FUTURE EXPECTATIONS AND FORWARD-LOOKING STATEMENTS

This Quarterly Report and the information incorporated herein by reference contain various "forward-looking statements" within the meaning of federal and state securities laws, including those identified or predicated by the words "believes," "anticipates," "expects," "plans," "will," or similar expressions with forward-looking connotations. Such statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the uncertainties inherent in the outcome of any litigation of the type described in this Quarterly Report under "PART II - Item 1. Legal Proceedings," trends and other expectations described in "PART I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," risk factors disclosed in our earnings and other press releases issued to the public from time to time, as well as those other factors as described under "PART II - Item 1A. Risk Factors" set forth below. Given these uncertainties, readers of this Quarterly Report are cautioned not to place undue reliance upon such statements. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligations to update any such forward-looking statements.

Overview

We are a developer and distributor of comprehensive systems, content, electronic games and gaming player terminals for the casino, charity, international bingo, and video lottery markets. Initially, our customers were located primarily in the Native American gaming sector; however, around 2003, we began diversifying into broader domestic and international gaming markets.

Although we continue to develop systems and products for Native American tribes throughout the United States, we now intend to expand our efforts to include the development and marketing of products and services: (i) for the various commercial casino markets; (ii) video lottery systems and other products for various domestic and international lotteries; and (iii) products for various charity and international bingo and other emerging markets.

Our products cover a broad spectrum of the gaming industry, including:
interactive systems for both server-based and stand-alone gaming operations; interactive electronic bingo games for the Class II gaming market and for the Class III, stand-alone and video lottery markets; proprietary gaming player terminals in multiple configurations and formats; electronic instant lottery scratch ticket systems; casino management systems, including player tracking, cash and cage, slot accounting, and slot management modules; unified currency systems; and other electronic and paper bingo systems. In addition, we provide maintenance, operations support and other services for our customers and products.

We design and develop networks, software and content that provide our customers with, among other things, comprehensive gaming systems, some of which are delivered through a telecommunications network that links our player terminals with one another, both within a single gaming facility or among several gaming facilities.

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

Class II Market

We derive our Class II gaming revenues from participation arrangements with our Native American customers. Under these arrangements, we retain ownership of the gaming equipment installed at our customers' tribal gaming facilities, and receive revenue based on a percentage of the hold per day generated by each gaming system. Our portion of the hold per day is reported by us as "Gaming revenue - Class II" and represents the total amount that end users wager, less the total amount paid to end users for prizes, the amounts retained by the facilities for their share of the hold and the accretion of contract rights.

As the Class II market has matured, we have seen new competitors with significant gaming experience and financial resources enter the market. New tribal-state compacts, such as the Oklahoma gaming legislation passed by referendum in 2004, have also led to increased competition. In addition, there has been what we believe to be an extended period of non enforcement by regulators of existing restrictions on non-Class II devices, which has forced us to continue competing against games that do not appear to comply with the published regulatory restrictions on Class II games. Due to this increased competition in Oklahoma, and because of continued conversion to games played under the compact, we have and may continue to experience pressure on our pricing model and hold per day, with the result that gaming providers, including the Company, are competing on the basis of price as well as the entertainment value and technological quality of their products. We have also experienced and expect to continue to experience a decline in the number of our Class II games deployed in Oklahoma, in accordance with our recent conversion strategy. While we will continue to compete by regularly introducing new and more entertaining games with technological enhancements that we believe will appeal to end users, we believe that the level of revenue retained by our customers from their installed base of player terminals will become a more significant competitive factor, one that may require us to change the terms of our participation arrangements with customers. We will continue the deployment of one-touch, compact-compliant Class III games in Oklahoma, which will reduce the number of Class II machines in play.

Class III Games and Systems for Oklahoma

During 2004, the Oklahoma Legislature passed legislation authorizing certain forms of gaming at racetracks, and additional types of games at tribal gaming facilities, pursuant to a tribal-state compact. The Oklahoma gaming legislation allows the tribes to sign a compact with the state of Oklahoma to operate an unlimited number of electronic instant bingo games, electronic bonanza-style bingo games, electronic amusement games, and non-house-banked tournament card games. In addition, certain horse tracks in Oklahoma are allowed to operate a limited number of instant and bonanza-style bingo games and electronic amusement games. All vendors placing games at any of the racetracks under the compact will ultimately be required to be licensed by the state of Oklahoma. Pursuant to the compacts, vendors placing games at tribal facilities will have to be licensed by each tribe. All electronic games placed under the compact have to be certified by independent testing laboratories to meet technical specifications. These technical specifications were published by the Oklahoma Horse Racing Commission and the individual tribal gaming authorities in the first calendar quarter of 2005. We are fully licensed in Oklahoma and as of December 31, 2008, we had placed 6,555 player terminals at 42 facilities that are operating under the Oklahoma gaming compact. We generally receive a 20% revenue share for the games played under the Oklahoma Gaming Compact.

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

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

Charity Market

Charity bingo and other forms of charity gaming are operated by or for the benefit of non profit organizations for charitable, educational and other lawful purposes. These games are typically only interconnected within the gaming facility where the terminals are located. Regulation of charity gaming is vested with each individual state, and in some states, regulatory authority is delegated to county or municipal governmental units. In Alabama, our largest charity market, constitutional amendments have been passed authorizing charity bingo in certain locations. The regulation of charity bingo in Alabama is typically vested with a local governmental authority. However, the Governor's office has commissioned a task force to review the types of games placed in the charitable bingo halls in the state. We ordinarily place player terminals under participation arrangements in the charity market and receive a percentage of the hold per day generated by each of the player terminals. As of December 31, 2008, we had 2,379 high-speed, standard bingo games installed for the charity market in three Alabama facilities.

All Other Gaming Markets

Class III Washington State Market. The majority of our Class III gaming equipment in Washington State has been sold to customers outright, for a one-time purchase price, which is reported in our results of operations as "Gaming equipment, system sale and lease revenue" at the time of proper revenue recognition. Certain game themes we use in the Class III market have been licensed from third parties and are resold to customers along with our Class III player terminals. Historically, revenue from the sale of Class III gaming equipment is recognized when the units are delivered to the customer, and the licensed games installed, or over the contract term when the fair value of undelivered products has not been established. Because we sell new products, systems and services for which fair value has not been established, beginning in fiscal 2008, revenue generated from this market will generally be recognized over the terms of the contracts. To a considerably lesser extent, we also enter into either participation arrangements or lease-purchase arrangements for our Class III player terminals, on terms similar to those used for our player terminals in the Class II market.

We also receive a small back-office fee from both leased and sold gaming equipment in Washington State. Back-office fees cover the service and maintenance costs for back-office servers installed in each facility to run our Class III games, as well as the cost of related software updates.

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

International Commercial Bingo Market. In March 2006, we entered into a contract with Apuestas Internacionales, S.A. de C.V., or Apuestas, a subsidiary of Grupo Televisa, S.A., to provide traditional and electronic bingo gaming, technical assistance, and related services for Apuestas' locations in Mexico. Apuestas currently has a permit issued by the Mexican Ministry of the Interior (Secretaria de Gobernación) to open and operate 65 bingo parlors. Apuestas is projecting that all 65 bingo parlors will be open by May 2011. As of December 31, 2008, we had installed 4,898 player terminals at 21 bingo parlors in Mexico under this contract with Apuestas. At December 31, 2008, all player terminals placed by us in the Apuestas bingo parlors were pursuant to a revenue share arrangement that is comparable to our Oklahoma market arrangements.

As of December 31, 2008, we had entered into separate contracts with four other companies incorporated in Mexico to provide traditional and electronic bingo gaming, technical assistance, and related services for bingo parlors in Mexico. As of December 31, 2008, we had installed 590 player terminals at four parlors in Mexico under these contracts.

Development Agreements

As we seek to continue the growth in our customer base and to expand our installed base of player terminals, a key element of our strategy has become entering into development agreements with various Native American tribes to assist in the funding of new or expansion of existing tribal gaming facilities. Pursuant to these agreements, we advance funds to the tribes for the construction of new tribal gaming facilities or for the expansion of existing facilities.

Amounts advanced that are in excess of those to be reimbursed by such tribes for real property and land improvements are allocated to intangible assets and are generally amortized over the life of the contract on a straight-line basis.

In return for the amounts advanced by us, we receive a commitment for a fixed number of player terminal placements in the facility or a fixed percentage of the available gaming floor space, and a fixed percentage of the hold per day from those terminals over the term of the development agreement. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of our floor space. In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid.

We have in the past, and may in the future, reduce the number of player terminals in certain of our facilities as a result of ongoing competitive pressures faced by our customers from alternative gaming facilities and pressures faced by our machines from competitors' products. We have in the past, and in the future may also, by mutual agreement and for consideration, amend these contracts in order to reduce the number of player terminals at these facilities.

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

As a result of the substantial levels of past and current development activity in Oklahoma, we expect the future pace of development in Oklahoma to decline somewhat. Accordingly, we do not anticipate future levels of development participation in Oklahoma to keep pace with our historical levels. As of December 31, 2008, we have placed approximately 5,400 units in 10 facilities in Oklahoma pursuant to development agreements.

Third-Party Software and Technology

Our Manufacturing and License Agreement with WMS Gaming, Inc., which was originally entered into on May 17, 2004 and amended and restated on June 29, 2005 (the "Agreement"), will expire under operation of its terms on June 30, 2009. The Agreement enabled us to distribute, at a discount, WMS licensed products (i) on an exclusive (except as to WMS) basis in the Class II and Class III Native American market in Oklahoma; (ii) on a limited exclusive basis (except as to WMS and subject to WMS' existing commitments) in the Class II Native American market in North America, the pull tab and Class II-style bingo market in Mexico, and in the Charity markets in Alabama; and (iii) on a non exclusive basis for the Class III market in Washington. Although we may exercise certain sell-off rights in Oklahoma and Mexico, after June 30, 2009, we may continue to distribute WMS products, but without the benefits of a contractual discount or a grant of exclusivity.

RESULTS OF OPERATIONS

The following tables outline our end-of-period and average installed base of
player terminals for the three months ended December 31, 2008 and 2007.

                                                          At December 31,
                                                          2008        2007
         End-of-period installed player terminal base
         Class II player terminals
         New Generation system - Reel Time Bingo®          2,211       3,477
         Legacy system                                       303         342
         Oklahoma compact games                            6,555       4,369
         Mexico                                            5,488       3,513
         Other player terminals(1)                         2,681       2,729



                                                      Three Months Ended
                                                         December 31,
                                                       2008          2007
          Average installed player terminal base:
          Class II player terminals
          New Generation System - Reel Time Bingo        2,209        3,691
          Legacy system                                    303          346
          Oklahoma compact games                         5,902        4,190
          Mexico                                         5,369        3,114
          Other player terminals(1)                      2,703        2,737

Three Months Ended December 31, 2008, Compared to Three Months Ended December 31, 2007

Total revenues for the three months ended December 31, 2008, were $28.6 million, compared to $30.2 million for the three months ended December31 2007, a $1.6 million or 5% decrease.

Gaming Revenue - Class II

§ Class II gaming revenue was $5.0 million in the three months ended December 31, 2008, compared to $8.0 million in the three months ended December 31, 2007, a $3.0 million or 38% decrease. We expect the number of Class II terminals to continue to decrease as they are replaced with higher-earning Oklahoma compact player terminals.

§ Reel Time Bingo revenue was $4.5 million for the three months ended December 31, 2008, compared to $7.4 million in the three months ended December 31, 2007, a $2.9 million or 39% decrease. The average installed base of player terminals decreased 40%, which was partially offset by a 10% increase in the average hold per day. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, decreased $72,000 or 21%, to $278,000 in the three months ended December 31, 2008, compared to $350,000 in the three months ended December 31, 2007. The reduction in accretion of contract rights is the result of allocating the total accretion rights across all product lines with the majority being allocated against Oklahoma compact revenue. During fiscal 2009, we will continue to convert Reel Time Bingo player terminals to games played under the compact, which are included in "Gaming revenue - Oklahoma compact," and we expect this trend to continue in the future as Reel Time Bingo competes with the higher hold per day of compact games.

† Legacy revenue decreased $118,000, or 19%, to $500,000 in the three months ended December 31, 2008, from $618,000 in the three months ended December 31, 2007. The average installed base of Legacy player terminals decreased 12%, and the hold per day decreased by 10%.

Gaming Revenue - Oklahoma Compact

† In March 2005, we began converting Reel Time Bingo player terminals to games that could be played under the Oklahoma compact. The Oklahoma compact games generated revenue of $13.8 million in the three months ended December 31, 2008, compared to $11.6 million during the same period of 2007, an increase of $2.2 million, or 19%. The average installed base of the Oklahoma compact games increased 40%, as the conversion of Class II player terminals to compact games continues, while hold per day decreased 11%. We expect the rate of conversion from Class II to compact games to decline in the future, as over 86% of the Oklahoma installed base at December 31, 2008, consisted of Oklahoma compact units. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, increased $402,000, or 65%, to $1.0 million, in the three months ended December 31, 2008, compared to $621,000 in the same period of 2007.

Gaming Revenue - Charity

† Charity gaming revenues decreased $1.3 million, or 34%, to $2.5 million for the three months ended December 31, 2008, compared to $3.9 million for the same period of 2007. The average installed base of charity player terminals decreased 6%, and the hold per day decreased 32%. The decrease in the hold per day is primarily attributable to competitive factors and to a lesser extent, economic factors. Competitive factors would include, but not be limited to, a significant increase of competitor units added to the gaming floor of our largest charity operation, players reward programs not offered on our player terminals and location of our player terminals on the gaming floor.

Gaming Revenue - All Other

§ Class III back-office fees decreased $107,000, or 12%, to $774,000 in the three months ended December 31, 2008, from $881,000 during the same period of 2007.

§ Revenues from the New York Lottery system increased $87,000, or 6%, to $1.6 million in the three months ended December 31, 2008, from $1.5 million in the three months ended December 31, 2007. Currently, eight of the nine planned racetrack casinos are operating, with approximately 13,000 total terminals. At the current placement levels, we have obtained near break-even operations for the New York Lottery system and expect to achieve profitable operations after all of the facilities are operating.

† Revenues from the Mexico bingo market increased $264,000 to $2.4 million in the three months ended December 31, 2008, from $2.1 million during the same period of 2007. As of December 31, 2008, we had installed 5,448 player terminals at 25 bingo parlors in Mexico compared to 3,513 terminals installed at 14 bingo parlors at December 31, 2007. Our revenue share is in the range of the other electronic bingo markets in which we operate.

Gaming Equipment and System Sale and Lease Revenue and Cost of Sales

† Gaming equipment and system sale and lease revenue was $1.8 million for the three months ended December 31, 2008, and for the same period of 2007. Gaming equipment and system sale revenue of $1.7 million for the three months ended December 31, 2008, includes 100 player terminals sold. Gaming equipment and system sale revenue of $1.1 million for the three months ended December 31, 2007, included the sale of 50 player terminals and one system. License revenues for the three months ended December 31, 2008, were $77,000, compared to $464,000 for the three months ended December 31, 2007, a decrease of $387,000. Total cost of sales, which includes cost of royalty fees, increased $1.1 million, to $1.8 million in the three months ended December 31, 2008, from $790,000 in the three months ended December 31, 2007. The increase primarily relates to the increase in cost of sales associated with the revenue discussed above.

Other Revenue

† Other revenues increased $156,000, or 42%, to $524,000 for the three months ended December 31, 2008, from $368,000 during the same period of 2007. The increase is primarily due to increased maintenance income in the three months ended December 31, 2008.

Selling, General and Administrative Expenses

† Selling, general and administrative expenses, or SG&A, increased approximately $4.2 million, or 26%, to $20.3 million for the three months ended December 31, 2008, from $16.1 million in the same period of 2007. This increase was primarily a result of (i) an increase in salaries and wages and the related employee benefits of approximately $900,000, due to headcount increases (at December 31, 2008, we employed 500 full-time and part-time employees, compared to 442 at December 31, 2007); and (ii) an increase in legal and professional fees of approximately $3.1 million, largely related to the Diamond Game legal matter.

Amortization and Depreciation

† Amortization expense increased $186,000, or 15%, to $1.4 million for the three-months ended December 31, 2008, compared to $1.2 million for the same period of 2007. Depreciation expense increased $2.2 million, or 19%, to $13.5 million for the three months ended December 31, 2008, from $11.3 million for the corresponding three months ended December 31, 2007, primarily as a result of additional player terminals for the Oklahoma market.

Other Income and Expense

§ Interest income increased $156,000, or 14%, to $1.3 million for the three months ended December 31, 2008, from $1.1 million in the same period of 2007. We entered into development agreements with a customer under which approximately $70.9 million has been advanced and is outstanding at December 31, 2008, and for which we impute interest on these interest-free loans. For the three months ended December 31, 2008, we recorded imputed interest of $1.2 million million relating to development agreements with an imputed interest rate range of 6.00% to 9.00%, compared to $804,000 for the . . .