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, beginning 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 further expand our efforts to include the development and marketing of products and services for: (i) 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 Native American Class II and charity gaming markets 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 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, or linked interactive paper bingo systems. In fiscal 2006, we entered the international electronic bingo market and currently supply bingo systems to four 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 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 are required to be licensed by the state of Oklahoma. Pursuant to the compacts, vendors placing games at tribal facilities 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 March 31, 2009, we had placed 6,647 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 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 stand-alone player terminals outside of Oklahoma have been placed in Rhode Island. We believe that additions to our key senior management personnel will help accelerate our entrance into new Class III markets and that we will deliver additional player terminals to other Class III markets this fiscal year.

As a prerequisite to conducting business in the major commercial gaming markets, we, our directors, officers, and key employees are required to secure various licenses. It is difficult to properly estimate the amount of time and expense that will be necessary to complete the required licensing process. We are not currently licensed to conduct business in any major gaming market (international or domestic).

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 win per unit generated by each gaming system. Our portion of the win per unit 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 win per unit, with the result that gaming providers, including us, 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 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 could reduce the number of our Class II machines in play in that same jurisdiction.

Charity Market

Charity bingo and other forms of charity gaming are operated by or for the benefit of nonprofit organizations for charitable, educational and other lawful purposes. These games are typically only interconnected within the gaming facility where the terminals are located. Regulation of charity gaming is vested with each individual state, and in some states, regulatory authority is delegated to county or municipal governmental units.

In Alabama, our largest charity market, constitutional amendments have been passed authorizing charity bingo in certain locations. The regulation of charity bingo in Alabama is typically vested with a local governmental authority. However, the Alabama Governor's office has recently commissioned a task force to review the types of games placed in the charitable bingo halls in the state. The Alabama Governor's office and the Alabama Attorney General's office have issued conflicting public statements regarding the legality of certain types of equipment commonly used to play charity bingo within the state of Alabama.

We ordinarily place player terminals under participation arrangements in the charity market and receive a percentage of the win per unit generated by each of the player terminals. As of March 31, 2009, we had 2,273 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 the third fiscal quarter of 2009, revenue generated from this market will 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 win per unit. 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 the second fiscal quarter of 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 2014. As of March 31, 2009, we had installed 4,755 player terminals at 22 bingo parlors in Mexico under this contract with Apuestas. At March 31, 2009, 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 March 31, 2009, we had entered into separate contracts with three other companies incorporated in Mexico to provide traditional and electronic bingo gaming, technical assistance, and related services for bingo parlors in Mexico. As of March 31, 2009, we had installed 370 player terminals at three parlors in Mexico under these contracts.

Development Agreements

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

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 win per unit 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.

In the third quarter of fiscal 2008, we 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 as of the first quarter of fiscal 2009 is being amortized over the life of the agreement. The repayment period of the note will be based on the performance of the facility. In the quarter ended March 31, 2009, we made a commitment of $7.0 million that consists of both a loan for new unit placements in an expanded facility and a placement fee for certain units to remain at the current facility for an extended period of time. As of March 31, 2009, we had advanced $1.25 million toward this commitment. The remaining commitment of $5.75 million is expected to be paid over the next three fiscal quarters in the following increments: $2.75 million, $1.5 million and $1.5 million, respectively.

As of March 31, 2009, we have placed approximately 4,956 units in eight 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. After June 30, 2009, we may continue to distribute WMS products pursuant to certain sell-off rights in Oklahoma and Mexico and certain limited distribution rights in Washington; however, we will not have the benefits of a contractual discount or a grant of exclusivity.

Recent Developments

In January 2009, we executed a reduction of 77 full-time and part-time employees, including two engaged in field operations and business development, 66 in system and game development, and nine in other general administrative and executive functions. Severance and other benefits of approximately $1.1 million were paid in the quarter ended March 31, 2009.

RESULTS OF OPERATIONS

The following tables outline our end-of-period and average installed base of
player terminals for the three and six months ended March 31, 2009 and 2008.

                                                            At March 31,
                                                          2009        2008
          End-of-period installed player terminal base
          Oklahoma compact games                           6,647       5,119
          Class II player terminals
          New Generation system - Reel Time Bingo®         2,153       2,223
          Legacy system                                      289         311
          Mexico                                           5,125       4,039
          Other player terminals(1)                        2,575       2,771



                                             Three Months Ended          Six Months Ended
                                                  March 31,                  March 31,
                                              2009          2008         2009         2008
 Average installed player terminal base:
 Oklahoma compact games                         6,463        4,564         6,179       4,411
 Class II player terminals
 New Generation System - Reel Time Bingo        2,184        3,084         2,197       3,389
 Legacy system                                    296          340           299         343
 Mexico                                         5,259        3,688         5,315       3,400
 Other player terminals(1)                      2,637        2,774         2,670       2,755

Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008

Total revenues for the three months ended March 31, 2009, were $33.9 million, compared to $32.2 million for the three months ended March 31, 2008, a $1.7 million or 5.2% increase.

Gaming Revenue - Oklahoma Compact

† The Oklahoma compact games generated revenue of $15.3 million in the three months ended March 31, 2009, compared to $14.1 million during the same period of 2008, an increase of $1.2 million, or 8.5%. The average installed base of the Oklahoma compact games increased 41.6%, as the conversion of Class II player terminals to compact games continues, while the win per unit decreased 13.5%, due to general economic downturn causing a reduction in play. We expect the rate of conversion from Class II to compact games to decline in the future, as over 87% of the Oklahoma installed base at March 31, 2009, consisted of Oklahoma compact units. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, increased $684,000, or 117.9%, to $1.3 million, in the three months ended March 31, 2009, compared to $581,000 in the same period of 2008.

Gaming Revenue - Class II

† Class II gaming revenue was $5.2 million in the three months ended March 31, 2009, compared to $7.5 million in the three months ended March 31, 2008, a $2.3 million or 31.5% 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 $4.7 million for the three months ended March 31, 2009, compared to $6.9 million in the three months ended March 31, 2008, a $2.2 million or 32.5% decrease. The decrease is primarily attributable to a decrease in the average installed base of player terminals of 29.2%. Accretion of contract rights related to development agreements, which is recorded as a reduction of revenue, decreased $50,000 or 14.4%, to $294,000 in the three months ended March 31, 2009, compared to $344,000 in the three months ended March 31, 2008. 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.

† Legacy revenue decreased $126,000, or 20.2%, to $497,000 in the three months ended March 31, 2009, from $622,000 in the three months ended March 31, 2008. The average installed base of Legacy player terminals decreased 12.9%, and the win per unit decreased by 7.0%, due to general economic downturn causing a reduction in play.

Gaming Revenue - Charity

† Charity gaming revenues decreased $1.5 million, or 34.6%, to $2.9 million for the three months ended March 31, 2009, compared to $4.4 million for the same period of 2008. The average installed base of charity player terminals decreased 6.3%, and the win per unit decreased 31.6%. The decrease in the win per unit 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 $69,000, or 7.9%, to $813,000 in the three months ended March 31, 2009, from $882,000 during the same period of 2008.

† Revenues from the New York Lottery system increased $133,000, or 7.9%, to $1.9 million in the three months ended March 31, 2009, from $1.7 million in the three months ended March 31, 2008. 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 $231,000, or 9.4% to $2.7 million in the three months ended March 31, 2009, from $2.5 million during the same period of 2008. As of March 31, 2009, we had installed 5,125 player terminals at 25 bingo parlors in Mexico compared to 4,039 terminals installed at 16 bingo parlors at March 31, 2008. 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 increased $4.0 million, or 1,051.8%, to $4.4 million for the three months ended March 31, 2009, from $378,000 for the same period of 2008. Gaming equipment and system sale revenue of $4.3 million for the three months ended March 31, 2009, includes the sale of $2.7 million for 360 player terminals. The sale of these units will result in a quarterly reduction of recurring Oklahoma Compact revenue of approximately $850,000. Gaming equipment and system sale revenue of $205,000 for the three months ended March 31, 2008, did not include player terminal or system sales. License revenues for the three months ended March 31, 2009, were $19,000, compared to $173,000 for the three months ended March 31, 2008, a decrease of $154,000. Total cost of sales, which includes cost of royalty fees, increased $1.9 million, to $2.3 million in the three months ended March 31, 2009, from $414,000 in the three months ended March 31, 2008. The increase primarily relates to the increase in revenue discussed above.

Other Revenue

† Other revenues increased $220,000, or 45.6%, to $702,000 for the three months ended March 31, 2009, from $482,000 during the same period of 2008. The increase is primarily due to increased maintenance income in the three months ended March 31, 2009.

Selling, General and Administrative Expenses

† Selling, general and administrative expenses, or SG&A, increased approximately $3.8 million, or 23.1%, to $20.5 million for the three months ended March 31, 2009, from $16.6 million in the same period of 2008. This increase was primarily a result of (i) an increase due to legal fees and settlement costs, net of expected insurance proceeds of approximately $4.2 million, related to the Diamond Game legal matter; (ii) a net increase in personnel costs of $405,000; including an increase in stock compensation, an accrual under an annual incentive plan and other employee benefits; offset by a decrease in salaries and wages due to a reduction in force in January 2009; and . . .