief Financial Officer and Treasurer

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



|                                         |  |                                                                                               |  |                 
|---------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------
|Signature                                |  | Title                                                                                         |  | Date            
|                                         |  |                                                                                              
|* Russel H. McMeekin                     |  | Chief Executive Officer (Principal Executive Officer)                                         |  | October 22, 2007
|                                         |  |                                                                                              
|/s/    HEATHER A.
ROLLO Heather A. Rollo |  | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |  | October 22, 2007
|                                         |  |                                                                                              
|* Peter G. Boynton                       |  | Chairman of the Board                                                                         |  | October 22, 2007
|                                         |  |                                                                                              
|* Major General Paul A. Harvey (Ret)     |  | Director                                                                                      |  | October 22, 2007
|                                         |  |                                                                                              
|* Terrance W. Oliver                     |  | Director                                                                                      |  | October 22, 2007
|                                         |  |                                                                                              
|* Rick
L. Smith                          |  | Director                                                                                      |  | October 22, 2007
|                                         |  |                                                                                              
|* Douglas M. Todoroff                    |  | Director                                                                                      |  | October 22, 2007



|     |  |                                  
|---- |  | ---------------------------------
|     | 
|*By: |  | /s/    HEATHER A.
ROLLO          
|     |  | Heather A. Rollo Attorney-in-fact



66