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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For The Fiscal Year Ended December 31, 2005
 OR
 o
    
    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. 0-30989
 Progressive Gaming International Corporation
  Nevada
    
    88-0218876(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)920 Pilot Road, P.O. Box 98686Las Vegas, Nevada
    
    89119(Address of principal executive offices)
    
    (Zip Code)
 (702) 896-3890
 NONE
  Common Stock, $.10 par value
 o þ
 o þ
 þ o
 o
 o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  CAUTIONARY NOTICE




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PROGRESSIVE GAMING INTERNATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2005
 TABLE OF CONTENTS
 PART I
    
    1Item 1. Business
    
    1Item 1A. Risk Factors
    
    15Item 1B. Unresolved Staff Comments
    
    28Item 2. Properties
    
    28Item 3. Legal Proceedings
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    29PART II
    
    29Item 5. Market for Registrants Common Stock, Related Security Holder Matters and Issuer Purchases of Equity Securities
    
    29Item 6. Selected Financial Data
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    32Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    38Item 8. Consolidated Financial Statements and Supplementary Data
    
    39Item 9A. Controls and Procedures
    
    71Item 9B. Other Information
    
    74PART III
    
    74Item 10. Directors and Executive Officers of the Registrant
    
    74Item 11. Executive Compensation
    
    74Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    74Item 13. Certain Relationships and Related Transactions
    
    74Item 14. Principal Accounting Fees and Services
    
    74PART IV
    
    74Item 15. Exhibits, Financial Statement Schedules
    
    74EXHIBIT 10.11EXHIBIT 10.12EXHIBIT 10.19EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I
 
 Item 1. Business
 Overview
  
    
    Table and Slot Games.We develop, acquire, license and distribute
proprietary branded and non-branded table and slot games. Our
proprietary game content is designed to provide casino patrons an
entertaining and enjoyable gaming experience and thereby generate
greater revenues for customers than other games available in the
market. Our table game products include Caribbean Stud®, Texas HoldEm
Bonus poker (also available with World Series of Poker® branding
through agreement with Harrahs), Two-Card Joker poker, Progressive
Blackjack, Progressive Baccarat, and several other blackjack and poker
derivatives. Our slot game content library includes licensed branded
game offerings based upon popular brands such as Ripleys Believe It
or Not!®, Clue®, Dick Clark® Rock, Roll and Remember, Trivial
Pursuit®, Garfield®, KISS®, the Beach Boys, Celia Cruz, Tito Puente,
Ed McMahon, and Wink Martindale. In addition, we offer other
non-branded games and mystery concepts such as Flip It, Graveyard
Bash, Office Daze, Kazoingo and Liberty Ball.
    
    Management and Progressive Jackpot Software Systems.Under the
umbrella of CasinoLink® Enterprise Edition, we offer a modular,
comprehensive and fully integrated suite of software products that
enables casinos to track the wagers placed by both table and slot
players as well as accurately account for the performance of each
table and slot game. Our customers utilize this data to increase the
productivity of their marketing programs and enhance the security of
each game, which in turn helps increase their operating efficiency and
profitability. With CasinoLink® Enterprise Edition, gaming operators
can also implement their own progressive jackpots and bonusing to
increase the appeal of games through the opportunity to win larger
prizes to provide real-time marketing at each game station.
  Recent Developments
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tm
     Industry Overview
 Global Gaming Industry  Market Size
  Growth of the Gaming Industry
  
    
    Rising social acceptability and popularity of gaming as a leisure
activity.The gaming industry has grown with the rising popularity and
social acceptability of gaming as a leisure activity. According to the
American Gaming Association, more than one in five Americans (21%) has
developed a more favorable view of casino gaming over the past five to
ten years. We believe the proliferation of poker television
programming and poker tournaments has also contributed to the
continued increase in consumer spending on gaming.
    
    Improvement in the breadth and quality of gaming offerings.
Technological advancements have played a critical role in expanding
the breadth and improving the quality of gaming offerings. Advanced
audio and video capabilities have made slot games more appealing by
enabling innovative game content and multi-line, multi-denomination
game play, while secondary events, such as progressive jackpots and
other bonusing features, have increased the overall entertainment
value by providing players the chance to
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win additional prizes. Patron
convenience has also been improved with developments in cashless
technology and the use of ticketing with bill validators. We believe
that effective promotion of patron loyalty programs by gaming
operators has caused patrons to increase their number of annual visits
and in turn, increase their gaming and non-gaming expenditures. With
the potential regulatory approval of central server-based and
downloadable technologies, which will allow players to access a number
of different games and other features from one machine, we believe
there will be additional growth and replacements in the slot machine
sector. Similarly, we believe recent technological breakthroughs and
innovations in table game management, including player, chip and game
tracking capabilities that enable gaming operators to accurately
analyze and reward patrons, may lead to similar increased player
appeal for table games.
    
    Legalization of gaming in several U.S. States.Since the beginning of
2004, the legislatures or gaming authorities of several U.S. states,
including those in Pennsylvania, Florida, Oklahoma and Maine, have
permitted for legalization or expansion of gaming activities within
their respective states. Other state legislatures, such as that of
Massachusetts, are considering gaming legislation to generate
additional tax revenue and stimulate economic development.
    
    Proliferation of Native American casino gaming.Native American gaming
represents the fastest growing segment of the North American gaming
industry. Gaming revenues from Native American casinos have increased
from $12.7 billion in 2001 to $19.0 billion in 2004, representing a
14.2% compound annual growth rate. As of 2005, there were 581
federally recognized Native American tribes, many of which operate
gaming facilities, and 161 Native American tribes who have applied for
federal recognition.
    
    International expansion.Internationally, we anticipate further growth
and expansion in regions such as Macau, Russia, the United Kingdom and
the Baltic states. We expect Macau to become the largest gaming
market, by revenue, in the world, and growth is expected to continue
under its efforts to redevelop the island of Cotai into a Las
Vegas-like gaming and entertainment destination market.
 Products
Table and Slot Games Segment
  Table Games.
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Slot Games.
      Systems Segment
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Table Management Modules. ®
  
    
    Table Manageris the base product upon which the Chip Manager and
Card Manager product offerings are built. Table Manager employs
magnetic player identification card readers and touch-screen computer
displays at each gaming table or at the pit stand. Table Manager
allows dealers to input a players time and average bets at the tables
for tracking purposes after the player identification card is scanned
by the magnetic card reader.
    
    Chip Managercan be utilized in conjunction with Table Manager for
an even more detailed view of table play. With Chip Manager, manual
inputs to track wagers are eliminated by utilizing sensors located at
each player position at the table that automatically scan RFID casino
chips, which are embedded with microchips that transmit encrypted
radio frequency signals. The use of RFID casino chips enables casinos
to track the amount wagered in real time, detect counterfeit casino
chips and minimize cheating. This real-time data enables our customers
to increase casino patron loyalty by more accurately assigning player
ratings and more effectively directing complimentary benefits. It also
enables casinos to detect counterfeit chips and allows them to
redirect supervisor time from administration to customer-relationship
and other tasks. In addition, through our agreement with Magellan, we
now offer our customers next-generation 13.56-megahertz high-frequency
technology that utilizes thin flat antennas and according to our
internal tests significantly increases the speed of chip recognition.
For example, our internal testing shows that Chip Manager is now
capable of reading 100 RFID casino chips in approximately 0.2 seconds.
We also believe this technology will support the development of
further RFID products suitable for expanding customer service and
player tracking.
    
    Card Managerutilizes Image Based Recognition (IBR) for reading
playing cards as they are dealt and which adds yet another level of
data analysis by allowing for the monitoring of player betting
patterns and the recording of game results. This level of the ITS
product is provided by Shuffle Master. Card Manager enables gaming
operators to better understand the skill level of their patrons, helps
minimize dealer mistakes and facilitates detection of card-counting
and cheating.
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Slot Management Modules. ® ®
 
    
    CasinoLink®Player Tracking:CasinoLink® Player Tracking is composed
of micro controller-based printed circuit boards installed within slot
machines, as well as card readers, displays and keypads that provide
casinos with the ability to track player gaming activity and monitor
employee access to slot machines.
    
    CasinoLink®Slot Management:Our CasinoLink® Slot Management module
provides gaming operators with robust, highly scalable applications
for accounting and auditing, administration and security and
marketing. This module is comprised of firmware that provides access
to player activity data gathered by the CasinoLink® Player Tracking
module. This system also provides access to slot machine activity,
including security events, revenue, expenses and other financial
reporting metrics. This module is well suited to fulfill the
requirements of large, geographically dispersed gaming operators who
require multi-site capability.
 ® ® ®
 Server-Based Gaming Modules. ® ®
 
    
    CasinoLink®Game Station:The CasinoLink® Game Station module will
allow patrons to enjoy a variety of software-based casino games,
ranging from slot games to Keno, while sitting at the same gaming
machine. To enhance profitability, gaming operators will be able to
select the game mix and denominations across the casino floor on a
real-time basis.
    
    CasinoLink®Sports Stations PrimeLine and Rapid Bet Live:The
PrimeLine and Rapid Bet Live modules will allow patrons to engage in
sports wagering activities, utilizing thin client technology, directly
from a gaming machine or a remote device, including traditional game
outcome wagers, bet-by-event or play wagering, and simulated sports
betting. On March 4, 2006, Rapid Bet Live  commenced a 30 day field
trial at the Palms Hotel and Casino in Las Vegas.
 ®
 CasinoLink ® Jackpot Station (CJS) Module.
 
    
    Progressive Jackpot.To create a jackpot, our CJS system monitors play
on one or more slot machines or table games and accumulates, in
real-time, a predetermined percentage of each bet. This jackpot
increases continuously until won by a player and then can be reset
automatically to accumulate subsequent jackpots.
    
    Bonusing.Bonusing technology enables the design and delivery of
bonuses and other promotions directly to players at the point and time
of play, right at their favorite game. A bonusing system provides a
cash bonus, which can be random or preset separate
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from the normal
payout for a winning combination, and can be structured to award a
player just for playing, with no winning reel combination or minimum
coin-in required. While bonus amounts are typically lower than the top
progressive payout for the game, the frequency is higher, providing a
valuable marketing tool for stimulating, extending and increasing the
rate of play.
 WagerLink Cashless Module. ® ®
 Other Products
  ® ® ® ®
   Growth Strategies
  
    
    Increase focus on our table management modules.We believe our table
management modules, with state-of-the-art RFID technology licensed
through Magellan, bring to the table games sector the benefits of
accurate and automated data collection and player tracking previously
seen only in the slot games sector. We believe the enhanced
performance of chip tracking, coupled with decreasing costs to
manufacture RFID-enabled chips, will accelerate the adoption of our
table management products across the approximate 49,300 table games
worldwide. To increase their marketability, we intend to also market
our table management modules as a part of ITS. As a part of the ITS
alliance, IGT will, among other things, also be responsible for
selling and distributing our portion of the ITS suite of products.
    
    Strengthen our leading proprietary table game franchise.We intend to
leverage our Caribbean Stud® franchise by introducing newer versions
of this game to maintain and grow its market share. For example, in
2005 we introduced Caribbean Stud®  Diamond Edition, which
incorporates our patented progressive betting feature. Additionally,
we believe the Texas HoldEm
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Bonus poker game will be our next
significant table game franchise.
    
    Market our systems products under the CasinoLink® Enterprise Edition
umbrella.Although our systems are capable of operating independently
of one another, we believe utilizing multiple modules of CasinoLink®
Enterprise Edition together will enhance the systems functionality.
For example, CJS enables our customers to implement their own
multi-site, multi-level progressive jackpot systems in a
cost-effective manner. When combined with our table and slot
management modules, CJS can create progressive jackpots across the
entire casino floor. We intend to highlight such value propositions in
marketing the CasinoLink® Enterprise Edition products.
    
    Complete the development and introduce our server-based
wagering
modules.We are currently developing a suite of server-based gaming
modules to support what we expect will be an eventual shift towards
server-based gaming. Upon completion and approval, we will market Game
Station and the CasinoLink® Sports Station modules of PrimeLine and
Rapid Bet Live as part of CasinoLink® Enterprise Edition. We intend
to utilize recently acquired VirtGame technologies to expedite our
central server-based development efforts. We showcased the
capabilities of server-based gaming at the Global Gaming Expo in
September 2005, with demonstrations of our approximately 35 slot games
for use under the Game Station architecture. We expect that the
adoption of wireless gaming in various jurisdictions will further
accelerate the adoption of server-based wagering, primarily for
sports and poker applications.
    
    Continue expanding our strategic alliances.Our strategic alliances
have allowed us to access key intellectual property and technology
assets in developing our products. We obtained exclusive rights to
next-generation RFID technology through our Magellan license
agreement. We also obtained access to leading gaming machine hardware
platforms through our alliances with IGT and Bally Gaming. We intend
to continue entering into strategic alliances in our efforts to
provide leading technology and content products to our customers.
 Segment and Geographic Information
  Competition
  
    
    the continued popularity of our existing products and our ability to develop and introduce new products that gain
market acceptance and satisfy consumer preferences;
    
    our ability to maintain existing regulatory approvals and obtain future approvals in order to conduct our business; and
    
    our ability to protect, maintain and enforce our existing intellectual property rights and to adequately secure and
enforce such rights for new products.
  Table and Slot Games Competition
 Table Games. ® ® ® ® ®
 Slot Games.
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Casino Management Systems Competition
 ®
 ® ®
 Manufacturing and Assembly Operations
     Marketing and Distribution
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Research and Development
 ®
      Employees
  Government Regulation
 Overview
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Gaming Devices and Equipment
  Associated Equipment
  Regulation of Stockholders
  Regulation and Licensing  Nevada
 Gaming.
  
    
    preventing any involvement, direct or indirect, of any unsavory or unsuitable persons in gaming
or the manufacture or distribution of gaming devices at any time or in any capacity;
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
    
    strictly regulating all persons, locations, practices and activities related to the operation of
licensed gaming establishments and the manufacturing or distribution of gaming devices and
equipment;
    
    establishing and maintaining responsible accounting practices and procedures;
    
    maintaining effective controls over the financial practices of licensees (including requirements
covering minimum procedures for internal fiscal controls and safeguarding assets and revenues,
reliable recordkeeping and periodic reports to be filed with the Nevada Gaming Authorities);
    
    preventing cheating and fraudulent practices; and
    
    providing and monitoring sources of state and local revenue based on taxation and licensing fees.
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Regulation of Security Holders .
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Other Jurisdictions
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Federal Regulation
  Application of Future or Additional Regulatory Requirements
  Available Information
  
 Item 1A. Risk Factors
 You should consider carefully the following risk factors, together with all of the other
information included in this Annual Report on Form 10-K. Each of these risk factors could adversely
affect our business, operating results and financial condition, as well as adversely affect the
value of an investment in our common stock.
 Risks Relating to Our Business
 If we are unable to develop or introduce innovative products and technologies that gain market
acceptance and satisfy consumer preferences, our current and future revenues will be adversely
affected.
   If we are unable to rapidly develop new technologies, our products and technologies may become
obsolete or noncompetitive.
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If our current or proposed products or technologies do not receive regulatory approval, our revenue
and business prospects will be adversely affected.
   If our products or technologies currently in development do not achieve commercial success, our
revenue and business prospects will be adversely affected.
  We may not be successful in forming or maintaining strategic alliances with other companies, which
could negatively affect our product offerings and sales.
  If any conflicts arise between us and any of our alliance partners, our reputation, revenues and
cash position could be significantly harmed.
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
    
    unwillingness on the part of an alliance partner to pay us license fees or
royalties we believe are due to us under the strategic alliance;
    
    uncertainty regarding ownership of intellectual property rights arising from
our strategic alliance activities, which could result in litigation, permit
third parties to use certain of our intellectual property or prevent us from
utilizing such intellectual property rights and from entering into additional
strategic alliances;
    
    unwillingness on the part of an alliance partner to keep us informed regarding
the progress of its development and commercialization activities, or to permit
public disclosure of the results of those activities;
    
    slowing or cessation of an alliance partners development or commercialization
efforts with respect to our products or technologies;
    
    delays in the introduction or commercialization of products or technologies; or
    
    termination or non-renewal of the strategic alliance.
   If our remaining license agreements with Hasbro, Inc. and other content providers are terminated or
are not renewed, or if we breach our obligations under any license agreement, our revenues could be
reduced.
 ® ® ® ®
 ® ®
  Our failure to protect, maintain and enforce our existing intellectual property or secure, maintain
and enforce such rights for new proprietary technology could adversely affect our future growth and
success.
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® ® ® ®
 If we are unable to effectively promote our trademarks, our revenues and results of operations may
be materially adversely affected.
  Our competitors may develop non-infringing products or technologies that adversely affect our
future growth and revenues.
  We may incur significant litigation expenses protecting our intellectual property or defending our
use of intellectual property, which may have a material adverse effect on our cash flow.
  
    
    be expensive and time consuming to defend resulting in the diversion of managements attention and resources;
    
    cause one or more of our patents to be ruled or rendered unenforceable or invalid, or require us to cease making,
licensing or using products or systems that incorporate the challenged intellectual property; or
    
    require us to spend significant time and money to redesign, reengineer or rebrand our products or systems if feasible.
  If we are found to be infringing on a third-partys intellectual property rights, we may be forced
to discontinue certain products or technologies, pay damages or obtain a license to use the
intellectual property, any of which may adversely affect our future growth and revenues.
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Some of our products may contain open source software which may be subject to restrictive open
source licenses requiring us to make our source code available to third parties and potentially
granting third parties certain rights to the software.
  We depend upon our ability to obtain licenses for popular intellectual properties and our failure
to secure such licenses with acceptable terms could adversely affect our future growth and success.
 ® ® ® ® ®
 The Public Company Accounting Oversight Board, or PCAOB, is conducting an inspection of our
external auditors BDO Seidman LLP and their audit of our financial statements as of and for the
year ended December 31, 2004.
   We operate in a highly competitive market and may be unable to successfully compete which may harm
our operating results.
   
    
    the relative popularity of our existing products and our ability to develop and introduce appealing new products;
    
    our ability to obtain adequate space and favorable placement on casino gaming floors;
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
    
    our ability to maintain existing regulatory approvals and to obtain further regulatory approvals as needed; and
    
    our ability to enforce our existing intellectual property rights and to adequately secure, maintain and protect
rights for new products.
 Our cash flow from operations and available credit may not be sufficient to meet our capital
requirements and, as a result, we could be dependent upon future financing, which may not be
available.
    If gaming operators cancel the placement of our games or do not agree to recurring revenue
arrangements, our revenues and growth could be adversely affected.
    The gaming industry is highly regulated, and we must adhere to various regulations and maintain our
licenses to continue our operations.
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Future authorizations or regulatory approvals may not be granted in a timely manner or at all which
would adversely affect our results of operations.
  Enforcement of remedies or contracts against Native American tribes could be difficult.
  Our business is closely tied to the casino industry and factors that negatively impact the casino
industry may also negatively affect our ability to generate revenues.
   
    
    general economic conditions;
    
    levels of disposable income of casino patrons;
    
    downturn or loss in popularity of the gaming industry in general, and table and slot games in particular;
    
    the relative popularity of entertainment alternatives to casino gaming;
    
    the growth and number of legalized gaming jurisdictions;
    
    local conditions in key gaming markets, including seasonal and weather-related factors;
    
    increased transportation costs;
    
    acts of terrorism and anti-terrorism efforts;
    
    changes or proposed changes to tax laws;
    
    increases in gaming taxes or fees;
    
    legal and regulatory issues affecting the development, operation and licensing of casinos;
    
    the availability and cost of capital to construct, expand or renovate new and existing casinos;
    
    the level of new casino construction and renovation schedules of existing casinos; and
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
    
    competitive conditions in the gaming industry and in particular gaming markets, including the effect of
such conditions on the pricing of our games and products.
  The gaming industry is sensitive to declines in the public acceptance of gaming. Public opinion can
negatively affect the gaming industry and our future performance.
  Economic, political and other risks associated with our international sales and operations could
adversely affect our operating results.
  
    
    changes in foreign currency exchange rates;
    
    exchange controls;
    
    changes in regulatory requirements;
    
    costs to comply with applicable laws;
    
    changes in a specific countrys or regions political or economic conditions;
    
    tariffs and other trade protection measures;
    
    import or export licensing requirements;
    
    potentially negative consequences from changes in tax laws;
    
    different regimes controlling the protection of our intellectual property;
    
    difficulty in staffing and managing widespread operations;
    
    changing labor regulations;
    
    requirements relating to withholding taxes on remittances and other payments by subsidiaries;
    
    restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;
    
    restrictions on our ability to repatriate dividends from our subsidiaries; and
    
    violations under the Foreign Corrupt Practices Act.
 Holders of our common stock are subject to the requirements of the gaming laws of all jurisdictions
in which we are licensed.
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We may not realize the benefits we expect from the acquisitions of VirtGame and EndX.
  
    
    integrating the technologies of the companies;
    
    entering markets in which we have limited or no prior experience;
    
    obtaining regulatory approval for the central server-based technology;
    
    successfully completing the development of VirtGame and EndX technologies;
    
    developing commercial products based on those technologies;
    
    retaining and assimilating the key personnel of each company;
    
    attracting additional customers for products based on VirtGame or EndX technologies;
    
    implementing and maintaining uniform standards, controls, processes, procedures, policies and information systems; and
    
    managing expenses of any undisclosed or potential legal liability of VirtGame or EndX.
  Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder
value and strain our resources.
  
    
    difficulties in integrating operations, technologies, services, accounting and personnel;
    
    difficulties in supporting and transitioning customers of our acquired companies to our
technology platforms and business processes;
    
    diversion of financial and management resources from existing operations;
    
    difficulties in obtaining regulatory approval for technologies and products of acquired companies;
    
    potential loss of key employees;
    
    if we finance acquisitions by issuing convertible debt or equity securities, our existing
stockholders may be diluted, which dilution could adversely affect the market price of our stock;
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
    
    inability to generate sufficient revenues to offset acquisition or investment costs; and
    
    potential write-offs of acquired assets.
  Our business will be seriously jeopardized if we are unable to attract and retain key employees.
  If our products or technologies contain defects, our reputation could be harmed and our results of
operations adversely affected.
  As our business is subject to quarterly fluctuation, our operating results and stock price could be
volatile, particularly on a quarterly basis.
  We have substantial debt and debt service requirements, which could have an adverse impact on our
business and the value of our common stock.
  
    
    it may be difficult for us to make payments on our outstanding indebtedness;
    
    a significant portion of our cash flows from operations must be dedicated
to debt service and will not be available for other purposes that would
otherwise be operationally value-enhancing uses of such funds;
    
    our ability to borrow additional amounts for working capital, capital
expenditures, potential acquisition opportunities and other purposes may be
limited;
    
    we may be limited in our ability to withstand competitive pressures and may
have reduced financial flexibility in responding to changing business,
regulatory and economic conditions in the gaming industry;
    
    we may be at a competitive disadvantage because we may be more highly
leveraged than our competitors and, as a result, more restricted in our
ability to invest in our growth and expansion;
    
    it may cause us to fail to comply with applicable debt covenants and could
result in an event of default that could result in all of our indebtedness
being immediately due and payable; and
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
    
    if new debt is added to our and our subsidiaries current debt levels, the
related risks that we and they now face could intensify.
  We may be forced to reduce or delay growth initiatives and capital expenditures, obtain additional
equity capital or restructure our debt if we are unable to generate sufficient cash flow to meet
our debt service requirements.
    Our lenders have imposed numerous debt covenants that include financial and operating restrictions
that may adversely affect how we conduct our business and potentially reduce our revenues and
affect the value of our common stock.
  
    
    incur more debt;
    
    pay dividends, redeem or repurchase our stock or make other distributions;
    
    make acquisitions or investments;
    
    use assets as security in other transactions;
    
    enter into transactions with affiliates;
    
    merge or consolidate with others;
    
    dispose of assets or use asset sale proceeds;
    
    create liens on our assets; and
    
    extend credit.
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We have been named as a defendant in litigation that could result in substantial costs and divert
managements attention and resources.
  Risks Relating to Our Securities
 The share price of our common stock may be volatile and could decline substantially.
  
    
    periodic variations in the actual or anticipated financial results of our business or of our competitors;
    
    downward revisions in securities analysts estimates of our future operating results or of the future
operating results of our competitors;
    
    material announcements by us or our competitors;
    
    quarterly fluctuations in non-recurring revenues from cash-based licensing transactions;
    
    public sales of a substantial number of shares of our common stock; and
    
    adverse changes in general market conditions or economic trends or in
conditions or trends in the markets in which we operate.
 If our quarterly results are below the expectations of securities market analysts and investors,
the price of our common stock may decline.
  
    
    changes in market conditions that can affect the demand for the products we sell;
    
    quarterly fluctuations in non-recurring revenues from cash-based licensing transactions;
    
    general economic conditions that affect the availability of disposable income among consumers; and
    
    the actions of our competitors.
  Future sales of our common stock may depress our stock price.
  - 26 -




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##### Table of Contents



If a recent action of an employee of one of our underwriters is held to be gun jumping in
violation of the Securities Act of 1933 or to constitute a prospectus that does not meet the
requirements of the Securities Act, we could be required to repurchase the securities sold in our
recent common stock offering.
  We have the ability to issue additional equity securities, which would lead to dilution of our
issued and outstanding common stock.
  We do not intend to pay cash dividends. As a result, stockholders will benefit from an investment
in our common stock only if it appreciates in value.
  Anti-takeover provisions in our organizational documents, our stockholder rights plan and Nevada
law could make a third-party acquisition of us difficult and therefore could affect the price
investors may be willing to pay for our common stock.
  - 27 -




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##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  AreaLocation/Activity
    
    (Sq Ft.)Las Vegas, NV  Corporate Administration
    
    
    86,515Las Vegas, NV  Operations
    
    
    30,594Houten, The Netherlands  Service and Administration
    
    
    10,118Egg Harbor, NJ  Service and Sales
    
    
    7,604Biloxi, MS  Service and Sales
    
    
    6,300Carlsbad, CA  R&D
    
    
    6,268Lane Cove, Australia  Service and Sales
    
    
    4,617Sparks, NV   Service and Sales
    
    
    4,608Oldham, UK  Service and Sales
    
    
    4,500Calgary, Canada  Service and Sales
    
    
    4,202Mokena, IL  Service and Sales
    
    
    4,200Kansas City, MO  Service and Sales
    
    
    3,600Tallinn, Estonia  Service and Sales
    
    
    1,593Oxford, UK  Service and Sales
    
    
    1,200Macau  Service and Sales
    
    
    400176,319
   
 Item 3. Legal Proceedings
      - 28 -




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Stock and Related Stockholder Matters and Issuer
Repurchases of Equity Securities
 Unregistered Sales of Equity Securities and Use of Proceeds
      High
    
    Low2005First Quarter
    
    $
    13.90
    
    
    $
    9.00Second Quarter
    
    
    16.21
    
    
    
    10.75Third Quarter
    
    
    15.43
    
    
    
    11.42Fourth Quarter
    
    
    14.10
    
    
    
    8.872004First Quarter
    
    $
    6.25
    
    
    $
    4.08Second Quarter
    
    
    5.09
    
    
    
    4.01Third Quarter
    
    
    5.80
    
    
    
    4.25Fourth Quarter
    
    
    10.63
    
    
    
    5.56
   - 29 -




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##### Table of Contents



Number of
    
    
    Weighted-
    
    
    Number of securitiessecurities to be
    
    
    average
    
    
    remaining available forissued upon
    
    
    exercise price of
    
    
    future issuance underexercise of
    
    
    outstanding
    
    
    equity compensationoutstanding
    
    
    options,
    
    
    plans (excludingoptions, warrants
    
    
    warrants
    
    
    securities reflected inand rights
    
    
    and rights
    
    
    column (a)(a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by shareholders
    
    
    3,056,121
    
    
    $
    6.44
    
    
    
    831,013Equity compensation plans not approved by shareholders
    
    
    347,500
    (1)
    
    $
    6.76
    
    
    
    Total (2)
    
    
    3,403,621
    
    
    $
    6.48
    
    
    
    831,013
 
 (1)
    
    Amount represents warrants to purchase 347,500 shares of our common stock issued to various licensors which granted us rights to intellectual property.(2)
    
    Amounts exclude 193,913 options and 293,020 warrants assumed in the acquisition of VirtGame, which have a weighted average exercise price of $15.11. - 30 -




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##### Table of Contents



Item 6. Selected Financial Data
  amounts in thousands except per share amounts
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Operations Data:Total revenue
    
    $
    78,221
    
    
    $
    96,374
    
    
    $
    91,803
    
    
    $
    109,371
    
    
    $
    104,740Cost of revenue
    
    
    36,106
    
    
    
    42,882
    
    
    
    46,849
    
    
    
    58,591
    
    
    
    47,932Gross profit
    
    
    42,115
    
    
    
    53,492
    
    
    
    44,954
    
    
    
    50,780
    
    
    
    56,808Selling, general and administrative expenses
    
    
    41,606
    
    
    
    43,809
    
    
    
    55,422
    
    
    
    69,900
    
    
    
    50,781Net gain on disposition of non-core assets
    
    
    (2,536
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of core intellectual property
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    5,545
    
    
    
    9,683
    
    
    
    (10,468
    )
    
    
    (19,120
    )
    
    
    6,027Interest expense
    
    
    (8,895
    )
    
    
    (9,684
    )
    
    
    (14,324
    )
    
    
    (15,689
    )
    
    
    (11,720
    )Loss on early retirement of debt
    
    
    (2,993
    )
    
    
    
    
    
    
    (9,524
    )
    
    
    
    
    
    
    (3,135
    )Other income, net
    
    
    360
    
    
    
    195
    
    
    
    87
    
    
    
    375
    
    
    
    1,620Income (loss) from continuing operations before income taxes
    
    
    (5,983
    )
    
    
    194
    
    
    
    (34,229
    )
    
    
    (34,434
    )
    
    
    (7,208
    )Income tax (provision) benefit
    
    
    
    
    
    
    65
    
    
    
    13
    
    
    
    (1,480
    )
    
    
    (847
    )Income (loss) from continuing operations
    
    
    (5,983
    )
    
    
    259
    
    
    
    (34,216
    )
    
    
    (35,914
    )
    
    
    (8,055
    )Loss from discontinued operations (net of taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,989
    )
    
    
    (1,645
    )Net income (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )
    
    $
    (37,903
    )
    
    $
    (9,700
    )Weighted average common shares outstanding:Basic
    
    
    25,124
    
    
    
    21,884
    
    
    
    14,689
    
    
    
    12,843
    
    
    
    11,750Diluted
    
    
    25,124
    
    
    
    22,359
    
    
    
    14,689
    
    
    
    12,843
    
    
    
    11,750Basic and diluted income (loss) per share:Income (loss) from continuing operations
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )
    
    $
    (2.80
    )
    
    $
    (0.69
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )
    
    
    (0.14
    )Net income (loss)
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )
    
    $
    (2.95
    )
    
    $
    (0.83
    )Balance Sheet Data:Total assets
    
    $
    185,846
    
    
    $
    107,317
    
    
    $
    102,282
    
    
    $
    135,103
    
    
    $
    168,697Total debt /
obligations / deferred tax liabilities
    
    $
    59,214
    
    
    $
    73,802
    
    
    $
    76,013
    
    
    $
    117,077
    
    
    $
    118,092Stockholders equity (deficit)
    
    $
    104,555
    
    
    $
    10,241
    
    
    $
    7,389
    
    
    $
    (6,912
    )
    
    $
    28,654
  - 31 -




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##### Table of Contents



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 .
 Overview
  
    
    Slot and Table Games.Our table and slot games segment develops, acquires, licenses and
distributes proprietary and non-proprietary branded and non-branded table and slot games.
We lease our table and slot games and license our content to customers in exchange for
recurring revenue consisting of (i) fixed periodic fees, (ii) 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) of the gaming devices for our more popular titles or (iii)
license fees for any proprietary slot game content provided to third parties for use on
their game hardware. We also receive one-time license fees for our table and slot game
content. During 2003, we shifted our business model from focusing on table and slot
hardware assembly operations to third party manufacturers and distributors. In connection
with this transition, we incurred approximately $2.5 million of other expenses related to
the write-down of obsolete slot machines and related hardware, as well as $0.6 million in
related severance expense. This shift allowed us to focus our human and capital resources
on developing and distributing game content, a business with higher margins and lower
capital expenditures.
    
    Systems.Our systems segment consists of the license of our management and progressive
jackpot systems. These systems enable casinos to track the wagers placed by both table and
slot players as well as accurately account for the performance of each table and slot game.
These systems also enable casinos to implement their own progressive jackpots and bonusing.
Systems revenues are primarily comprised of software, hardware and support services, which
comprise of both upfront payments as well as recurring fees based on the total number of
gaming devices under management.
  ®
  Acquisitions / Divestitures
 ® ® ® ®
     Financing and Other Matters
 Debt Retirement.
 - 32 -




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##### Table of Contents



Equity Offering.
 General Information
  Results of Operations
 Revenues and Cost of Revenues
 Year Ended December 31,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Revenues:Slot and table games
    
    $
    33,670
    
    
    $
    40,560
    
    
    $
    40,932
    
    
    
    (17.0
    )%
    
    
    (0.09
    )%Interior signage
    
    
    5,252
    
    
    
    20,014
    
    
    
    36,919
    (a)
    
    
    (73.8
    )%
    
    
    (45.8
    )%Systems
    
    
    39,299
    
    
    
    35,800
    
    
    
    13,952
    
    
    
    9.8
    %
    
    
    156.6
    %Total revenues
    
    $
    78,221
    
    
    $
    96,374
    
    
    $
    91,803
    
    
    
    (18.8
    )%
    
    
    5.0
    %Cost of revenues:Slot and table games
    
    $
    12,677
    
    
    $
    11,999
    
    
    $
    13,999
    
    
    
    5.7
    %
    
    
    (14.3
    )%Interior signage
    
    
    3,832
    
    
    
    12,335
    
    
    
    25,736
    (a)
    
    
    (68.9
    )%
    
    
    (52.1
    )%Systems
    
    
    19,597
    
    
    
    18,548
    
    
    
    7,114
    
    
    
    5.7
    %
    
    
    160.7
    %Total cost of revenues
    
    $
    36,106
    
    
    $
    42,882
    
    
    $
    46,849
    
    
    
    (15.8
    )%
    
    
    (8.5
    )%Gross profit
    
    $
    42,115
    
    
    $
    53,492
    
    
    $
    44,954
    
    
    
    (21.3
    )%
    
    
    19.0
    %
 
 (a)
    
    2003 Interior signage category includes electronics sales, which are included with Systems category
in 2004 and 2005. Slot and table games.
 ® ® ® ®
 ® ®
 ® ®
  Interior signage.
 - 33 -




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##### Table of Contents



Systems. ®
 Gross profit.
 Condensed Statement of Operations
 Year Ended December 31,
    
    
    Percentage Change2005
    
    
    2004
    
    
    2003
    
    
    05 vs. 04
    
    
    04 vs. 03Total revenue
    
    $
    78,221
    
    
    $
    96,374
    
    
    $
    91,803
    
    
    
    (18.8
    )%
    
    
    5.0
    %Cost of revenue
    
    
    36,106
    
    
    
    42,882
    
    
    
    46,849
    
    
    
    (15.8
    )%
    
    
    (8.5
    )%Gross profit
    
    
    42,115
    
    
    
    53,492
    
    
    
    44,954
    
    
    
    (21.3
    )%
    
    
    (19.0
    )%SG&A expense
    
    $
    28,652
    
    
    $
    27,595
    
    
    $
    30,281
    
    
    
    3.8
    %
    
    
    (8.9
    )%Slot rent expense
    
    
    
    
    
    
    1,204
    
    
    
    5,668
    
    
    
    (100.0
    )%
    
    
    (78.8
    )%R&D expense
    
    
    8,060
    
    
    
    6,102
    
    
    
    5,159
    
    
    
    32.1
    %
    
    
    18.3
    %Depreciation and amortization
    
    
    4,894
    
    
    
    8,908
    
    
    
    14,314
    
    
    
    (45.1
    )%
    
    
    (37.8
    )%Net gain on disposal of non-core assets
    
    
    (2,536
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of core intellectual property
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    $
    5,545
    
    
    $
    9,683
    
    
    $
    (10,468
    )
    
    
    (42.7
    %
    
    
    192.5
    %Interest expense, net
    
    
    (8,895
    )
    
    
    (9,684
    )
    
    
    (14,324
    )
    
    
    (8.1
    )%
    
    
    32.4
    %Loss on early retirement of debt
    
    
    (2,993
    )
    
    
    
    
    
    
    (9,524
    )
    
    
    
    
    
    
    Other income, net
    
    
    360
    
    
    
    195
    
    
    
    87
    
    
    
    84.6
    %
    
    
    124.1
    %Income (loss) before income tax benefit
    
    
    (5,983
    )
    
    
    194
    
    
    
    (34,229
    )
    
    
    (3,184.0
    )%
    
    
    100.6
    %Income tax benefit
    
    
    
    
    
    
    65
    
    
    
    13
    
    
    
    (100.0
    )%
    
    
    400.0
    %Net income (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )
    
    
    (2,410.0
    )%
    
    
    100.8
    %Net income (loss) per share
    
    
    (0.24
    )
    
    
    0.01
    
    
    
    (2.33
    )
    
    
    (2,481.4
    )%
    
    
    100.4
    %
 Selling, general and administrative expense (SG&A
 Slot rent expense.
 Research and development expense (R&D). ®
 Depreciation and amortization.
 Net gain on disposition of non-core assets.
 - 34 -




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##### Table of Contents



Gain on sale of core intellectual property.
 Interest expense.
 Loss on early retirement of debt
 Other income.
 Income taxes.
 Earnings (loss) per share.
 Liquidity and Capital Resources
    (Amounts in millions)Net loss
    
    $
    (6.0
    )Non-cash items
    
    
    6.6Gain on disposition of non-core assets
    
    
    (2.5
    )Loss on early retirement of debt
    
    
    3.0Other changes in assets and liabilities
    
    
    (22.4
    )Net cash used in operations
    
    $
    (21.3
    )
     Less than
    
    1  3
    
    4  5
    
    After 5(Amount in thousands)
    
    Total
    
    1 year
    
    Years
    
    Years
    
    YearsContractual ObligationsLong-term debt
    
    $
    45,284
    
    
    $
    284
    
    
    $
    45,000
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    28
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    15,586
    
    
    
    5,344
    
    
    
    10,242
    
    
    
    
    
    
    
    Operating leases
    
    
    9,777
    
    
    
    2,714
    
    
    
    4,637
    
    
    
    2,251
    
    
    
    175License / Development
    
    
    21,861
    
    
    
    7,834
    
    
    
    9,970
    
    
    
    1,972
    
    
    
    2,085Employment agreements
    
    
    413
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    92,949
    
    
    $
    16,617
    
    
    $
    69,849
    
    
    $
    4,223
    
    
    $
    2,260
 - 35 -




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##### Table of Contents



Employment Agreements
  Purchase Commitments
   Off-Balance Sheet Arrangements
  Capital Expenditures and Other
   Share Repurchase Plan
  Critical Accounting Policies
   Revenue Recognition
  Slot and Table Games.
 - 36 -




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##### Table of Contents



Systems.
 Postcontract Customer Support.
 License Arrangements .
 Interior Signage.
 Inventory and Obsolescence
  Long-Lived Asset Impairment
   Recently Issued Accounting Standards
  Share-Based Payment,
  - 37 -




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
 Foreign Currency Risk
   Interest Rate Risk
   - 38 -




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##### Table of Contents



Item 8. Consolidated Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2005, 2004, and 2003
 Report of Independent Registered Public Accounting Firm (BDO Seidman LLP)Consolidated Balance Sheets as of December 31, 2005 and 2004Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2005, 2004 and 2003Consolidated Statements of Changes in Stockholders Equity (Deficit) for the Years Ended December 31, 2005, 2004 and 2003Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003Notes to Consolidated Financial StatementsQuarterly Results of Operations (Unaudited)
  - 39 -




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    Internal Control 
Integrated Framework
  
 - 40 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
as of December 31, 2005 and 2004
 (Amounts in thousands)
    
    2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,081
    
    
    $
    12,305Accounts receivable, net of allowance for doubtful accounts of $805 and $900
    
    
    12,919
    
    
    
    14,300Contract sales receivable, net of allowance for doubtful accounts of $1,529 and $1,529
    
    
    13,170
    
    
    
    2,462Inventories, net of reserves of $1,157 and $1,332
    
    
    10,534
    
    
    
    10,276Prepaid expenses
    
    
    3,582
    
    
    
    2,572Total current assets
    
    
    54,286
    
    
    
    41,915Contract sales and notes receivable, net
    
    
    89
    
    
    
    1,075Property and equipment, net
    
    
    4,417
    
    
    
    9,975Intangible assets, net
    
    
    61,951
    
    
    
    34,896Goodwill
    
    
    57,173
    
    
    
    15,227Other assets
    
    
    7,930
    
    
    
    4,229Total assets
    
    $
    185,846
    
    
    $
    107,317LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    7,681
    
    
    $
    9,832Customer deposits
    
    
    1,224
    
    
    
    3,047Current portion of long-term debt and notes payable
    
    
    287
    
    
    
    368Accrued liabilities
    
    
    5,552
    
    
    
    7,614Deferred revenues and license fees
    
    
    7,620
    
    
    
    2,781Total current liabilities
    
    
    22,364
    
    
    
    23,642Long-term debt and notes payable, net of unamortized discount of $954 and $1,895
    
    
    44,071
    
    
    
    63,170Other long-term liabilities
    
    
    
    
    
    
    1,970Deferred tax liability
    
    
    14,856
    
    
    
    8,294Total liabilities
    
    
    81,291
    
    
    
    97,076Commitments and contingenciesStockholders 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 34,355,943 and 22,498,149
shares issued and outstanding
    
    
    3,436
    
    
    
    2,250Additional paid-in capital
    
    
    217,075
    
    
    
    116,932Other comprehensive loss
    
    
    (744
    )
    
    
    (145
    )Accumulated deficit
    
    
    (113,886
    )
    
    
    (107,903
    )Subtotal
    
    
    105,881
    
    
    
    11,134Less treasury stock, 254,174 and 217,698 shares, at cost
    
    
    (1,326
    )
    
    
    (893
    )Total stockholders equity
    
    
    104,555
    
    
    
    10,241Total liabilities and stockholders equity
    
    $
    185,846
    
    
    $
    107,317
  - 41 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003
 (Amounts in thousands, except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Revenues:Slot and table games
    
    $
    33,670
    
    
    $
    40,560
    
    
    $
    40,932Interior signage
    
    
    5,252
    
    
    
    20,014
    
    
    
    36,919Systems
    
    
    39,299
    
    
    
    35,800
    
    
    
    13,952Total revenues
    
    
    78,221
    
    
    
    96,374
    
    
    
    91,803Cost of revenues:Slot and table games
    
    
    12,677
    
    
    
    11,999
    
    
    
    13,999Interior signage
    
    
    3,832
    
    
    
    12,335
    
    
    
    25,736Systems
    
    
    19,597
    
    
    
    18,548
    
    
    
    7,114Total cost of revenues
    
    
    36,106
    
    
    
    42,882
    
    
    
    46,849Gross profit
    
    
    42,115
    
    
    
    53,492
    
    
    
    44,954Selling, general and administrative expense
    
    
    28,652
    
    
    
    27,595
    
    
    
    30,281Slot rent expense
    
    
    
    
    
    
    1,204
    
    
    
    5,668Research and development
    
    
    8,060
    
    
    
    6,102
    
    
    
    5,159Depreciation and amortization
    
    
    4,894
    
    
    
    8,908
    
    
    
    14,314Net gain on disposition of non-core assets
    
    
    (2,536
    )
    
    
    
    
    
    
    Gain on sale of core intellectual property
    
    
    (2,500
    )
    
    
    
    
    
    
    36,570
    
    
    
    43,809
    
    
    
    55,422Operating income (loss)
    
    
    5,545
    
    
    
    9,683
    
    
    
    (10,468
    )Interest expense
    
    
    (8,895
    )
    
    
    (9,684
    )
    
    
    (14,324
    )Loss on early retirement of debt
    
    
    (2,993
    )
    
    
    
    
    
    
    (9,524
    )Other income, net
    
    
    360
    
    
    
    195
    
    
    
    87Income (loss) before income tax benefit
    
    
    (5,983
    )
    
    
    194
    
    
    
    (34,229
    )Income tax benefit
    
    
    
    
    
    
    65
    
    
    
    13Net income (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )Weighted average common shares:Basic
    
    
    25,124
    
    
    
    21,884
    
    
    
    14,689Diluted
    
    
    25,124
    
    
    
    22,359
    
    
    
    14,689Basic and diluted earnings (loss) per share:
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )
  - 42 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2005, 2004 and 2003
 (Amounts in thousands)
    
    2005
    
    2004
    
    2003Net income (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )Other comprehensive income (loss), net of tax:Foreign currency translation gains (losses)
    
    
    (599
    )
    
    
    108
    
    
    
    605Comprehensive income (loss)
    
    $
    (6,582
    )
    
    $
    367
    
    
    $
    (33,611
    )
  - 43 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
For the Years Ended December 31, 2005, 2004 and 2003
 Additional
    
    
    ForeignCommon Stock
    
    
    Paid-In
    
    
    Currency
    
    
    Accumulated
    
    
    Treasury(Amounts in thousands)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Translation
    
    
    Deficit
    
    
    Stock
    
    
    TotalBalance, December 31, 2002
    
    
    13,050
    
    
    $
    1,305
    
    
    $
    67,299
    
    
    $
    (858
    )
    
    $
    (73,946
    )
    
    $
    (712
    )
    
    $
    (6,912
    )Stock options exercised
    
    
    339
    
    
    
    34
    
    
    
    1,364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,398Employee stock purchase plan
    
    
    97
    
    
    
    10
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Employee stock incentive plan
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135Stock options and warrants granted to
consultants and vendors
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95Private placement
    
    
    8,425
    
    
    
    842
    
    
    
    40,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,744Stock warrants issues with private placement
    
    
    
    
    
    
    
    
    
    
    4,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,185Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    605
    
    
    
    
    
    
    
    
    
    
    
    605Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,216
    )
    
    
    
    
    
    
    (34,216
    )Balance, December 31, 2003
    
    
    21,911
    
    
    $
    2,191
    
    
    $
    114,325
    
    
    $
    (253
    )
    
    $
    (108,162
    )
    
    $
    (712
    )
    
    $
    7,389Stock options exercised
    
    
    436
    
    
    
    44
    
    
    
    1,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,899Employee stock purchase plan
    
    
    87
    
    
    
    9
    
    
    
    407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416Employee stock incentive plan
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    345Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Issuance of restricted stock
    
    
    64
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (181
    )
    
    
    (181
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    
    
    
    
    259Balance, December 31, 2004
    
    
    22,498
    
    
    $
    2,250
    
    
    $
    116,932
    
    
    $
    (145
    )
    
    $
    (107,903
    )
    
    $
    (893
    )
    
    $
    10,241Stock options exercised
    
    
    626
    
    
    
    63
    
    
    
    3,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,126Stock warrants exercised
    
    
    1,518
    
    
    
    152
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,152Employee stock purchase plan
    
    
    14
    
    
    
    1
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118Employee stock incentive plan
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (599
    )
    
    
    
    
    
    
    
    
    
    
    (599
    )Issuance of restricted stock
    
    
    131
    
    
    
    13
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (433
    )
    
    
    (433
    )Issuance of common stock for cash
    
    
    8,298
    
    
    
    830
    
    
    
    69,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,924Common stock issued in acquisition
    
    
    1,271
    
    
    
    127
    
    
    
    19,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,273Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,983
    )
    
    
    
    
    
    
    (5,983
    )Balance, December 31, 2005
    
    
    34,356
    
    
    $
    3,436
    
    
    $
    217,075
    
    
    $
    (744
    )
    
    $
    (113,886
    )
    
    $
    (1,326
    )
    
    $
    104,555
  - 44 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
 (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation
    
    
    2,594
    
    
    
    6,999
    
    
    
    11,548Amortization
    
    
    2,300
    
    
    
    1,909
    
    
    
    2,766Provision for (recovery of) bad debts
    
    
    (49
    )
    
    
    149
    
    
    
    (342
    )Provision for obsolete inventory
    
    
    (85
    )
    
    
    (912
    )
    
    
    1,670Amortization of debt discount and debt issue costs
    
    
    1,147
    
    
    
    1,576
    
    
    
    2,161Loss (gain) on disposition of property and equipment
    
    
    44
    
    
    
    (6
    )
    
    
    290Net gain on disposition of non-core assets
    
    
    (2,536
    )
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    2,993
    
    
    
    
    
    
    
    9,524Stock-based compensation
    
    
    736
    
    
    
    344
    
    
    
    154Write-down of assets
    
    
    
    
    
    
    
    
    
    
    3,320Other
    
    
    
    
    
    
    (33
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,503
    )
    
    
    (3,083
    )
    
    
    3,061Contract sales receivable
    
    
    (9,633
    )
    
    
    (2,801
    )
    
    
    216Inventories
    
    
    (1,404
    )
    
    
    (1,548
    )
    
    
    2,724Prepaid expenses and other assets
    
    
    (6,607
    )
    
    
    (419
    )
    
    
    1,888Trade accounts payable
    
    
    (1,829
    )
    
    
    3,376
    
    
    
    (2,840
    )Accrued expenses
    
    
    (3,306
    )
    
    
    341
    
    
    
    (1,966
    )Customer deposits, deferred revenue and other liabilities
    
    
    1,793
    
    
    
    2,320
    
    
    
    (2,276
    )Net cash provided by (used in) operating activities
    
    
    (21,328
    )
    
    
    8,471
    
    
    
    (2,318
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (1,923
    )
    
    
    (792
    )
    
    
    (1,132
    )Purchase of inventory leased to others
    
    
    (862
    )
    
    
    (5,097
    )
    
    
    (4,110
    )Proceeds from sales of property and equipment
    
    
    145
    
    
    
    69
    
    
    
    13Proceeds from sale of non-core assets
    
    
    11,402
    
    
    
    
    
    
    
    Purchases of business operations, net of cash acquired
    
    
    (36,203
    )
    
    
    
    
    
    
    Increase in intangible assets
    
    
    (8,769
    )
    
    
    (245
    )
    
    
    (150
    )Net cash used in investing activities
    
    
    (36,210
    )
    
    
    (6,065
    )
    
    
    (5,379
    )Cash flows from financing activities:Principal payments on notes payable and long-term debt
    
    
    (20,061
    )
    
    
    (108
    )
    
    
    (123
    )Call premium on early retirement of debt
    
    
    (1,188
    )
    
    
    
    
    
    
    Principal payments on capital leases
    
    
    (60
    )
    
    
    (587
    )
    
    
    (1,513
    )Principal payments of deferred license fees
    
    
    
    
    
    
    (535
    )
    
    
    (493
    )Purchase of treasury stock
    
    
    (433
    )
    
    
    (181
    )
    
    
    Proceeds from issuance of common stock and warrants
    
    
    81,320
    
    
    
    2,352
    
    
    
    1,752Net cash provided by (used in) financing activities
    
    
    59,578
    
    
    
    941
    
    
    
    (377
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (264
    )
    
    
    275
    
    
    
    482Increase (decrease) in cash and cash equivalents
    
    
    1,776
    
    
    
    3,622
    
    
    
    (7,592
    )Cash and cash equivalents, beginning of year
    
    
    12,305
    
    
    
    8,683
    
    
    
    16,275Cash and cash equivalents, end of year
    
    $
    14,081
    
    
    $
    12,305
    
    
    $
    8,683
  - 45 -




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##### Table of Contents



PROGRESSIVE GAMING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 2005, 2004 and 2003
 (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Supplemental disclosure of cash flows information:Cash paid during the year for:Interest
    
    $
    8,467
    
    
    $
    9,685
    
    
    $
    13,138State and federal taxes
    
    $
    170
    
    
    $
    46
    
    
    $
    56Supplemental schedule of non-cash investing and financing activities:Retirement of debt
    
    
    
    
    
    
    
    
    
    $
    40,000Issuance of warrants
    
    
    
    
    
    
    
    
    
    $
    4,261Transfer equipment to inventory
    
    
    
    
    
    $
    198
    
    
    $
    74Property and equipment acquired through capital lease
    
    
    
    
    
    
    
    
    
    $
    48Gaming equipment leased to others acquired through capital lease
    
    
    
    
    
    $
    670Acquisitions:Fair value of assets acquired
    
    $
    22,234Liabilities assumed
    
    
    2,266Fair value of common stock, warrants and options issued in business combinations
    
    
    19,273Goodwill recognized
    
    
    35,508
  - 46 -




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##### Table of Contents



1. Description of Business and Summary of Significant Accounting Policies
 Description of Business:
 ®
  Slot and Table games.
 Systems.
 Interior Signage.
 Acquisitions / Divestitures
 ® ® ® ®
   ® ®
 Summary of Significant Accounting Policies:
 Principles of Consolidation.
 Cash and Cash Equivalents.
 Fair Values of Financial Instruments.
 Receivables and Allowance for Doubtful Accounts.
 - 47 -




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##### Table of Contents



Inventories.
 Long-Lived Assets.
  Patents and Trademarks.
 Intangible Assets.
  Deferred Revenues and License Fees.
 Deposits and Product Sales Recognition.
 Other Assets.
 Commitments and Contingencies.
 Foreign Currency Translation.
 Nonmonetary Exchanges.
   Revenue Recognition.
 Slot and Table Games.
 Systems.
 - 48 -




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##### Table of Contents



Postcontract Customer Support.
 License Arrangements.
 Interior Signage.
  Stock-Based Compensation .
  (Amounts in thousands, except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )Add: Reported stock-based compensation expense
    
    
    736
    
    
    
    344
    
    
    
    154Deduct: Pro forma stock-based compensation expense determined under fair value method
    
    
    (3,032
    )
    
    
    (1,368
    )
    
    
    (956
    )Pro forma net loss
    
    $
    (8,279
    )
    
    $
    (765
    )
    
    $
    (35,018
    )Earnings (loss) per share:As reported  Basic and diluted
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )Pro forma  Basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.03
    )
    
    $
    (2.38
    )
 Equity Instruments Issued to Consultants and Vendors.
 ® ® ® ®
 Related
Party Transactions.
        Software Development Capitalization.
 Income Taxes.
 - 49 -




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##### Table of Contents



Guarantees.
 Use of Estimates and Assumptions.
 2. Acquisitions
  VirtGame
    Net current assets
    
    $
    (0.8
    )Property and equipment, net
    
    
    0.2Goodwill
    
    
    18.1Intangible assets
    
    
    9.5Working capital loan
    
    
    (2.4
    )Deferred tax liability
    
    
    (3.4
    )Net assets acquired
    
    $
    21.2
   EndX
   Net current assets
    
    $
    0.2Property and equipment, net
    
    
    0.1Goodwill
    
    
    21.4Intangible assets
    
    
    10.7Deferred tax liability
    
    
    (3.2
    )Net assets acquired
    
    $
    29.2
 - 50 -




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##### Table of Contents



PitTrak
 ® ® ®
 Pro Forma Results (unaudited)
  
    
    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
    
    
    2004Net revenues
    
    $
    82,079
    
    
    $
    101,812Income from operations
    
    $
    (757)
    
    
    $
    5,165Net loss
    
    $
    (12,117
    )
    
    $
    (4,692
    )Loss per share  basic and diluted
    
    $
    (0.46
    )
    
    $
    (0.20
    )
 3. Fair Values of Financial Instruments
  Carrying
    
    
    Estimated(Amounts in thousands)
    
    Amount
    
    
    FMVLiabilities:Senior Notes
    
    $
    44,046
    
    
    $
    47,700
  - 51 -




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##### Table of Contents



4. Receivables
  (Amounts in thousands)
    
    2005
    
    
    2004Trade accounts
    
    $
    12,874
    
    
    $
    14,784Other
    
    
    850
    
    
    
    416Subtotal
    
    
    13,724
    
    
    
    15,200Less: allowance for doubtful accounts
    
    
    (805
    )
    
    
    (900
    )Net
    
    $
    12,919
    
    
    $
    14,300
  (Amounts in thousands)
    
    2005
    
    
    2004Contract sales
    
    $
    14,788
    
    
    $
    2,462Notes
    
    
    
    
    
    
    2,604Subtotal
    
    
    14,788
    
    
    
    5,066Less: allowance for doubtful accounts
    
    
    (1,529
    )
    
    
    (1,529
    )Net
    
    $
    13,259
    
    
    $
    3,537Current portion
    
    $
    13,170
    
    
    $
    2,462
  (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Allowance for doubtful accounts  beginning
    
    $
    2,429
    
    
    $
    3,496
    
    
    $
    3,784Provision for bad debts (recoveries)
    
    
    (49
    )
    
    
    149
    
    
    
    772Write  offs
    
    
    (46
    )
    
    
    (1,216
    )
    
    
    (1,060
    )Allowance for doubtful accounts  ending
    
    $
    2,334
    
    
    $
    2,429
    
    
    $
    3,496
 5. Inventories
  (Amounts in thousands)
    
    2005
    
    
    2004Raw materials
    
    $
    7,384
    
    
    $
    7,651Finished goods
    
    
    4,303
    
    
    
    3,618Work-in-progress
    
    
    4
    
    
    
    339Subtotal
    
    
    11,691
    
    
    
    11,608Less: reserve for obsolete inventory
    
    
    (1,157
    )
    
    
    (1,332
    )Total
    
    $
    10,534
    
    
    $
    10,276
  (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Reserve for obsolete inventory  beginning
    
    $
    1,332
    
    
    $
    4,479
    
    
    $
    4,072Provision for obsolete inventory
    
    
    (85
    )
    
    
    (912
    )
    
    
    1,670Write  offs
    
    
    (90
    )
    
    
    (2,235
    )
    
    
    (1,263
    )Reserve for obsolete inventory  ending
    
    $
    1,157
    
    
    $
    1,332
    
    
    $
    4,479
 - 52 -




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##### Table of Contents



6. Property and Equipment
  (Amounts in thousands)
    
    2005
    
    
    2004Buildings and leasehold improvements
    
    $
    977
    
    
    $
    1,240Machinery and equipment
    
    
    7,452
    
    
    
    5,237Equipment leased to others
    
    
    4,228
    
    
    
    24,291Furniture and fixtures
    
    
    1,773
    
    
    
    6,631Transportation equipment
    
    
    677
    
    
    
    846Subtotal
    
    
    15,107
    
    
    
    38,245Less: accumulated depreciation
    
    
    (10,690
    )
    
    
    (28,270
    )Total
    
    $
    4,417
    
    
    $
    9,975
  7. Goodwill and Intangible Assets
  (Amounts in thousands)
    
    2005
    
    
    2004Perpetual license
    
    $
    35,762
    
    
    $
    35,762Patent and trademark rights
    
    
    15,769
    
    
    
    10,461Covenants not to compete
    
    
    377
    
    
    
    377Software development costs
    
    
    1,905
    
    
    
    2,154Licensed technology
    
    
    3,940
    
    
    
    250Core technology and other proprietary rights
    
    
    21,100
    
    
    
    834Subtotal
    
    
    78,853
    
    
    
    49,838Less: accumulated amortization
    
    
    (16,902
    )
    
    
    (14,942
    )Total
    
    $
    61,951
    
    
    $
    34,896
  (Amounts in thousands)
    
    2005
    
    
    2004Goodwill
    
    $
    59,287
    
    
    $
    17,341Less: accumulated amortization
    
    
    (2,114
    )
    
    
    (2,114
    )Total
    
    $
    57,173
    
    
    $
    15,227
     - 53 -




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##### Table of Contents



Net Amount Allocated by SegmentSlot andTable(Amounts in thousands)
    
    Games
    
    
    Systems
    
    
    Corporate
    
    
    TotalGoodwill
    
    $
    14,838
    
    
    $
    42,335
    
    
    $
    
    
    
    $
    57,173Indefinite life intangible asset (perpetual license)
    
    
    31,276
    
    
    
    
    
    
    
    
    
    
    
    31,276Definite life intangible assets (detail below)
    
    
    4,520
    
    
    
    23,414
    
    
    
    2,741
    
    
    
    30,675Total
    
    $
    50,634
    
    
    $
    65,749
    
    
    $
    2,741
    
    
    $
    119,124
   Gross Carrying
    
    
    Accumulated(Amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    NetPatent and trademark rights
    
    $
    15,769
    
    
    $
    (9,150
    )
    
    $
    6,619Covenants not to compete
    
    
    377
    
    
    
    (377
    )
    
    
    Software development costs
    
    
    1,905
    
    
    
    (1,680
    )
    
    
    225Licensed technology
    
    
    3,940
    
    
    
    (84
    )
    
    
    3,856Core technology and other proprietary rights
    
    
    21,100
    
    
    
    (1,125
    )
    
    
    19,975Total
    
    $
    43,091
    
    
    $
    (12,416
    )
    
    $
    30,675
  (Amounts in thousands)2006
    
    $
    6,7872007
    
    
    5,8572008
    
    
    5,3892009
    
    
    4,788Thereafter
    
    
    7,854Total
    
    $
    30,675
 8. Accrued Liabilities
  (Amounts in thousands)
    
    2005
    
    
    2004Payroll and related costs
    
    $
    1,461
    
    
    $
    3,048Income taxes
    
    
    
    
    
    
    231Interest
    
    
    863
    
    
    
    1,324Royalties
    
    
    524
    
    
    
    1,341Restructuring and severance expense
    
    
    308
    
    
    
    574Liability for intellectual property
    
    
    1,500
    
    
    
    Other
    
    
    896
    
    
    
    1,096Total
    
    $
    5,552
    
    
    $
    7,614
 9. Net Gain on Disposition of Non-core Assets
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10. Gain on Sale of Core Intellectual Property
  11. Debt and Capital Leases
  (Amounts in thousands)
    
    2005
    
    
    200411.875% Senior Secured Notes due August 15, 2008, net of unamortized discount of $954 and $1,898
    
    $
    44,046
    
    
    $
    63,105Capital 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 $69 and $1,017.
    
    
    2
    
    
    
    62Unsecured promissory note to TAB, Ltd. bearing interest at 5%, principal and interest due currently
    
    
    284
    
    
    
    284Notes payable secured by transportation and office equipment, interest rates between 0% to 12% due through 2004
    
    
    26
    
    
    
    87Total
    
    
    44,358
    
    
    
    63,538Less: current portion
    
    
    (287
    )
    
    
    (368
    )Long-term portion
    
    $
    44,071
    
    
    $
    63,170
  (Amounts in thousands)2006
    
    $
    3132007
    
    
    2008
    
    
    45,0002009
    
    
    2010
    
    
    Total
    
    $
    45,313
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12. Commitments and Contingencies
  Minimum(Amounts in thousands)
    
    Payments2006
    
    $
    2,7142007
    
    
    2,4722008
    
    
    2,1652009
    
    
    1,1272010
    
    
    1,124Thereafter
    
    
    175Total
    
    $
    9,777
  Other Commitments and Contingencies
   Legal Matters
        - 56 -




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##### Table of Contents



13. Income Taxes
  (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003U.S.
    
    $
    (7,504
    )
    
    $
    219
    
    
    $
    (33,653
    )Foreign
    
    
    1,521
    
    
    
    (25
    )
    
    
    (576
    )Total
    
    $
    (5,983
    )
    
    $
    194
    
    
    $
    (34,229
    )
  (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Current
    
    $
    
    
    
    $
    65
    
    
    $
    13Deferred
    
    
    
    
    
    
    
    
    
    
    Total provision
    
    $
    
    
    
    $
    65
    
    
    $
    13Continuing operations
    
    $
    
    
    
    $
    65
    
    
    $
    13Discontinued operations
    
    
    
    
    
    
    
    
    
    
    Total benefit (provision)
    
    $
    
    
    
    $
    65
    
    
    $
    13
  (Amounts in thousands)
    
    2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %Amounts at statutory rate
    
    $
    2,094
    
    
    
    35.0
    %
    
    $
    (68
    )
    
    
    (35.0
    )%
    
    $
    11,980
    
    
    
    35.0
    %Adjustments:Foreign subsidiaries tax, net
    
    
    (76
    )
    
    
    (1.3
    )%
    
    
    55
    
    
    
    28.3
    %
    
    
    
    
    
    
    0.0
    %State income tax and other
    
    
    87
    
    
    
    1.5
    %
    
    
    60
    
    
    
    31.0
    %
    
    
    183
    
    
    
    0.5
    %Non-deductible expenses
    
    
    (73
    )
    
    
    (1.2
    )%
    
    
    285
    
    
    
    146.7
    %
    
    
    (55
    )
    
    
    (0.2
    )%Valuation allowance
    
    
    (2,032
    )
    
    
    (34.0
    )%
    
    
    (267
    )
    
    
    (137.6
    )%
    
    
    (12,095
    )
    
    
    (35.3
    )%Total benefit (provision)
    
    $
    
    
    
    
    0.0
    %
    
    $
    65
    
    
    
    33.5
    %
    
    $
    13
    
    
    
    0.0
    %
 - 57 -




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##### Table of Contents



(Amounts in thousands)
    
    2005
    
    
    2004Deferred tax assets:Current:Inventory book / tax differences
    
    $
    1,010
    
    
    $
    1,038Prepaid expenses and other
    
    
    1,183
    
    
    
    1,429Valuation allowance
    
    
    (2,193
    )
    
    
    (2,467
    )Subtotal
    
    
    
    
    
    
    Noncurrent:Deferred revenue
    
    $
    1,052
    
    
    $
    935Tax credits
    
    
    1,930
    
    
    
    1,930Intangible assets and other
    
    
    2,745
    
    
    
    3,651Property and equipment and other
    
    
    2,090
    
    
    
    787Net operating loss carryforward
    
    
    39,137
    
    
    
    30,769Valuation allowance
    
    
    (43,828
    )
    
    
    (35,043
    )Subtotal
    
    
    3,126
    
    
    
    3,029Total deferred tax assets
    
    
    3,126
    
    
    
    3,029Deferred tax liabilities:Current:
    
    
    
    
    
    
    Noncurrent:Perpetual license
    
    
    (11,323
    )
    
    
    (11,323
    )Definite lived intangible assets
    
    
    (6,659
    )
    
    
    Sale leaseback
    
    
    
    
    
    
    Subtotal
    
    
    (17,982
    )
    
    
    (11,323
    )Total deferred tax liabilities
    
    
    (17,982
    )
    
    
    (11,323
    )Net deferred tax liability
    
    $
    (14,856
    )
    
    $
    (8,294
    )
  (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Beginning balance
    
    $
    37,510
    
    
    $
    37,243
    
    
    $
    25,148Additions (deductions)
    
    
    2,032
    
    
    
    267
    
    
    
    12,095Purchase accounting adjustments
    
    
    6,479
    
    
    
    
    
    
    
    Ending balance
    
    $
    46,021
    
    
    $
    37,510
    
    
    $
    37,243
    - 58 -




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##### Table of Contents



14. Earnings Per Share
  (Amounts in thousands except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Net earnings (loss)
    
    $
    (5,983
    )
    
    $
    259
    
    
    $
    (34,216
    )Weighted average shares outstanding
    
    
    25,124
    
    
    
    21,884
    
    
    
    14,689Dilutive stock options outstanding
    
    
    
    
    
    
    475
    
    
    
    Weighted average and potential shares outstanding
    
    
    25,124
    
    
    
    22,359
    
    
    
    14,689Basic earnings (loss) per share
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )Diluted earnings (loss) per share
    
    $
    (0.24
    )
    
    $
    0.01
    
    
    $
    (2.33
    )
  15. Benefit Plans
  16. Stock-Based Compensation Plans
 th
    - 59 -




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2005
    
    
    2004
    
    
    2003Wtd. Ave
    
    
    
    
    
    
    Wtd. Ave
    
    
    
    
    
    
    Wtd. AveExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    Exercise(Amounts in thousand except per option amounts)
    
    Options
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceDirector Plan:Options beginning of year
    
    
    470
    
    
    $
    5.01
    
    
    
    317
    
    
    $
    5.26
    
    
    
    257
    
    
    $
    5.70Granted
    
    
    60
    
    
    
    15.07
    
    
    
    154
    
    
    
    4.50
    
    
    
    65
    
    
    
    4.46Exercised
    
    
    (78
    )
    
    
    4.91
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    (95
    )
    
    
    5.15
    
    
    
    (1
    )
    
    
    9.25
    
    
    
    (5
    )
    
    
    17.25Options, end of year
    
    
    357
    
    
    
    6.68
    
    
    
    470
    
    
    
    5.00
    
    
    
    317
    
    
    
    5.26Exercisable at end of year
    
    
    224
    
    
    
    5.49
    
    
    
    267
    
    
    
    5.32
    
    
    
    200
    
    
    
    5.42Weighted average fair value of options granted during the year
    
    
    
    
    
    $
    9.46
    
    
    
    
    
    
    $
    3.23
    
    
    
    
    
    
    $
    3.07Employee Plans:Options beginning of year
    
    
    2,292
    
    
    $
    4.42
    
    
    
    1,732
    
    
    $
    3.92
    
    
    
    2,068
    
    
    $
    4.82Granted
    
    
    763
    
    
    
    12.67
    
    
    
    1,209
    
    
    
    5.14
    
    
    
    388
    
    
    
    4.02Exercised
    
    
    (548
    )
    
    
    5.01
    
    
    
    (436
    )
    
    
    4.12
    
    
    
    (338
    )
    
    
    4.13Cancelled
    
    
    (233
    )
    
    
    5.56
    
    
    
    (213
    )
    
    
    5.08
    
    
    
    (386
    )
    
    
    4.70Options, end of year
    
    
    2,274
    
    
    
    7.55
    
    
    
    2,292
    
    
    
    4.42
    
    
    
    1,732
    
    
    
    4.80Exercisable at end of year
    
    
    597
    
    
    
    6.68
    
    
    
    675
    
    
    
    5.25
    
    
    
    947
    
    
    
    5.09Weighted average fair value of options granted during the year
    
    
    
    
    
    $
    8.01
    
    
    
    
    
    
    $
    3.63
    
    
    
    
    
    
    $
    2.84
  (Amounts in thousands except per option amounts)
 Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Life
    
    
    Price
    
    
    Options
    
    
    PriceDirector Plan:$2.75 - $4.75
    
    
    186,000
    
    
    
    6.8
    
    
    $
    4.25
    
    
    
    107,333
    
    
    $
    4.07$5.10 - $7.25
    
    
    111,000
    
    
    
    4.9
    
    
    
    6.22
    
    
    
    109,333
    
    
    
    6.23$15.07
    
    
    60,000
    
    
    
    6.5
    
    
    
    15.07
    
    
    
    7,500
    
    
    
    15.07357,000
    
    
    
    
    
    
    
    
    
    
    
    224,166Employee Plans:$1.49 - $4.25
    
    
    74,500
    
    
    
    5.5
    
    
    $
    3.51
    
    
    
    33,110
    
    
    $
    3.60$4.29 - $7.44
    
    
    1,429,564
    
    
    
    7.3
    
    
    
    5.16
    
    
    
    446,968
    
    
    
    5.52$8.25 - $14.90
    
    
    770,125
    
    
    
    8.8
    
    
    
    12.36
    
    
    
    116,760
    
    
    
    12.032,274,189
    
    
    
    
    
    
    
    
    
    
    
    596,838
    - 60 -




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##### Table of Contents



® ® ® ® ®
  2005
    
    
    2004
    
    
    2003Wtd. Ave
    
    
    
    
    
    
    Wtd. Ave
    
    
    
    
    
    
    Wtd. AveExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    Exercise(Amounts in thousand except per share amounts)
    
    Warrants
    
    
    Price
    
    
    Warrants
    
    
    Price
    
    
    Warrants
    
    
    PriceWarrants issued to vendors:Warrants, beginning of year
    
    
    660
    
    
    $
    5.90
    
    
    
    660
    
    
    $
    5.90
    
    
    
    660
    
    
    $
    5.90Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (312
    )
    
    
    4.94
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants, end of year
    
    
    348
    
    
    
    6.76
    
    
    
    660
    
    
    
    5.90
    
    
    
    660
    
    
    
    5.90Exercisable at end of year
    
    
    348
    
    
    
    6.76
    
    
    
    660
    
    
    
    5.90
    
    
    
    660
    
    
    
    5.90
 17. Concentrations of Credit Risk
   Accounts
    
    
    ContractReceivable
    
    
    Receivable
    
    
    TotalDomestic region
    
    
    80.2
    %
    
    
    79.5
    %
    
    
    79.8
    %International region:Australia / Asia
    
    
    6.1
    
    
    
    1.3
    
    
    
    3.7Europe
    
    
    13.7
    
    
    
    19.2
    
    
    
    16.5Total International
    
    
    19.8
    
    
    
    20.5
    
    
    
    20.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 - 61 -




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##### Table of Contents



18. Guarantor Financial Statements
  CONSOLIDATING CONDENSED BALANCE SHEETS
 (Amounts in thousands)
    
    December 31, 2005Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash
    
    $
    12,387
    
    
    $
    (117
    )
    
    $
    1,811
    
    
    $
    
    
    
    $
    14,081Accounts receivable, net
    
    
    9,311
    
    
    
    1,047
    
    
    
    2,561
    
    
    
    
    
    
    
    12,919Inventories, net
    
    
    6,017
    
    
    
    3,386
    
    
    
    1,131
    
    
    
    
    
    
    
    10,534Other current assets
    
    
    7,704
    
    
    
    5,995
    
    
    
    3,053
    
    
    
    
    
    
    
    16,752Total current assets
    
    
    35,419
    
    
    
    10,311
    
    
    
    8,556
    
    
    
    
    
    
    
    54,286Property and equipment, net
    
    
    3,437
    
    
    
    287
    
    
    
    693
    
    
    
    
    
    
    
    4, 417Goodwill and intangible assets, net
    
    
    51,976
    
    
    
    32,098
    
    
    
    35,050
    
    
    
    
    
    
    
    119,124Investments in and loans to subsidiaries
    
    
    73,427
    
    
    
    
    
    
    
    
    
    
    
    (73,427
    )
    
    
    Other assets
    
    
    7,809
    
    
    
    233
    
    
    
    (23
    )
    
    
    
    
    
    
    8,019Total assets
    
    $
    172,068
    
    
    $
    42,929
    
    
    $
    44,276
    
    
    $
    (73,427
    )
    
    $
    185,846LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities
    
    $
    15,731
    
    
    $
    3,447
    
    
    $
    3,186
    
    
    $
    
    
    
    $
    22,364Intercompany transactions
    
    
    (499
    )
    
    
    (9,080
    )
    
    
    4,480
    
    
    
    5,099
    
    
    
    Total current liabilities
    
    
    15,232
    
    
    
    (5,633
    )
    
    
    7,666
    
    
    
    5,099
    
    
    
    22,364Long-term debt, net
    
    
    44,045
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    44,071Other liabilities, long term
    
    
    
    
    
    
    
    
    
    
    22,307
    
    
    
    (22,307
    )
    
    
    Deferred tax liability
    
    
    8,236
    
    
    
    3,413
    
    
    
    3,207
    
    
    
    
    
    
    
    14,856Stockholders equity (deficit)
    
    
    104,555
    
    
    
    45,149
    
    
    
    11,070
    
    
    
    (56,219
    )
    
    
    104,555Total liabilities and stockholders equity (deficit)
    
    $
    172,068
    
    
    $
    42,929
    
    
    $
    44,276
    
    
    $
    (73,427
    )
    
    $
    185,846
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##### Table of Contents



CONSOLIDATING CONDENSED BALANCE SHEETS
 (Amounts in thousands)
    
    December 31, 2004Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash
    
    $
    7,532
    
    
    $
    1
    
    
    $
    4,772
    
    
    $
    
    
    
    $
    12,305Accounts receivable, net
    
    
    12,126
    
    
    
    2,259
    
    
    
    2,377
    
    
    
    
    
    
    
    16,762Inventories, net
    
    
    5,710
    
    
    
    2,676
    
    
    
    1,890
    
    
    
    
    
    
    
    10,276Intercompany transactions
    
    
    4,847
    
    
    
    3,811
    
    
    
    
    
    
    
    (8,658
    )
    
    
    Other current assets
    
    
    
    
    
    
    2,304
    
    
    
    268
    
    
    
    
    
    
    
    2,572Total current assets
    
    
    30,215
    
    
    
    11,051
    
    
    
    9,307
    
    
    
    (8,658
    )
    
    
    41,915Property and equipment, net
    
    
    4,498
    
    
    
    4,847
    
    
    
    630
    
    
    
    
    
    
    
    9,975Intangible assets
    
    
    44,404
    
    
    
    5,329
    
    
    
    390
    
    
    
    
    
    
    
    50,123Investments in subsidiaries
    
    
    14,764
    
    
    
    
    
    
    
    
    
    
    
    (14,764
    )
    
    
    Other assets
    
    
    5,032
    
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    5,304Total assets
    
    $
    98,913
    
    
    $
    21,499
    
    
    $
    10,327
    
    
    $
    (23,422
    )
    
    $
    107,317LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities
    
    $
    17,312
    
    
    $
    4,463
    
    
    $
    1,867
    
    
    $
    
    
    
    $
    23,642Intercompany transactions
    
    
    
    
    
    
    
    
    
    
    8,657
    
    
    
    (8,657
    )
    
    
    Total current liabilities
    
    
    17,312
    
    
    
    4,463
    
    
    
    10,524
    
    
    
    (8,657
    )
    
    
    23,642Long-term debt, net
    
    
    63,108
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    63,170Other liabilities, long term
    
    
    1,970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,970Deferred tax liability
    
    
    6,282
    
    
    
    2,012
    
    
    
    
    
    
    
    
    
    
    
    8,294Stockholders equity (deficit)
    
    
    10,241
    
    
    
    15,024
    
    
    
    (259
    )
    
    
    (14,765
    )
    
    
    10,241Total liabilities and stockholders equity (deficit)
    
    $
    98,913
    
    
    $
    21,499
    
    
    $
    10,327
    
    
    $
    (23,422
    )
    
    $
    107,317
 - 63 -




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##### Table of Contents



CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
 (Amounts in thousands)
    
    Year Ended December 31, 2005Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    41,235
    
    
    $
    21,393
    
    
    $
    15,593
    
    
    $
    
    
    
    $
    78,221Cost of sales
    
    
    20,248
    
    
    
    9,364
    
    
    
    6,494
    
    
    
    
    
    
    
    36,106Selling, general and admin. expenses
    
    
    32,996
    
    
    
    1,130
    
    
    
    7,480
    
    
    
    
    
    
    
    41,606Net 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
    
    
    (5,027
    )
    
    
    8,953
    
    
    
    1,619
    
    
    
    
    
    
    
    5,545Equity in earnings of subsidiaries
    
    
    10,474
    
    
    
    
    
    
    
    
    
    
    
    (10,474
    )
    
    
    Interest expense
    
    
    (8,787
    )
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    (8,895
    )Other income (expense), net
    
    
    350
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    360Income (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
    )
 CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
 (Amounts in thousands)
    
    Year Ended December 31, 2004Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    58,255
    
    
    $
    26,987
    
    
    $
    13,616
    
    
    $
    (2,484
    )
    
    $
    96,374Cost of sales
    
    
    26,882
    
    
    
    10,150
    
    
    
    8,334
    
    
    
    (2,484
    )
    
    
    42,882Selling, general and admin. expenses
    
    
    29,689
    
    
    
    8,681
    
    
    
    5,439
    
    
    
    
    
    
    
    43,809Operating income (loss)
    
    
    1,684
    
    
    
    8,156
    
    
    
    (157
    )
    
    
    
    
    
    
    9,683Equity in earnings of subsidiaries
    
    
    8,169
    
    
    
    
    
    
    
    
    
    
    
    (8,169
    )
    
    
    Interest expense
    
    
    (9,640
    )
    
    
    (35
    )
    
    
    (9
    )
    
    
    
    
    
    
    (9,684
    )Other income (expense), net
    
    
    55
    
    
    
    (1
    )
    
    
    141
    
    
    
    
    
    
    
    195Income (loss) from operations before income taxes
    
    
    268
    
    
    
    8,120
    
    
    
    (25
    )
    
    
    (8,169
    )
    
    
    194Income tax (provision) benefit
    
    
    (9
    )
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    65Net income (loss)
    
    $
    259
    
    
    $
    8,120
    
    
    $
    49
    
    
    $
    (8,169
    )
    
    $
    259
 - 64 -




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##### Table of Contents



CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
 (Amounts in thousands)
    
    Year Ended December 31, 2003Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    48,523
    
    
    $
    29,263
    
    
    $
    15,711
    
    
    $
    (1,694
    )
    
    $
    91,803Cost of sales
    
    
    22,549
    
    
    
    15,713
    
    
    
    10,281
    
    
    
    (1,694
    )
    
    
    46,849Selling, general and admin expenses
    
    
    25,200
    
    
    
    24,235
    
    
    
    5,987
    
    
    
    
    
    
    
    55,422Operating income (loss)
    
    
    774
    
    
    
    (10,685
    )
    
    
    (557
    )
    
    
    
    
    
    
    (10,468
    )Equity in earnings (loss) of subsidiaries
    
    
    (11,442
    )
    
    
    
    
    
    
    
    
    
    
    11,442
    
    
    
    Interest expense
    
    
    (13,986
    )
    
    
    (132
    )
    
    
    (206
    )
    
    
    
    
    
    
    (14,324
    )Loss on early retirement of debt
    
    
    (9,524
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,524
    )Other income (expense), net
    
    
    (28
    )
    
    
    (72
    )
    
    
    187
    
    
    
    
    
    
    
    87Income (loss) before income taxes
    
    
    (34,206
    )
    
    
    (10,889
    )
    
    
    (576
    )
    
    
    11,442
    
    
    
    (34,229
    )Income tax (provision) benefit
    
    
    (10
    )
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    13Net income (loss)
    
    $
    (34,216
    )
    
    $
    (10,889
    )
    
    $
    (553
    )
    
    $
    11,442
    
    
    $
    (34,216
    )
 - 65 -




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##### Table of Contents



CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
 (Amounts in thousands)
    
    For the Twelve Months Ended December 31, 2005Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,402Proceeds from sale of property and equipment
    
    
    96
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    145Additions 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,320Principal payments on capital leases
    
    
    (52
    )
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (60
    )Purchase of treasury stock
    
    
    (433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (433
    )Net cash provided by (used in) financing activities
    
    
    59,647
    
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    59,578Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (264
    )
    
    
    
    
    
    
    (264
    )Increase (decrease) in cash and cash equivalents
    
    
    4,855
    
    
    
    (118
    )
    
    
    (2,961
    )
    
    
    
    
    
    
    1,776Cash and cash equivalents, beginning of period
    
    
    7,532
    
    
    
    1
    
    
    
    4,772
    
    
    
    
    
    
    
    12,305Cash and cash equivalents, end of period
    
    $
    12,387
    
    
    $
    (117
    )
    
    $
    1,811
    
    
    $
    
    
    
    $
    14,081
 - 66 -




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##### Table of Contents



CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
 (Amounts in thousands)
    
    For the Twelve Months Ended December 31, 2004Non -Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    3,115
    
    
    $
    3,156
    
    
    $
    2,200
    
    
    $
    
    
    
    $
    8,471Cash 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
    )
    
    
    
    
    
    
    
    
    
    
    69Other 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,352Principal 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
    )
    
    
    
    
    
    
    941Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    275Increase in cash and cash equivalents
    
    
    1,521
    
    
    
    
    
    
    
    2,101
    
    
    
    
    
    
    
    3,622Cash and cash equivalents, beginning of period
    
    
    6,011
    
    
    
    1
    
    
    
    2,671
    
    
    
    
    
    
    
    8,683Cash and cash equivalents, end of period
    
    $
    7,532
    
    
    $
    1
    
    
    $
    4,772
    
    
    $
    
    
    
    $
    12,305
 (Amounts in thousands)
    
    For the Twelve Months Ended December 31, 2003Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    (7,977
    )
    
    $
    4,481
    
    
    $
    1,178
    
    
    $
    
    
    
    $
    (2,318
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (1,225
    )
    
    
    (3,205
    )
    
    
    (812
    )
    
    
    
    
    
    
    (5,242
    )Proceeds from sale of equipment
    
    
    7
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    13Other investing activities
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150
    )Net cash used in investing activities
    
    
    (1,368
    )
    
    
    (3,199
    )
    
    
    (812
    )
    
    
    
    
    
    
    (5,379
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (123
    )Principal payments on capital leases
    
    
    (224
    )
    
    
    (1,267
    )
    
    
    (22
    )
    
    
    
    
    
    
    (1,513
    )Principal payments on deferred license fees
    
    
    (493
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (493
    )Proceeds from issuance of common stock and warrants
    
    
    1,752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,752Net cash provided by (used) in financing activities
    
    
    912
    
    
    
    (1,267
    )
    
    
    (22
    )
    
    
    
    
    
    
    (377
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    482
    
    
    
    
    
    
    
    482Increase (decrease) in cash and cash equivalents
    
    
    (8,433
    )
    
    
    15
    
    
    
    826
    
    
    
    
    
    
    
    (7,592
    )Cash and cash equivalents, beginning of period
    
    
    14,444
    
    
    
    (14
    )
    
    
    1,845
    
    
    
    
    
    
    
    16,275Cash and cash equivalents, end of period
    
    $
    6,011
    
    
    $
    1
    
    
    $
    2,671
    
    
    $
    
    
    
    $
    8,683
 - 67 -




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##### Table of Contents



19. Segment Reporting
     (Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Business Segments:Revenue:Slot and table games
    
    $
    33,670
    
    
    $
    40,560
    
    
    $
    40,932Interior signage
    
    
    5,252
    
    
    
    20,014
    
    
    
    36,919Systems
    
    
    39,299
    
    
    
    35,800
    
    
    
    13,952Total
    
    $
    78,221
    
    
    $
    96,374
    
    
    $
    91,803Operating income (loss):Slot and table games
    
    $
    11,771
    
    
    $
    14,701
    
    
    $
    (1,373
    )Interior signage
    
    
    141
    
    
    
    3,362
    
    
    
    2,073Systems
    
    
    12,635
    
    
    
    10,976
    
    
    
    1,403Corporate
    
    
    (19,002
    )
    
    
    (19,356
    )
    
    
    (12,571
    )Total
    
    $
    5,545
    
    
    $
    9,683
    
    
    $
    (10,468
    )Depreciation and amortization:Slot and table games
    
    $
    2,655
    
    
    $
    6,439
    
    
    $
    10,677Interior signage
    
    
    115
    
    
    
    526
    
    
    
    783Systems
    
    
    265
    
    
    
    149
    
    
    
    121Corporate
    
    
    1,859
    
    
    
    1,794
    
    
    
    2,733Total
    
    $
    4,894
    
    
    $
    8,908
    
    
    $
    14,314Total assets:Slot and table games
    
    $
    73,159
    
    
    $
    64,897
    
    
    $
    65,950Interior signage
    
    
    
    
    
    
    1,529
    
    
    
    15,238Systems
    
    
    62,123
    
    
    
    20,995
    
    
    
    1,890Corporate
    
    
    50,564
    
    
    
    19,896
    
    
    
    19,204Total
    
    $
    185,846
    
    
    $
    107,317
    
    
    $
    102,282Capital expenditures / purchase of leased inventories:Slot and table games
    
    $
    1,011
    
    
    $
    5,097
    
    
    $
    4,200Interior signage
    
    
    
    
    
    
    229
    
    
    
    752Systems
    
    
    
    
    
    
    150
    
    
    
    Corporate
    
    
    1,774
    
    
    
    413
    
    
    
    290Total
    
    $
    2,785
    
    
    $
    5,889
    
    
    $
    5,242
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(Amounts in thousands)
    
    2005
    
    
    2004
    
    
    2003Geographic Operations:Revenue:North America
    
    $
    62,626
    
    
    $
    83,008
    
    
    $
    76,091Australia
    
    
    6,592
    
    
    
    4,453
    
    
    
    5,861Europe
    
    
    9,003
    
    
    
    8,913
    
    
    
    9,851Total
    
    $
    78,221
    
    
    $
    96,374
    
    
    $
    91,803Operating income (loss):North America
    
    $
    3,925
    
    
    $
    9,841
    
    
    $
    (9,747
    )Australia
    
    
    1,932
    
    
    
    (123
    )
    
    
    (450
    )Europe
    
    
    (312)
    
    
    
    (35
    )
    
    
    (271
    )Total
    
    $
    5,545
    
    
    $
    9,683
    
    
    $
    (10,468
    )Depreciation and amortization:North America
    
    $
    4,282
    
    
    $
    8,700
    
    
    $
    14,117Australia
    
    
    317
    
    
    
    71
    
    
    
    70Europe
    
    
    295
    
    
    
    137
    
    
    
    127Total
    
    $
    4,894
    
    
    $
    8,908
    
    
    $
    14,314Assets:North America
    
    $
    141,570
    
    
    $
    97,012
    
    
    $
    94,106Australia
    
    
    5,789
    
    
    
    5,855
    
    
    
    4,205Europe
    
    
    38,487
    
    
    
    4,450
    
    
    
    3,971Total
    
    $
    185,846
    
    
    $
    107,317
    
    
    $
    102,282Capital expenditures / purchase of leased inventories:North America
    
    $
    2,379
    
    
    $
    5,610
    
    
    $
    4,993Australia
    
    
    142
    
    
    
    166
    
    
    
    167Europe
    
    
    264
    
    
    
    113
    
    
    
    82Total
    
    $
    2,785
    
    
    $
    5,889
    
    
    $
    5,242
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20. Recently Issued Accounting Standards
  Share-Based Payment,
    - 70 -




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QUARTERLY RESULTS OF OPERATIONS (unaudited)
 (Amounts in thousands)
    
    1 ST
    
    
    2 ND
    
    
    3 RD
    
    
    4 THRevenues:2005
    
    $
    22,908
    
    
    $
    19,291
    
    
    $
    16,837
    
    
    $
    19,1852004
    
    $
    21,129
    
    
    $
    23,288
    
    
    $
    25,680
    
    
    $
    26,278Operating costs and expenses:2005
    
    $
    19,647
    
    
    $
    15,120
    
    
    $
    16,640
    
    
    $
    21,2692004
    
    $
    21,027
    
    
    $
    21,787
    
    
    $
    21,759
    
    
    $
    22,117Operating income:2005
    
    $
    3,261
    
    
    $
    4,171
    
    
    $
    197
    
    
    $
    (2,084
    )2004
    
    $
    102
    
    
    $
    1,501
    
    
    $
    3,921
    
    
    $
    4,161Net income (loss):2005
    
    $
    957
    
    
    $
    1,887
    
    
    $
    (1,983
    )
    
    $
    (6,844
    )2004
    
    $
    (2,353
    )
    
    $
    (948
    )
    
    $
    1,589
    
    
    $
    1,970Weighted average shares outstanding:Basic -2005
    
    
    22,567
    
    
    
    23,287
    
    
    
    24,507
    
    
    
    30,6622004
    
    
    21,731
    
    
    
    21,768
    
    
    
    21,830
    
    
    
    21,878Diluted -2005
    
    
    25,491
    
    
    
    25,988
    
    
    
    24,507
    
    
    
    30,6622004
    
    
    21,731
    
    
    
    21,768
    
    
    
    22,006
    
    
    
    23,601Basic earnings (loss) per share:2005
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    (0.08
    )
    
    $
    (0.22
    )2004
    
    $
    (0.11
    )
    
    $
    (0.04
    )
    
    $
    0.07
    
    
    $
    0.09Diluted earnings (loss) per share:2005
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    (0.08
    )
    
    $
    (0.22
    )2004
    
    $
    (0.11
    )
    
    $
    (0.04
    )
    
    $
    0.07
    
    
    $
    0.09
 
 Item 9A. Controls and Procedures
        
    
    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.
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
    
    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.
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Report of Independent Registered Public Accounting Firm
          
 - 73 -




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Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
 Code of Ethics
  
 Item 11. Executive Compensation
 
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13. Certain Relationships and Related Transactions
 
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)(1) and (2) Financial Statements and Schedules
  (3) Exhibits
  (b) Exhibits
 ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger and Reorganization, dated February
19, 2005, by and among the Company, Viking Acquisition Sub,
Inc., Viking Merger Subsidiary, LLC and VirtGame Corp.,
incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed on February 23, 2005.2.2
    
    Amendment No. 1 to Agreement and Plan of Merger and
Reorganization, dated July 29, 2005, by and among the Company,
Viking Acquisition Sub, Inc., Viking Merger Subsidiary, LLC and
VirtGame Corp., incorporated by reference to Exhibit 2.2 to the
Companys Current Report on Form 8-K filed on August 4, 2005.2.3
    
    Asset Purchase Agreement, dated May 6, 2005, by and between the
Company and MSG Acquisition, LLC, now known as Mikohn Signs and
Graphics, LLC., incorporated by reference to Exhibit 10.14 to
the Quarterly Report on Form 10-Q filed on August 9, 2005.2.4
    
    Share Purchase Agreement for the sale and purchase of all the
issued share capital of EndX Group Limited, dated September 6,
2005, by and among the Company, Nicholas Boyes-Hunter and
others, incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on September 9,
2005.3.1
    
    Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Companys
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ExhibitNumber
    
    Description of DocumentRegistration Statement on Form S-1 (No. 33-69076).3.2
    
    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).3.3
    
    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, 2001.4.9
    
    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
    
    Summary of the Companys 2005 Incentive Compensation Plan, incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form
10-Q filed on May 10, 2005.*10.2
    
    Summary of 2005 compensation for the Companys non-employee directors, incorporated by reference to Exhibit 10.15 to the Quarterly
Report on Form 10-Q filed on May 10, 2005.*10.3
    
    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.*10.4
    
    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.*10.5
    
    Stock Option Plan, as amended, incorporated by reference to the Companys Definitive Proxy Statement filed on July 19, 2004.*10.6
    
    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.*10.7
    
    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.*10.8
    
    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.*10.9
    
    Amended and Restated Employment agreement, dated August 10, 2004, by and between the Company and Michael A. Sicuro,
 - 75 -




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##### Table of Contents



ExhibitNumber
    
    Description of Documentincorporated by
reference to Exhibit 10.33 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.*10.10
    
    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.*10.11
    
    Employment Agreement, dated July 1, 2005, by and between the Company and Neil Crossan.*10.12
    
    Employment Agreement, dated June 6, 2005, by and between the Company and Thomas Galanty.10.13
    
    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).10.14
    
    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, 2005.10.15
    
    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, 2005.10.16
    
    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, 2005.10.17
    
    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, 2005.10.18
    
    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, 2005.10.19
    
    Consulting and Confidentiality Agreement, dated September 19, 2005, by and between the Company and Michael F. Dreitzer.21.1
    
    Subsidiaries.23.1
    
    Consent of BDO Seidman, 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. - 76 -




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##### Table of Contents



SIGNATURES
  PROGRESSIVE GAMING INTERNATIONAL CORPORATIONMarch 31, 2006
    
    by:
    
    /s/ MICHAEL A. SICUROMichael A. SicuroExecutive Vice President, Chief FinancialOfficer, Secretary and Treasurer
   Signature
    
    Title
    
    Date/s/ RUSSEL H. MCMEEKIN.
    
    Chief Executive Officer (Principal Executive Officer)
    
    March 31, 2006Russel H. McMeekin/s/ MICHAEL A. SICURO
    
    Executive Vice President, Chief
Financial Officer, Secretary and
    
    March 31, 2006Michael A. Sicuro
    
    Treasurer (Principal Financial Officer)/s/ HEATHER A. ROLLO
    
    Vice President, Finance and Chief
Accounting Officer (Principal
    
    March 31, 2006Heather A. Rollo
    
    Accounting Officer)/s/ PETER G. BOYNTON
    
    Chairman of the Board
    
    March 31, 2006Peter G. Boynton/s/ PAUL A. HARVEY
    
    Director
    
    March 31, 2006Major General Paul A. Harvey (Ret)/s/ TERRANCE W. OLIVER
    
    Director
    
    March 31, 2006Terrance W. Oliver/s/ RICK L. SMITH
    
    Director
    
    March 31, 2006Rick L. Smith/s/ DOUGLAS M. TODOROFF
    
    Director
    
    March 31, 2006Douglas M. Todoroff
 - 77 -