The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the expectations reflected in these forward-looking statements as a result of the factors set forth in this report, including those set forth under Item 1A, "Risk Factors."

Overview

We design, develop, and market bingo systems, VLT's, slot machines and related software, and server-based wireless gaming systems. VLT's, slot machines and related software are collectively referred to as "box business". We entered the box business in March 2007 with our acquisition of Summit Gaming for $40.9 million in cash. For the 53 weeks ended November 2, 2008 and our fiscal years ended October 31, 2007 and 2006, our portable bingo terminals, fixed-base bingo terminals, and box businesses made the following contributions to revenue:

Revenue Contribution
2008 2007 2006 Portable Bingo Terminals 63% 64% 79% Fixed Base Bingo Terminals 16% 16% 21% Box Equipment 21% 20% 0%

As of November 2, 2008, we had bingo systems in service in 40 states, one US territory, various Native American locations and in five foreign countries. We had box sales in 15 states, one US territory, and various Native American locations. We are marketing new server-based wireless gaming systems where users play a range of games including bingo, video poker, keno and other slot machine games. The Mini™ wireless server-based gaming system was installed in Europe during the second quarter of 2008. The Elite ™ server-based gaming system, was installed domestically in the third quarter of 2008 and in Europe during the first quarter of fiscal 2009. The European configuration supports wireless bingo and fast action gaming for the European bingo market.

We generate revenue by placing electronic bingo systems in bingo halls under contracts based on (1) a fixed fee per use per session; (2) a fixed weekly fee per terminal; or (3) a percentage of the revenue generated by each terminal. Revenue growth for our bingo systems is affected by player acceptance of electronic bingo as an addition or an alternative to paper bingo. Additionally, our revenue growth is dependent on our ability to expand operations into new markets and our ability to increase our market share in our current markets. Fixed-base bingo terminals generate greater revenue per terminal than portable bingo terminals, but also require a greater initial capital investment.

We typically install our electronic bingo systems at no charge to our customers, and we capitalize the costs. For the 53 weeks ending November 2, 2008 and fiscal year ended October 31, 2007, costs of $53,000 and $105,000 were capitalized, respectively, and amortization occurs over the expected term of the contract. We record depreciation of bingo equipment over either a three- or five-year estimated useful life using the straight-line method of depreciation.

Our box business generates revenue from the sale of boxes (new and used), software conversion kits, content fees, license fees, participation fees, parts, and services. For the 53 weeks ending November 2, 2008 and fiscal year ended October 31, 2007, 95.6% and 91.9%, respectively, of our box business sales were derived from the sale of new and used equipment, conversion kits, and parts. In some instances, we recognize recurring participation revenue in lieu of a one-time machine sale. Increasing market share in existing markets and expanding product placement into new markets drives revenue growth.

Our bingo and box expenses consist primarily of cost of revenue, general and administrative expense, sales and marketing expense, and research and development expense. Cost of revenue consists of expenses associated with technical and operational support of the bingo systems in bingo halls, depreciation and amortization of bingo terminals, cost of sales related to equipment sold, and repair/refurbishment/disposal costs of bingo terminals and related support equipment. General and administrative costs consist of expenses associated with management of our company and the related support; including finance and accounting, legal, compliance, information systems, human resources, allowance for doubtful accounts receivable, and amortization of intangible assets acquired from the Summit acquisition. Sales and marketing expenses consist primarily of commissions paid to distributors for promoting and supporting our products, and compensation paid to our internal sales force to manage existing customers, to generate new customers, and sell additional and upgraded equipment. Research and development costs consist of company-sponsored activities to provide customers with new or enhanced games or game themes for our VLT and slot machines, improved bingo terminals, and to develop and test new wireless server-based systems.

Fiscal 2008 Highlights

During the 53 weeks ended November 2, 2008, we incurred a net loss of $11.2 million, compared to net income of $4.7 million in fiscal 2007 as a result of various factors, including primarily the following:

· $10.8 million goodwill impairment charge;

· $3.4 million decrease in revenue due to a declining economy, increased regional competition and pricing pressures;

· decreased total cost of revenue of $1.2 million primarily due to $1.5 million decrease in depreciation related primarily to certain assets becoming fully depreciated, a decrease of $0.6 million in cost of goods sold related directly to decreased revenue, offset by an increase of $0.9 million in refurbishment, disposals, and obsolescence reserve related to bingo equipment as a result of write-offs of units and/or parts on older product lines;

· approximately $3.3 million in pre-tax impairment of the value of our investment in auction rate securities;

· net interest expense increase of $2.3 million related to the acquisition of our box division as well as $0.8 million in debt retirement costs associated with the refinancing of our credit facility, $0.4 million in prepayment penalties and a $0.7 million charge due to our interest rate swap agreement related to the New Credit Facility;

· $1.7 million increase in research and development expense primarily due to the inclusion of 53 weeks reported for 2008 for our box division compared to seven months in fiscal 2007;

· $0.5 million increase in amortization of the identifiable intangible assets purchased in the Summit Gaming acquisition due to the inclusion of 53 weeks reported for 2008.

During the 53 weeks ending November 2, 2008, our capital expenditures increased approximately 94.0%, or $6.3 million to $13.0 million, from $6.7 million during fiscal 2007, primarily related to the purchase of our new headquarters in Reno, Nevada.

Fiscal Year

We have adopted the fifty-two/fifty-three week fiscal year beginning with the period ending on the first Sunday in November of 2008. The fiscal years ending October 31, 2007 and 2006 were both on a twelve-month calendar basis.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet dates and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, bingo terminal depreciation, goodwill impairment, obsolescence, provision for income taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when the following criteria are met:

· persuasive evidence of an arrangement between us and our customer exists,

· delivery has occurred or services have been rendered,

· the price is fixed or determinable, and

· collectability is reasonably assured.

We earn our revenue in a variety of ways. We offer our products for lease or sale. We also sell service and software updates for equipment previously sold or leased.

Bingo Equipment
Revenue is recognized for bingo terminals and bingo systems installed as a single element placed in bingo halls under contracts based on (1) a fixed fee per use per session; (2) a fixed weekly fee per terminal; or (3) a percentage of the revenue generated by each terminal. Revenue recognition is a key component of our results of operations, and determines the timing of certain expenses, such as commissions. We recognize revenue when all of the following factors exist: (a) evidence of an arrangement with the customer; (b) play or availability of the bingo terminals; (c) a fixed or determinable fee; and
(d) collectability is reasonably assured. We exercise judgment in assessing the credit worthiness of customers to determine whether collectability is reasonably assured. Should changes in conditions cause us to determine the factors are not met for future transactions, revenue recognized for future reporting periods could be adversely affected.

Box Equipment
Our product sales revenues are generated from the sale of VLT's, conversion kits, content fees, license fees, participation fees, equipment and services. In some instances, we recognize recurring participation revenue in lieu of a one-time machine sale. Revenues are recorded in accordance with American Institute of Certified Public Accountants' ("AICPA") Statement of Position ('SOP") No. 97-2 Software Revenue Recognition and are reported net of discounts, sales taxes and other taxes of a similar nature. Revenues related to contracted production are recognized as the related work is delivered. We recognize license fee revenues over the term of the associated agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. Amounts received prior to completing the earnings process are deferred until revenue recognition criteria are met. Our sales credit terms are predominately 30 days. In certain limited circumstances, we may extend credit terms up to 160 days.

Deferred Revenue

Deferred Revenue consists of amounts received or billed after a product is delivered or services are rendered, but prior to meeting all of the requirements for revenue recognition. Complex systems and/or multiple element contracts may take several months to complete and our deferred revenues may increase as our products evolve toward a more systems-centric environment. Deferred revenue totaled $3.5 million at November 2, 2008 as compared to $0.8 million at October 31, 2007, and primarily represents amounts received for future deliverables.

Reserve for Bingo Terminal Obsolescence

We provide reserves for excess or obsolete bingo terminals on hand that we do not expect to be used. The reserves are based upon several factors, including our estimated forecast of bingo terminal demand for placement into bingo halls. The estimates of demand for future bingo terminals may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and/or obsolete bingo terminals. Although we attempt to assure the accuracy of our estimated forecasts, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our bingo terminals, results of operations, and financial condition.

Software Development Capitalization

We capitalize costs related to the development of certain software products that meet the criteria of Statement of Financial Accounting Standards ("SFAS") No. 86
- Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SFAS No. 86 provides for the capitalization of computer software that is to be used as an integral part of a product or process to be sold or leased, after technological feasibility has been established for the software and all research and development activities for the other components of the product or process have been completed. We capitalize qualified costs of software developed for new products or for significant enhancements to existing products. We cease capitalizing costs when the product is available for general release to our customers. We amortize the costs on a straight-line method over the estimated economic life of the product beginning when the product is available for general release. The achievement of technological feasibility and the estimate of a products' economic life require management's judgment. Any changes in key assumptions, market conditions or other circumstances could result in an impairment of the capitalized asset and a charge to our operating results.

Allowance for Doubtful Accounts

Bingo Equipment
We estimate the possible losses resulting from non-payment of outstanding accounts receivable arising from the lease of our bingo units. Our customer base consists primarily of entities operating in charitable, Native American, and commercial bingo halls located throughout the United States, Canada, Mexico, and the United Kingdom. In some jurisdictions, the billing and collection function is performed as part of a distributor relationship, and in those instances, we maintain allowances for possible losses resulting from non-payment by both the customer and distributor. We perform ongoing evaluations of customers and distributors for credit worthiness, economic trends, changes in customer payment terms, and historical collection experience when evaluating the adequacy of our allowance for doubtful accounts. We also reserve a percentage of accounts receivable based on aging category. In determining these percentages, we review historical write-offs of receivables, payment trends, and other available information. While such estimates have been within our expectations and the provisions established, a change in the financial condition of specific customers or in overall trends experienced may result in future adjustments of estimates of collectability of our receivables.

Box Equipment
We estimate the possible losses resulting from non-payment of outstanding accounts receivables arising from the sale of boxes and related equipment. Our customer base consists of casinos located in various states and Native American casinos. We perform ongoing evaluations of our customers and distributors for credit worthiness, economic trends, changes in our customer payment terms, and historical collection experience when evaluating the adequacy of our allowance for doubtful accounts.

Impairment of Long-lived Assets, Goodwill and Intangible Assets

We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. Recoverability of long-lived assets are measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset undiscounted and without interest. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

We review goodwill for impairment annually at the beginning of our fourth fiscal quarter, or whenever events or circumstances indicate the carrying value may not be recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. We perform the impairment analysis of goodwill at a reporting unit level by comparing the fair value of a reporting unit with its carrying value, including goodwill. If the fair value is less than the carrying value, the impairment to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds the fair value of the reporting unit goodwill.

During the year ended November 2, 2008, we recorded an impairment charge of $10.8 million related to goodwill related to our acquisition of Summit. During the same period, there was no impairment charge for long-lived assets. During the years ended October 31, 2007 and 2006, no impairment charges related to long-lived assets and goodwill were recorded.

Share-based Compensation

We account for share-based compensation in accordance with SFAS No. 123(R) - Accounting for Stock-Based Compensation. Under the fair value recognition provisions, we estimate share-based compensation at the award grant date and recognize expense over the service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Judgment is required in estimating stock volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. See Note 6 of our Consolidated Financial Statements for additional information regarding the adoption of SFAS No. 123(R).

Legal Contingencies

We are currently involved in various legal claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated.

Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial condition.

Results of Operations

The following table sets forth certain selected, unaudited, condensed consolidated financial data for the periods indicated:

53 Weeks Ended November 2, 2008 compared with the 12 Months Ended October 31,

2007

                                            53 Weeks Ended November 2, 2008 and 12 Months Ended October 31, 2007
                                                                       (In Thousands)
                                             Bingo Equipment                                        Box Equipment
                             53 Wks            12 Mths             % Change           53 Wks         7 Mths          % Change
                              Ended             Ended             Favorable/           Ended         Ended          Favorable/
                             11/2/08          10/31/07          (Unfavorable)         11/2/08       10/31/07       (Unfavorable)
Net Revenue                $    43,964       $    47,114                   (6.7 %)   $  11,483     $   11,691                (1.8 %)
Cost of Revenue                 19,103            19,683                    2.9 %        6,262          6,859                 8.7 %
Gross Profit                    24,861            27,431                   (9.4 %)       5,221          4,832                 8.1 %
Operating Expenses:
General and
administrative                   7,637             7,920                    3.6 %        3,380          1,618              (108.9 %)
Sales and marketing             10,007            10,028                    0.2 %          512            491                (4.3 %)
Research and Development         3,044             2,837                   (7.3 %)       2,547          1,028              (147.8 %)
Goodwill Impairment                  -                 -                    0.0 %       10,780              -                (100 %)
Gain on sale of assets               -                 -                    0.0 %            -           (656 )              (100 %)
Loss Contingencies                   -               124                  100.0 %            -              -                 0.0 %
Total operating expenses        20,688            20,909                    1.1 %       17,219          2,481              (594.0 %)
Income (loss) from
operations                       4,173             6,522                  (36.0 %)     (11,998 )        2,351              (610.3 %)
Interest Expense                  (267 )            (125 )               (113.6 %)      (4,357 )       (2,217 )             (96.5 %)
Impairment of
investments                     (3,306 )               -                 (100.0 )%           -              -              (100.0 %)
Other income (expense),
net                                160               780                  (79.5 )%          21             27               (22.2 %)
Income (loss) before
income taxes                       760             7,177                  (89.4 %)     (16,334 )          161           (10,245.3 %)
Provision (benefit) for
income taxes                       211             2,667                   92.1 %       (4,622 )            -               100.0 %
Net income (loss)          $       549       $     4,510                  (87.8 %)   $ (11,712 )   $      161            (7,374.5 %)

We acquired substantially all of the assets of Summit on March 28, 2007. Summit net revenues are included in the box business segment above, and fiscal 2008 reflects 53 weeks of activity compared to only 7 months of activity for the comparable period presented above for fiscal 2007.

Net Revenue

Bingo net revenue for the 53 weeks ended November 2, 2008 decreased 6.7% to $44.0 million from $47.1 million compared to the 12 months ended October 31, 2007. The decrease is the result of several factors, including the soft economy, increased regional competition, pricing pressures, and continued migration of commercial accounts to slot machine style gaming. Box net revenues decreased $208,000 for the 53 weeks ended November 2, 2008, or 1.8% to $11.5 million from $11.7 million compared to the 7 months ended October 31, 2007. The continued softness in the Louisiana market affected VLT sales, as did delays in obtaining approvals on gaming products in Montana. Financial results for the Box segment may continue to be volatile from quarter to quarter until we have broadened our revenue base by expanding into more VLT markets, and by penetrating into the Class III slot machine markets, such as California and Nevada.

Cost of Revenue

Bingo cost of revenue for the 53 weeks ended November 2, 2008 decreased 2.9% to $19.1 million, or 43.5% of net revenue, from $19.7 million, or 41.8% of net revenue, compared to the 12 months ended October 31, 2007. This decrease is primarily due to $1.5 million less bingo equipment depreciation over the comparable period in 2007, mainly from Travelers becoming fully depreciated in 2007, offset in part by a $0.9 million increase in the cost of disposals, slow-moving and obsolete materials as a result of the write-off of units and/or parts on older product lines as customers migrate to the newer product lines.

Box business cost of revenue decreased 8.7% to $6.3 million, or 54.5% of net revenue for the 53 weeks ended November 2, 2008 from $6.9 million, or 58.7% of net revenue compared to the 7 months ended October 31, 2007. The decrease in cost of revenue is primarily related to the decline in sales and the mix of products sold.

Gross Profit

Bingo gross profit for the 53 weeks ended November 2, 2008 decreased 9.4% to $24.9 million, or 56.5% of net revenue, from $27.4 million or 58.2% of net revenue compared to the 12 months ended October 31, 2007. The decrease in gross profit margin is primarily due to the revenue decline as described above.

Box gross profit increased 8.1% to $5.2 million, or 45.5% of net revenue for the 53 weeks ended November 2, 2008, from $4.8 million or 41.3% of net revenue compared to the 7 months ended October 31, 2007. The increase is due to an increase in sales of higher margin equipment and software.

Operating Expenses

Bingo general and administrative costs decreased 3.6% to $7.6 million for the 53 weeks ended November 2, 2008, from $7.9 million for the 12 months ended October 31, 2007. The decrease is primarily due to lower outside legal fees as the activity on major lawsuits, such as the Trend case, has declined since 2007. Box general and administrative costs increased 108.9% or $1.8 million to $3.4 million for the 53 weeks ended November 2, 2008 from $1.6 million for the 7 months ended October 31, 2007 primarily due to a full fiscal year of expenses. Amortization of the identifiable intangible assets purchased in the Summit Gaming acquisition increased $0.5 million due to the inclusion of 53 weeks reported for 2008 compared to 7 months reported for the fiscal year ended October 31, 2007.

Bingo sales and marketing expenses remained flat for the 53 weeks ended November 2, 2008, compared to the 12 months ended October 31, 2007. A decrease in distributor commissions directly related to the decline in revenue, and a decrease in advertising fees due to Canadian legislative changes, was offset by an increase in employee costs related to additional positions. Box sales and marketing expenses remained flat for the 53 weeks ended November 2, 2008, compared to the 7 months ended October 31, 2007.

Bingo research and development expenses increased by $0.2 million to $3.0 million, for the 53 weeks ended November 2, 2008, from $2.8 million compared to the 12 months ended October 31, 2007. The increase is primarily due to higher employee costs as a result of increased travel costs related to the Elite ™ testing in the UK. Box research and development expenses increased $1.5 million to $2.5 million for the 53 weeks ended November 2, 2008, from $1.0 million for the 7 months ended October 31, 2007. The increase in the box business segments is primarily due to a full fiscal year of expenses in 2008, costs expended for developing new product lines, such as the California Keno game which was approved in August 2008, new hardware design and software development for a major VLT contract, and increased licensing fees as we expand our distributorship to new markets.

For the 53 weeks ended November 2, 2008, we recorded a goodwill impairment charge of $10.8 million related to our acquisition of Summit compared to no goodwill impairment charge for the 12 months ended October 31, 2007.

There were no gains on the sale of assets for box for the 53 weeks ended November 2, 2008 compared to $0.7 million related to the 7 months ended October 31, 2007.

There were no loss legal contingencies recorded for the 53 weeks ended November 2, 2008, compared to $124,000 for the 12 months ended October 31, 2007.

Interest Expense

Interest expense of $4.6 million for the 53 weeks ended November 2, 2008 increased $2.3 million over the 12 months ended October 31, 2007. The increase is due to interest paid on debt incurred to purchase Summit, debt incurred to purchase our new corporate headquarters in Reno, Nevada, a prepayment penalty of $0.4 million as a result of refinancing our credit facility, $0.7 million as a result of our swap agreement valuation, and $0.8 million due to the write-off of debt acquisition costs associated with our Old Credit Facility.

Impairment of Investments

At November 2, 2008, we held auction rate securities ("ARS") with an aggregate purchase price of approximately $3.9 million. With the liquidity issues experienced in global credit and capital markets, the ARS held by us at November . . .