UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

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 number: 000-51703

FortuNet, Inc.

(Exact name of Registrant as specified in its charter)

Nevada	88-0252188
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
2950 South Highland Drive, Suite C Las Vegas, Nevada 89109
(Address of principal executive offices including Zip Code)
Registrant’s telephone number, including area code: (702) 796-9090

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes  xNo        

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes  xNo        

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes  oNo        

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer,” ” large accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes  xNo        

As of June 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $29,513,000 (based on a closing sale price of $10.09 per share as reported by the Nasdaq Global Market). Shares of common stock beneficially held by executive officers and directors and by each person who beneficially owns 5% or more of the outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 11,352,279 shares of the registrant’s common stock issued and outstanding as of March 21, 2008.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2008 are incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this Form 10-K.

FORTUNET, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2007

		Page
PART I
ITEM 1.	Business	5
ITEM 1A.	Risk Factors	17
ITEM 2.	Properties	27
ITEM 3.	Legal Proceedings	27
ITEM 4.	Submission of Matters to a Vote of Security Holders	28
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities	28
ITEM 6.	Selected Financial Data	29
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
ITEM 7A.	Quantitative and Qualitative Disclosure about Market Risk	35
ITEM 8.	Financial Statements and Supplementary Data	36
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	54
ITEM 9A.	Controls and Procedures	54
ITEM 9B.	Other Information	55
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	56
ITEM 11.	Executive Compensation	56
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	57
ITEM 14.	Principal Accountant Fees and Services	57
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	57
	Signatures	59

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Annual Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “contemplate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “will continue to be,” or the negative of foregoing and similar expressions regarding beliefs, plans expectations or intentions regarding the future also identify forward-looking statements. Forward-looking statements in this Annual Report include, without limitation, our statements that:

(A) in Item 1, (1) our belief that our field-proven mobile gaming platform is in compliance with the regulations promulgated under Nevada’s new mobile gaming law; (2) if we obtain the necessary approvals, we will begin marketing our wireless gaming platform to Nevada gaming establishments, most likely commencing with casinos with bingo halls where our mobile gaming platforms are already in use for playing bingo games; (3) we believe the addition of traditional casino games to our mobile platform will increase these casino operators’ revenues; (4) we expect to subsequently expand our marketing to additional Nevada gaming establishments that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of gaming establishments where playing of traditional casino games, such as poker, keno and slots, was previously not available; (5) we expect to subsequently expand marketing efforts for our wireless gaming platform beyond Nevada; (6) we intend to market our mobile casino gaming platforms under the WIN-WIN brand name; (7) we anticipate deploying our WIN-WIN platforms in Nevada casinos as soon as possible upon obtaining the required product approvals from the Nevada gaming authorities; (8) our belief that our current facility is adequate for manufacturing sufficient volume of mobile gaming products to satisfy the initially anticipated demand; (9) we anticipate that casino markets will continue to be highly regulated, have stringent product requirements and high system integrity and security requirements as the Nevada mobile gaming market develops; (10) in the emerging mobile gaming market, we expect to encounter competition from new entrants who seek to meet these market requirements; (11) we expect to continue to emphasize the research and development aspect of our business, including investing in our Smart products; (12) as the mobile gaming market develops in Nevada, we anticipate selling or leasing our mobile gaming platform products to a broader group of casino operators in Nevada and in other jurisdictions if mobile gaming is approved in these jurisdictions and the operation of our mobile gaming devices is specifically approved in these jurisdictions, (13) we believe that electronic bingo player units are legal in all tribal jurisdictions, United States Armed forces bases,  in a majority of the states in which paper bingo is legal, and in a growing number of foreign jurisdictions; (14) we intend to seek the necessary licenses, approvals and findings of suitability for our products and our personnel in other jurisdictions where there is an opportunity to market our products; (15) our belief that our current non-restricted gaming licenses allow us to manufacture and distribute our mobile gaming platforms in Nevada without additional licensing requirements; (16) we do not anticipate that any of our independent directors will be licensed as a result of serving as a director on the Company’s board of directors; (B) in Item 1A, (17) our future success depends to a significant degree on the skills, experience and efforts of our key personnel; (18) our future success depends upon our ability to attract, train and retain key marketing personnel and key managers as we further develop our products and as we enter new markets and expand in existing markets; (19) we expect, based on 2007 revenues, that our revenues attributable to sales generated through a certain distributor for 2008 will be reduced by approximately $1,500,000; (20) we expect competition to increase and intensify as the market for mobile gaming devices develops; (21) we expect fierce competition from multiple large competitors dominating their respective markets in our expansion efforts, such as Aristocrat Leisure, Ltd., International Game Technology, Alliance Gaming Corporation, WMS Gaming Inc. and Shuffle Master, Inc., that may enter the market for mobile gaming devices; (22) our belief that the failed auctions that we experienced during the first quarter of 2008 are not a result of the deterioration of the underlying credit quality of the auction rate securities, although valuation of them is subject to uncertainties that are difficult to predict; (23) our belief that any unrealized gain or loss associated with the auction rate securities will be temporary and will be recorded in accumulated other comprehensive income (loss) in our financial statements; (24) our belief that based on our cash and cash equivalents balances in the first quarter of 2008, the current lack of liquidity in the credit market and capital markets will not have a material impact on our liquidity, cash flows, financial flexibility, or our ability to fund our operations; (25) we will continue to monitor the market for our auction rate securities and consider its impact (if any) on the fair market value of our investments; (26) our belief that we will have the ability to hold any auction rate securities for which auctions fail until the market recovers; (27) we do not anticipate having to sell the auction rate securities in order to operate our business; (28) initially, we intend to offer our customers equipment lease agreements under which we will lease our wireless gaming terminals and the associated equipment; (29) we expect to enter into agreements with customers that operate casinos and bingo halls in more than one location; (30) we anticipate that our agreements with multi-location customers will provide that the customer will be responsible for providing, at its expense, a dedicated high-speed computer network connection between our server-based gaming systems in the various locations operated by the customer to a remote central gaming server supporting such systems; (31) we expect to spend substantial amounts on research and development; (32) we expect, as needed, to continue to make a significant investment in product development; (33) to manage any future growth effectively, we will have to expand our management team, integrate new personnel and augment our marketing and production capabilities; (34) to rapidly produce large volumes of wireless gaming terminals, we will have to formulate and implement design, production planning, manufacturing and quality assurance plans that are unlike those we have used in the past; (35) when legally permitted, we intend to provide mobile gaming platforms to enable players to play traditional casino games using our wireless player terminals in Nevada;  (36) we expect a substantial portion of our future growth to result from the general expansion of the gaming industry; (C) in Item 2, (37) our belief that our current facility is adequate for manufacturing a sufficient volume of mobile gaming products to satisfy the anticipated demand through the existing lease term; (D) in Item 3, (38) we believe that the final resolution of any of the threatened or pending litigation described above, individually or in the aggregate, is not likely to have a material adverse effect on our business, cash flow, results of operations or financial position; (E) in Item 5, (39) our belief that we do not foresee paying dividends on our common stock in the future; (40) our belief that we do not intend to commence procuring any significant amount of component parts to manufacture our gaming products until we can determine the duration of the currently ongoing review process of our mobile gaming systems with the Nevada gaming authorities; (41) our belief that our research and development efforts in 2007 have made our field proven mobile gaming platform compliant with the wireless gaming regulations promulgated by the Nevada Gaming Commission to date; (42) our belief that our revenues in 2008 will be reduced related to the loss of

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a significant number of locations related to a distributor; (43) we anticipate that our leasing revenue will be sufficient to fund our operating expenses in the short term; (44) our expectation that long term cash will be generated from existing operations and potentially through selling or leasing our products in new markets; (45) we expect to incur significant additional expenses in connection with the procurement of equipment and components and the manufacturing of additional stationary and wireless player terminals and that the expenses will consume a substantial portion of our recurring lease revenues; (46) our belief that our cash flow from operations will be adequate to meet our expenditures for the next 12 months and foreseeable future; (47) our expectation that the adoption of certain accounting pronouncements will not have a material effect on the Company’s financial condition, results of operations or cash flows; and (48) our anticipation to continue to capitalize costs related to the research and development of our gaming platforms until the field deployment of our mobile gaming system is achieved. 

Our expectations, beliefs, objectives, anticipations, intentions and strategies regarding the future, including, without limitation, those concerning expected operating results, revenues and earnings are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by the forward-looking statements including, but not limited to:  unexpected changes to Nevada’s new mobile gaming laws, a protracted delay in the Nevada Gaming Control Board’s review of our mobile gaming platform or its rejection of our product; inability to obtain the necessary approvals, licenses and findings of suitability; unexpected difficulties in penetrating new markets as a result of regulatory, competitive or other reasons; lack of resources to devote to marketing efforts; unexpected changes to zoning laws that effect our ability to continue to manufacture products in our current facility; inability to cut our costs resulting in a loss of our existing customers; legality of our electronic bingo players; unanticipated need of our directors to be licensed in order to serve on our board of directors; unexpected loss of key personnel; inability to provide competitive compensation packages to retain qualified personnel; our inability to create or introduce new products for the conventional bingo market; our failure to gain approval for our gaming platforms to play traditional casino games; unanticipated decreases in our manufacturing capabilities; unanticipated final resolution of our litigation matters; our loss of existing distributors or our failure to further broaden our distribution channel; inability to accurately predict the impact of a loss of a major portion of revenue from a certain distributor on our revenues for 2008; unanticipated substantial decrease or increase in our research and development expenses; unexpected changes to credit ratings of the auction rate securities, difficulty in evaluating the value of the auction rate securities; inability to accurately value the underlying assets supporting auction rate securities; changes in default rates applicable to the underlying assets, underlying collateral value, and the strength and quality of the market and liquidity;  inability to accurately predict the impact of the recordation of any unrealized gain or loss associated with auction rate securities in our financial statements; unexpected changes in our liquidity, cash flows due to unexpected changes in the credit and capital markets; inability to predict the impact of market changes with respect to our auction rate securities; unanticipated need to liquidate our auction rate securities; unanticipated changes to applicable tax rates or laws or changes in our tax position; an unanticipated need for additional funds for operating expenses, new business opportunities or other unforeseen events; the uncertainty of the outcome of any pending or threatened litigation; our inability to obtain additional financings through bank borrowings or debt or equity financing at all or on terms that are favorable to us; our inability to protect our intellectual property rights; the failure of the overall gaming industry to expand at the rate we expect; unexpected need to expand our operations and enter into a new lease; unanticipated drop or increase in inventory levels; inability of our leasing revenue to meet our operating expenses in the short and long term; (inability to finance additional expenses related to the procurement of equipment and the manufacturing of equipment and component parts; unanticipated increase in expenditures during the next 12 months; inability to accurately predict the impact of certain accounting pronouncements; and inability to capitalize our research and development costs.

We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Readers should also review the cautionary statements and discussion of the risks of our business set forth elsewhere herein under the heading “Risk Factors” under Part I, Item 1A and our other filings with the Securities and Exchange Commission (“SEC”).

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ITEM 1.     BUSINESS

General

We are a designer, manufacturer, and field service provider  of multi-game and multi-player server-based gaming platforms. Our gaming platforms include networks of both wireless and stationary player terminals, cashier-based point of sale, or POS, terminals, self-service POS kiosks and game file servers that conduct and control bingo games. Our gaming platforms have been adapted to conduct traditional casino games, such as keno, poker and slots, in addition to bingo.

We believe that our field-proven mobile gaming platform is in compliance with the regulations promulgated under Nevada’s new mobile gaming law, AB 471, or the Nevada Mobile Gaming Law, as adopted by the Nevada Gaming Commission. We submitted our wireless gaming platform for review by the Nevada gaming authoritiesin 2006.

If we obtain the necessary approvals, we will begin marketing our wireless gaming platform to Nevada gaming establishments, most likely commencing with casinos with bingo halls where our mobile gaming platforms are already in use for playing bingo games. We believe the addition of traditional casino games to our mobile platform will increase these casino operators’ revenues. We expect to subsequently expand our marketing to additional Nevada gaming establishments that may be attracted to our mobile gaming platform by the potential of new gaming revenues generated in the auxiliary gaming and peripheral public areas of gaming establishments where playing of traditional casino games, such as poker, keno and slots, was previously not available. We expect to subsequently expand marketing efforts for our wireless gaming platform beyond Nevada.

We currently own and lease to our customers an inventory of third- and fourth-generation wireless and stationary player terminals, marketed under the BingoStar® brand name, that are deployed in casinos and bingo halls in 27 jurisdictions in North America, including Nevada casinos operated by several major casino operators. We derive essentially all of our revenue from leasing our gaming platform to our customers. Our contracts are typically based on a fixed fee per use per bingo session, a fixed weekly fee per player terminal or a percentage of the revenue generated by each player terminal.

We were incorporated in Nevada in 1989. In 1993, we were licensed as a gaming equipment manufacturer and distributor by the Nevada Gaming Commission. In 1994, we received Nevada regulatory approval for our server-based, concurrent multi-gaming, video gaming network, Mega Fortune®. In 2003, we were granted an Operator of Inter-Casino Linked Systems, or OILS, license by the Nevada Gaming Commission. The OILS license permits us to operate progressive jackpot linked casino games offered simultaneously at a number of participating casinos. In September of 2006, we were granted an Operator of Mobile Gaming Systems license by the Nevada Gaming Commission.

In January 2004, we became the 100% owner of Millennium Games, Inc., or Millennium, which enabled us to consolidate our worldwide distribution rights and to significantly reduce our overall distribution and operational costs. Millennium serves as a distribution channel for our bingo products in Native American or tribal jurisdictions as well as other jurisdictions outside of Nevada.

The FortuNet Gaming Platform

Our core technology is embodied in the FortuNet® gaming platform that we currently lease to casinos and bingo halls throughout North America. Our gaming platform serves as the core foundation on which all of our mobile gaming platforms are based, including our BingoStar electronic bingo gaming platform and our WIN-WIN mobile casino gaming platform. The FortuNet gaming platform includes the following major structural elements:

• central game file servers that conduct and control the playing of bingo and traditional casino games on our wireless and stationary player terminals;

• a comprehensive player tracking, accounting, inventory management and reporting software package marketed under our Accounting and Inventory Management System, or AIMS™, brand name;

• a flexible gaming software package that executes on our multi-game, multi-player gaming platform and provides a variety of downloadable traditional casino games;

• interactive wireless and stationary player terminals that display the outcomes of the games determined by the central game file servers;

• Cashier-operated POS terminals and self-service POS kiosks, issuing money deposit receipts and dispensing payouts; and

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• internally developed hardware and software wireless technology enabling efficient, RF noise-tolerant and reliable bi-directional RF communications between central game file servers and wireless player terminals secured through the use of our downloadable and disposable authentication keys.

BingoStar Electronic Gaming Platform

Our BingoStar platform of integrated, multi-game, multi-player wireless and stationary player terminals allows patrons to play over 4,000 bingo cards with the option of concurrently playing entertainment games, such as solitaire. Our BingoStar platform enables many variations of bingo, including fast-paced 30-number bingo, 90-number British-style bingo, bonanza bingo, pari-mutuel bingo, progressive-jackpot bingo, Class-II slot-style bingo and multi-site linked bingo. BingoStar enables automatic and semi-automatic daubing of players’ electronic bingo cards that facilitates playing of numerous bingo cards in each bingo game, yielding higher revenues for bingo hall operators.

We have developed several proprietary sets of electronic bingo cards for generic and custom applications, such as bonanza bingo games and double-action bingo games. No card in our sets duplicates any card in any commercial set of paper bingo cards known to us. In addition, our wireless and stationary player terminals are capable of storing in electronic format complete facsimiles of third-party commercial sets of paper bingo cards. As a result, our player terminals can monitor both paper and electronic bingo cards.

BingoStar also allows the playing of do-it-yourself bingo cards, akin to a lottery ticket, on the player’s terminal by registering all electronic and paper do-it-yourself cards. The central game file server verifies all do-it-yourself cards and automatically rejects all void and unregistered cards, which results in a high degree of security and integrity for do-it-yourself bingo games. BingoStar will automatically disable a wireless player terminal if a POS cashier voids a player’s bingo cards. This feature prevents an unscrupulous cashier from pocketing the proceeds of the voided bingo cards.

In 2007, we have supplemented our BingoStar platform with a broad new line of bingo products, dubbed Smart (patents pending). The Smart product line includes progressive signs, solid state bingo flashboards, bar coded bingo balls and automatic bingo ball blowers. We have started field deployment of the Smart progressive signs and flashboards and anticipate the deployment of Smart bingo ball blowers in 2008. Following the unveiling of samples of our innovative bar coded Smart paper bingo cards in 2007, we are constructing an advanced printing press that will allow us to supply bingo halls with secure paper bingo cards in volume.

Accounting and Inventory Management System (AIMS)

Our gaming platform includes a comprehensive accounting and inventory management software package marketed under the brand name AIMS. Our AIMS software is a distributed software package running on our central game file servers and POS terminals. The AIMS software package runs in a mixed Windows-XP and Linux environment and is an assembly of numerous functional modules, each addressing the specific management needs of casinos and bingo halls. For example, AIMS includes a comprehensive player tracking module that analyzes and reports players’ spending and automatically issues electronic coupons that provide players with incentives to play multiple bingo sessions. AIMS also automatically tracks in real time the inventory of bingo packs as they are sold through POS terminals or directly on the gaming floor. In addition, AIMS automatically computes all payouts owed to bingo players and accrues progressive prizes, including the reserve accounts for the prizes. Because AIMS includes data exporting and importing modules that are fully compatible and integrated with commercial casino management packages running on casino mainframes, AIMS delivers full transparency into the operational results of our gaming platform to casino management.

WIN-WIN Mobile Gaming Platform

We intend to market our mobile casino gaming platforms under the WIN-WIN brand name. These platforms are comprised of our central game file servers, gaming software, wireless player terminals and POS terminals and POS kiosks operated through our wireless communication technology, as described below. We anticipate deploying our WIN-WIN platforms in Nevada casinos as soon as possible upon obtaining the required product approvals from the Nevada gaming authorities.

Redundant Central Game File Servers

The central game file server of our gaming platform is where bingo and traditional casino games are actually conducted. Game outcomes are then displayed on our wireless and stationary player terminals. Our redundant central game file servers are internally developed, PC-compatible computers equipped with non-modifiable and verifiable memory circuitry that we believe complies with Nevada’s gaming device standards. Our central game file servers run on a  reliable  operating system and facilitate the concurrent playing of multiple types of bingo games along with traditional casino games. In addition, our central game file servers generate all

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random factors that determine the outcomes of the games played. The central game file servers also generate unique, disposable encryption and authentication keys that are downloaded into the wireless player terminals and redundantly preserve game and financial transaction histories.

Flexible Gaming Software Package with Download Capabilities

Our internally developed modular gaming software allows us to rapidly customize our gaming packages to meet the regulatory requirements of specific jurisdictions. The architecture of our software is designed to provide multi-game, multi-player functionality and facilitates rapid modifications of existing games as well as the ability to download a variety of traditional casino games to the wireless player terminals. The package is written in the efficient C programming language and is executed in the reliable Linux environment.

Wireless Player Terminals

Our wireless player terminal is a key component of the FortuNet gaming platform. It reflects many years of research and development in the areas of wireless technology, communication security, software and hardware architecture, and ergonomic user interface design. While available in a variety of models and formats including smaller, monochrome units, the current models of our wireless player terminals are fourth generation products that incorporate either an 8.40 inch color liquid crystal display and measure 9.75 inches long by 2.00 inches wide and are 8.13 inches tall or 10.4 inch color liquid crystal display and measure 9.5 inches long by 0.6 inches wide and are 8.25 inches tall. The wireless player terminals are equipped with fast-recharge battery circuitry and sustain continuous operation for at least 12 hours.

Our color wireless player terminals are capable of playing not only bingo but also traditional casino games. If required approvals are obtained, our wireless player terminals will allow players to play traditional casino games anywhere within permitted public areas of the casino. By providing a means to play in a comfortable environment, our wireless player terminals may stimulate players to play longer and will, in essence, expand the casino floor to auxiliary gaming and peripheral public areas while simultaneously reducing energy and labor costs.

We believe that our mobile gaming platform meets the standards established by the Nevada Gaming Commission for mobile gaming devices, as well as many of the standards for conventional slot machines. In particular, our internal testing indicates that our wireless player terminal can withstand a 23,000 volt electrostatic discharge, the standard that is required of slot machines. It is also equipped with tamper-evident features and alarms that render the unit inoperable following a tampering event.

Stationary Player Terminals

Our stationary player terminals are secure PC-compatible computers equipped with high-resolution, 15 inch flat liquid crystal color touch screens and are available in different formats, such as slant-top, upright, coin-operated and cashless ultra-thin video terminals. These high end terminals allow players to watch and listen to close-circuit television programs in adjustable picture-in-picture windows while playing bingo or traditional casino games. Our stationary player terminals are housed in custom-made metal, slot-machine-like cabinets. Our stationary player terminals run essentially the same software as our wireless player terminals.

Cashier-operated POS terminals and self-service POS kiosks

Players make all money deposits and receive payouts and refunds at our secure PC-compatible cashier-operated POS terminals or at our self-service POS kiosks. The functions of both POS configurations are nearly identical, as both POS configurations issue bar-coded transaction receipts to the player, register the player’s identification from the player’s card, and register those transactions with the central game file servers. The only difference is that in the case of the cashier-operated terminals, it is the cashier who accepts payments and hands out refunds and prizes, whereas, a kiosk acts much like a bank automated teller machine.

Both POS configurations have optional features, such as the ability to accept credit cards where permitted by law. The kiosk is configurable to dispense bills, coins or redeemable bar-coded vouchers and is also configurable to include a charger rack housing wireless player terminal. In jurisdictions other than Nevada, the kiosk also optionally houses the central file server that operates games on the wireless player terminals dispensed from the kiosk. With optional wheels, a mobile kiosk can be transported to different multi-use facilities, such as theaters. The kiosk incorporates a player-operated touch screen that doubles as an advertising channel when the kiosk is not in use. The kiosk’s internal systems are securely locked and alarmed and are accessible only to authorized personnel who must identify themselves with a magnetic stripe user card and a password entered on the kiosk touch screen.

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Because self-service kiosks do not require cashiers, they can yield operators significant savings in labor costs. In addition, kiosks shorten the waiting lines, especially in bingo halls, and free more time for the patrons to play casino games.

Internally Developed, Secure and Reliable Wireless Communication Technology

Our mobile casino gaming platform uses our internally developed, fast-response, secure, bi-directional spread-spectrum and narrow-band radio frequency, or RF, communication hardware and software for wireless communications. Our communication hardware and software offer reliable and secure data delivery to and from our wireless player terminals, even in the noisy environments characteristic of modern casinos that are saturated with cellular telephones and security radio telephones. We use disposable downloadable encryption and authentication keys to prevent hacking of our RF channels.

Our wireless player terminals are also equipped with a close-proximity, secure, infrared communication channel to download our authentication keys. At the cashier-operated POS terminals and the self-service POS kiosks, we download the wireless player terminal with a file containing many disposable encryption and authentication keys. Each key is used only once to encrypt and authenticate a single gaming transaction performed over the RF channel. For example, each poker hand dealt by the file server to the player terminal is encoded separately with a unique key.

Our mobile gaming platform can detect and automatically terminate operations on the wireless player terminals when they are taken beyond permitted areas by automatically destroying the encryption and authentication keys. Our wireless player terminals are also equipped with player identification circuitry to, among other things, prevent under-age gaming

Manufacturing and Assembly

We develop and own all technical documentation and intellectual property rights to manufacturing tools, such as plastic molding forms and printed circuit board layout masks used to manufacture our wireless player terminals.

Once a product is designed and thoroughly tested at our facility, we contract the volume production of parts and subassemblies to outside vendors. We contract subassembly manufacturing jobs to a number of reputable second-source suppliers. As a result, if demand for our products increases significantly, we can increase our production capabilities by placing additional orders with multiple manufacturers.

In addition to contracting the manufacturing of our custom subassemblies, we also purchase standard off-the-shelf components, such as video monitors, power supplies and batteries in volume. In order to achieve economies of scale, we carefully research the component markets for the best prices available and often adjust our designs to incorporate cost-efficient components that we can purchase in large volumes.

Upon receipt of ordered parts and subassemblies, we assemble the finished products at our facility in Las Vegas. We believe that our current facility is adequate for manufacturing sufficient volume of mobile gaming products to satisfy the initially anticipated demand. Currently, we operate only one work shift. However, we can add up to two extra work shifts at our current facility.

Competition

We experience intense competition from a number of established suppliers of gaming equipment to the bingo market and the casino market. Many of our competitors have longer operating histories, long-standing relationships with gaming establishments and suppliers, greater name recognition and greater financial, technical and marketing resources than we do. As a result, our competitors may have substantial competitive advantages over us. Additionally, the casino market is characterized by a cautious attitude toward the reliability and security of emerging wireless gaming platforms, creating additional marketing challenges for us. We may not be able to exploit new or emerging technologies, adapt to changes in customer requirements more quickly than our competitors or devote the necessary resources to the marketing of our products and services. See “Item 1A. Risk Factors.”

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Bingo Market

Currently, our primary competitors in our existing electronic bingo market are VKGS, LLC, or Video King, formerly a division of BK Entertainment Corp. and GameTech International, Inc., or GameTech. We believe that we are focused on the high performance segment of the electronic bingo market, while many of our competitors serve the mass market segment where bingo player terminals are less expensive and have fewer features and technological capabilities.

In addition to Video King and GameTech, a number of other companies compete in the electronic bingo market including the recently merged Planet Bingo, LLC and Melange Computer Services, Inc., Blue Dog, Inc., Electronic Gaming Solutions, Inc.and California Concepts, Inc. Many of our bingo market competitors offer stationary and portable bingo player terminals. We are not aware of any competitors with an installed base of bi-directional wireless player terminals and only a few of them currently deliver any wireless technology. Our competitors’ existing one-way RF communication technology may limit their ability to offer more advanced versions of bingo or traditional casino games, such as keno, slots and poker on a wireless player terminal.

Emerging Mobile Gaming Market

The casino markets are highly regulated, have stringent product requirements and high system integrity and security requirements. We anticipate that these factors will continue to pertain as the Nevada mobile gaming market develops. In the emerging mobile gaming market, we expect to encounter competition from new entrants who seek to meet these market requirements.

Cantor Fitzgerald LP, a large financial services company that already offers wireless sports betting in the United Kingdom, is expected to seek Nevada’s approval for its technology. At least two other gaming technology companies, Chimera Technology Corp. and Diamond I, Inc. have announced their strong interest in the emerging mobile gaming market. Although we expect these and other companies to be attracted to the potentially lucrative Nevada mobile gaming market, we believe it will be difficult for such companies to fully meet the market’s requirements. For instance, obtaining Nevada gaming licenses can be difficult, costly and time consuming. Also it can be difficult to gain market recognition in the very demanding Nevada gaming market. Lastly, some of these companies have indicated that they plan to use off-the-shelf personal digital assistants as their wireless gaming terminals. We question whether such products can achieve regulatory and market acceptance.

In addition, large gaming equipment manufacturers in the Nevada slot machine market, including Aristocrat Leisure, Ltd., Alliance Gaming Corporation and WMS Gaming Inc., may also attempt to enter the emerging mobile gaming market. At least three well established gaming equipment manufacturers, International Game Technology, or IGT, Shuffle Master, Inc., and Progressive Gaming International Corporation have expressed interest in entering the emerging mobile gaming market. These companies are much larger than we are and are well entrenched in the existing gaming market.

The United States gaming equipment market has historically been dominated by IGT, currently the largest gaming equipment manufacturer in the world. However, we are not aware of any mobile gaming devices being field tested by these companies with a possible exception of Progressive Gaming International Corporation, which is currently field testing wireless sports wagering terminals that may be viewed by some as mobile gaming terminals, even though such sports wagering terminals are not considered to be gaming devices under the existing Nevada statutes and regulations.

Finally, traditional casino operators may attempt to enter the emerging mobile gaming markets themselves. Most of these companies are much larger than we are and have greater resources than we do.

Research and Development

Since our inception in 1989, we have continuously developed innovative gaming and entertainment products for our customers. We have internally developed all critical aspects of our gaming platform and have outsourced only the volume manufacturing of parts and subassemblies. We design all of our software, including all of our source code and all of our user interfaces and graphic art for our player terminals. We also design all of our hardware, including both electronic and mechanical components, all printed circuit board diagrams and layouts, and all 3D and 2D mechanical drawings for all our plastic and metal parts. We expect to continue to emphasize the research and development aspect of our business. Research and development costs for the fiscal years ending December 31, 2006 and 2007, were $1,483,841 and $1,494,724, respectively.

     We plan to continue to invest in the research and development of our Smart products.

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Customers

Currently, our customers are bingo hall operators in the commercial casino, tribal casino and charitable bingo markets. As the mobile gaming market develops in Nevada, we anticipate selling or leasing our mobile gaming platform products to a broader group of casino operators in Nevada and in other jurisdiction if mobile gaming is approved in these jurisdictions and the operation of our mobile gaming devices is specifically approved in these jurisdictions.

Although we have a broadly diversified and geographically dispersed customer base, sales to charitable organizations in Texas represented approximately 34% of our revenues during 2007. We generate a significant amount of our revenue from domestic customers. During 2005, 2006 and 2007, our domestic revenues were 98%, 98% and 98%, respectively.

Sales, Marketing and Distribution

Except where we are contractually or statutorily prohibited from doing so, we market our products to customers through direct and indirect channels. Our direct channel consists of our own marketing efforts as well as marketing through Millennium, our wholly-owned subsidiary.

We also distribute our products to our customers through our indirect channel consisting of a network of authorized distributors, operating in the United States, Canada, the United Kingdom and Australia. Our distributor agreements typically have one-year initial terms with successive one-year automatic renewals. Our distributors provide valuable services to our customers, including immediate on-site customer support. During 2007, sales through our single-largest distributor, K&B Sales Incorporated, doing business as Good Time Bingo, represented approximately 34% of our revenues.

Generally, the profit margins from the distributor facilitated accounts are lower than the profit margins typical for our direct accounts because the latter do not involve any commissions paid to distributors.

Customer Support

We provide comprehensive support services to our customers either directly or through our distributors. We also provide 24/7 hotline support to our customers. Although most of the technical problems are typically resolved over the telephone or by replacing failed equipment with spare parts, in critical cases, our field service personnel have to perform on-site maintenance and technical training. The on-site maintenance is provided by us as an accommodation to our customers and is not required by our contracts. We do not provide any performance, fitness of use or similar warranty or guaranty to our customers.

An important part of customer service is the initial installation and training of customer personnel. From time to time, we also perform customer service at locations directly serviced by our distributors, particularly when a distributor is new or inexperienced. Our personnel, particularly our management team, are composed of experts in the gaming field whose advice is well regarded by our customers. We continually provide our advice to our customers regarding our gaming platforms and compliance with regulatory matters related to our gaming platforms.

Our BingoStar platform can be easily configured by bingo hall personnel for any desired bingo games, patterns, prizes and sessions, without the involvement of ourselves or the local distributor. Our BingoStar platform allows our technicians to reprogram all stationary and wireless player terminals on-site. Where permitted by law and authorized by our customers, we can also remotely reprogram most of the components of our BingoStar platform utilizing secure communication protocols.

Intellectual Property

We hold two United States patents expiring in 2010, which relate to a lottery-type wagering game, and one United States patent expiring in 2012, which relates to a magnetic bingo board. We do not rely on any licensing revenue related to any of these patents. We have also filed additional patent applications that are currently pending in the United States Patent and Trademark Office.

We are the registered owner of trademarks FortuNet®, Mega Fortune® and BingoStar®, as well as pending trademark applications, including WIN-WIN™ and AIMS™.

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In addition, each of our employees has executed an agreement to maintain the confidentiality of our trade secrets and to assign to us any intellectual property that they conceive of in the scope of and during their employment with us.

Government Regulation

The gaming industry and the gaming equipment manufacturing industry exist within a stringently controlled regulatory environment and are subject to federal, state, tribal, local and foreign regulation. Companies participating in these industries must hold the required gaming licenses, permits or other approvals in all jurisdictions in which they conduct business. Many jurisdictions also require the licensing or a finding of suitability of officers, directors, major stockholders and key employees, the termination or disassociation with such officer, director, key employee or major stockholder that fails to file an application or to obtain a license or finding of suitability; the submission of detailed financial and operating reports; and the submission of reports of material loans, leases and financings; and the regulatory approval of some commercial transactions, such as the transfer or pledge of equity interests in the company. These regulatory burdens are imposed upon gaming-related suppliers or vendors on an ongoing basis. The regulatory agencies that oversee these jurisdictions not only continually scrutinize license holders, but in some cases also approve the types of products that can be sold by equipment manufacturers and used by operators. The standards for product approval vary from jurisdiction to jurisdiction, although the Nevada standards are generally the most stringent.

Various aspects of our business are subject to gaming regulation. Depending on the nature of the noncompliance, our failure to comply with these regulations may result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties.

Our electronic bingo products, including the wireless and stationary units, are subject to stricter scrutiny than traditional paper bingo products. We believe electronic bingo player units are legal in all tribal jurisdictions, United States Armed Forces bases, 27 states, and in a growing number of foreign jurisdictions.

Electronic bingo in charitable bingo halls is less widely permitted than paper bingo, largely because many states’ laws and regulations were written before electronic bingo technology was available. We believe that electronic bingo is permitted in 27 of the 48 states in the United States in which paper bingo is legal. Favorable changes in this regulatory environment occurred in the recent decade.

Licensing Requirements

Currently, we are licensed as a gaming equipment manufacturer or distributor in several states and tribal jurisdictions. We intend to seek the necessary licenses, approvals and findings of suitability for our products and our personnel in other jurisdictions where there is an opportunity to market our products. We cannot assure you that we will obtain the necessary licenses, approvals or findings of suitability in a timely fashion or at all. If obtained, we cannot assure that the licenses, approvals or findings of suitability will not be revoked, suspended or conditioned or that we will be able to obtain the necessary approvals for our future products as they are developed. If a license, approval or finding of suitability is required by a regulatory authority and we fail to receive the necessary license, approval or finding of suitability, we may be prohibited from distributing our products for use in the applicable jurisdiction or may be required to distribute our products through other licensed entities at a reduced profit.

Nevada Regulation

The Nevada Mobile Gaming Law

On June 6, 2005, Nevada enacted the Nevada Mobile Gaming Law. This law enabled the Nevada Gaming Commission, with the advice and assistance of the Nevada Gaming Control Board, to promulgate regulations governing the operation of mobile gaming and the licensing of operators, manufacturers and distributors of mobile gaming equipment and systems in Nevada. Before adopting the regulations, the Nevada Mobile Gaming Law required the Nevada Gaming Commission to determine that mobile gaming systems could be operated in compliance with all applicable laws, be secure and reliable and provide reasonable assurance that gaming devices would be operated only by players of lawful age and only in approved areas. These determinations were made and the final regulations under the Nevada Mobile Gaming Law were adopted on March 23, 2006.

The Nevada Mobile Gaming Law defines “mobile gaming” as conducting gaming through communication technology and devices that allow a player to transmit information to a computer that assists in placing a bet or wager and corresponding information related to the display of the game and its outcome. “Communications technology” is defined to mean the method and components employed by a gaming establishment to facilitate the transmission and reception of information, including wireless networks, wireless fidelity, wire, cable, radio, microwave, light, optics or computer data networks. Mobile gaming can only be conducted in “public areas” of a gaming establishment that operate at least 100 slot machines

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and at least one other game. Public areas specifically exclude hotel rooms or living accommodations. The regulations as adopted define “mobile gaming systems,” “operator of a mobile gaming system,” “equipment associated with mobile gaming” and “public areas” for purposes of the law.

The Nevada Mobile Gaming Law mandated that the revenue of operators and manufacturers of mobile gaming systems will be subject to the same licensing fee provisions to which currently licensed gaming establishments are subject with respect to the operation of other games and gaming devices and that mobile gaming devices will be subject to the same fees and taxes as are slot machines. Based upon the regulations as adopted, we believe that our current non-restricted gaming licenses allow us to manufacture and distribute our mobile gaming platforms in Nevada without additional licensing requirements. Our mobile gaming platforms for playing traditional casino games will be required to be approved before they may be deployed in Nevada casinos.

Policy Concerns of Nevada Gaming Laws

The laws, regulations and supervisory practices of most gaming authorities are based upon declarations of public policy. In the case of Nevada, these public policy concerns include, among other things:

• preventing unsavory or unsuitable persons from being directly or indirectly involved with gaming or the manufacture or distribution of gaming devices at any time or in any capacity;

• establishing and maintaining responsible accounting practices and procedures;

• maintaining effective controls over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs, and safeguarding assets and revenue, providing reliable record keeping and requiring the filing of periodic reports with the Nevada gaming authorities;

• preventing cheating and fraudulent practices; and

• providing a source of state and local revenue based on taxation and licensing fees.

Changes in these laws, regulations and procedures could have significant negative effects on our operations, financial condition and results of operations.

Individual Licensing Requirements

The Nevada gaming authorities may investigate any individual who has a material relationship to, or material involvement with, us in order to determine whether the individual is suitable for and/or should be licensed as a business associate of a gaming licensee.  Although licensing of an individual is not a prerequisite for becoming an officer of our company, such person becoming an officer is required to file necessary disclosures with Nevada gaming authorities within thirty (30) days of becoming an officer. Currently, only our Chief Executive Officer, or CEO, Yuri Itkis, Chief Technology Officer, or CTO, Boris Itkis, and Chief Marketing Officer, or CMO, Jack Coronel are licensed individuals. Additionally, our newly appointed Chief Financial Officer, or CFO, Kevin A. Karo has recently filed his application for a finding of suitability as a corporate officer with the Nevada Gaming Control Board.

Licensing is not a prerequisite to becoming an independent director of FortuNet, and we do not anticipate that any of our independent directors will be required to be licensed as a result of serving as a director on the Company’s board of directors. The Nevada gaming authorities may deny any application for any cause they deem reasonable. Granting of an individual license requires a concomitant determination of suitability of the applicant. A finding of suitability and grant of an individual license requires submission of detailed personal and financial information, followed by a thorough investigation. An applicant for licensing or a finding of suitability must pay for all the costs of the investigation. We reimbursed our employees for the cost of seeking and maintaining licenses obtained at our request, including Yuri Itkis, Boris Itkis, Jack B. Coronel and Kevin A. Karo. Changes in licensed positions must be reported to the Nevada gaming authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada gaming authorities may disapprove a change in a corporate position, such as a change in job title or substantive job responsibilities.

If the Nevada gaming authorities were to find any of our personnel required to be licensed unsuitable for licensing, we would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require us to terminate the employment of any person who refuses to file appropriate applications or refuses to pay the required investigative fees. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

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Consequences of Violating Gaming Laws

If the Nevada Gaming Commission determines we violated the Nevada Gaming Control Act or any of its regulations, it could limit, condition, suspend or revoke our registrations and gaming licenses. In addition, we and the persons involved could be subject to substantial fines for each separate violation of the Nevada Gaming Control Act, or the regulations of the Nevada Gaming Commission, at the discretion of the Nevada Gaming Commission. Limitation, conditioning or suspension of our gaming licenses or related registrations could, and revocation of any gaming license or registration would, have a material adverse effect on our gaming operations.

Requirements for Beneficial Securities Holders

Unless we are registered as a publicly traded corporation by the Nevada Gaming Commission, no person may become a stockholder of, or receive any percentage of profits from, us without first obtaining the necessary licenses and approvals from the Nevada Gaming Commission. We have also requested and obtained approval from the Nevada Gaming Commission for exemptions available under the Nevada Gaming Control Act that will generally exempt the beneficial holders of our securities from the mandatory licensing requirements. This exemption will apply to current and future beneficial holders of our securities.

Regardless of the number of shares held, any beneficial holder of our voting securities, may be required to file an application, be investigated, and have that person’s suitability as a beneficial holder of voting securities determined if the Nevada Gaming Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. An exemption from the licensing requirements does not have the effect of exempting a beneficial owner from a suitability determination if the Nevada Gaming Commission requires such determination. If the beneficial owner of our voting securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant must pay all costs of investigation incurred by the Nevada gaming authorities in conducting any investigation.

The Nevada Gaming Control Act requires any person who acquires five percent or more of any class of the voting securities of a registered company to report the acquisition to the Nevada Gaming Commission. The Nevada Gaming Control Act requires beneficial owners of 10 percent or more of a registered company’s voting securities to apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada Gaming Control Board mails the written notice requiring the filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Gaming Control Act, which acquires 10 percent or more, but not more than 15 percent, of the registered company’s voting securities may apply to the Nevada Gaming Commission for a waiver of the finding of suitability if the institutional investor holds the voting securities for investment purposes only. An application to be considered as an institutional investor is a separate application and the applicant is required to pay the applicable investigative fees.

An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of its business as an institutional investor and were not acquired and are not held for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered company, a change in the corporate charter, bylaws, management, policies or operations or the registered company or any of its gaming affiliates or any other action that the Nevada Gaming Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include:

• voting on all matters voted on by stockholders or interest holders;

• making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in management, policies or operations; and

• other activities the Nevada Gaming Commission may determine to be consistent with the investment intent.

Our CEO and Chairman of the board of directors, Yuri Itkis, our CTO, Boris Itkis, and our CMO, Jack Coronel have been found suitable for licensing by various gaming authorities. Our newly appointed CFO, Kevin A. Karo is currently in the process of applying for such licenses with various gaming authorities. If a gaming authority in any jurisdiction fails to find any of our officers, directors or significant stockholders suitable, we may be prohibited from leasing, licensing or selling our products in that jurisdiction. We are unaware of any facts or circumstances that would categorically prevent a gaming authority from finding any of our officers, directors or significant stockholders suitable.

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Consequences of Being Found Unsuitable

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or the Chairman of the Nevada Gaming Control Board, or who refuses or fails to pay the investigative costs incurred by the Nevada gaming authorities in connection with the investigation of its application, may be found unsuitable. The same restrictions apply to an owner of record if the owner of record, after request, fails to identify the beneficial owner. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of any voting security or debt security of a registered company beyond the period of times as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest in us or to have any other relationship with us, we:

• pay that person any dividend upon any voting securities;

• allow that person to exercise, directly or indirectly, any voting right held by that person relating to us;

• pay remuneration in any form to that person for services rendered or otherwise; or

• fail to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

A finding of suitability is generally determined based upon a myriad of facts and circumstances surrounding the entity or individual in question and many gaming authorities have broad discretion in determining whether a particular entity or individual is suitable. We are unaware of any facts or circumstances that would categorically prevent a gaming authority from finding any of our officers, directors or significant stockholders suitable.

Gaming Laws Relating to Securities Ownership

The Nevada Gaming Commission may, in its discretion, require the holder of any common stock, debt or similar security of a registered company to file applications, be investigated and be found suitable to own the common stock, debt or other security of the registered company if the Nevada Gaming Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the Nevada Gaming Commission determines that a person is unsuitable to own the security, then under the Nevada Gaming Control Act, the registered company may be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming Commission, it:

• pays to the unsuitable person any dividend, interest, or other distribution;

• Recognizes any voting right by the unsuitable person in connection with the securities;

• pays the unsuitable person remuneration in any form; or

• makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.

We are required to maintain a current stock ledger in Nevada that may be examined by the Nevada gaming authorities at any time. If any securities are held in trust by an agent or by a nominee, the record owner may be required to disclose the identity of the beneficial owner to the Nevada gaming authorities. A failure to make the disclosure may be grounds for finding the record owner unsuitable. We will be required to render maximum assistance in determining the identity of the beneficial owners of our voting securities.

The Nevada Gaming Commission has the power to require the stock certificates of any registered company to bear a legend stating that the securities are subject to the Nevada Gaming Control Act, but has not imposed this requirement on us. If the Nevada Gaming Commission were to impose this requirement, we expect that we would seek an exemption from this requirement.

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Approval of Changes in Control

As a registered company, we must obtain prior approval of the Nevada Gaming Commission with respect to a change in control through a merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by which anyone obtains control of us.

Entities seeking to acquire control of a registered company must satisfy the Nevada Gaming Control Board and the Nevada Gaming Commission with respect to a variety of stringent standards before assuming control of a registered company. The Nevada Gaming Commission also may require controlling stockholders, officers, directors and other persons who have a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.

Approval of Defensive Tactics

The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and registered companies that are affiliated with those operations, may be harmful to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to reduce the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to:

• assure the financial stability of corporate gaming licensees and their affiliates;

• preserve the beneficial aspects of conducting business in the corporate form; and

• promote a neutral environment for the orderly governance of corporate affairs.

Because we are a registered company, approvals may be required from the Nevada Gaming Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Gaming Control Act also requires prior approval of a plan of recapitalization proposed by a registered company’s board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control.

Fees and Taxes

We pay license fees and taxes computed in various ways depending on the type of gaming or activity involved. These fees and taxes, depending upon their nature, are payable monthly, quarterly or annually and are based upon either a percentage of the gross revenues received or the number of gaming devices operated. Annual fees are also payable to the State of Nevada for renewal of our manufacturers and distributors licenses, OILS license and our Mobile Gaming license. Our cost of fees and taxes for the years ending December 31, 2006 and 2007 were $87,515 and $92,821 respectively.

Foreign Gaming Investigations

Any person who is licensed, required to be licensed, registered, required to be registered, or who is under common control with those persons, collectively, “licensees,” and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Gaming Control Board of the licensee’s or registrant’s participation in foreign gaming. We currently comply with this requirement. The revolving fund is subject to increase or decrease at the discretion of the Nevada Gaming Commission. Licensees and registrants are required to comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee or registrant is also subject to disciplinary action by the Nevada Gaming Commission if it:

• knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation;

• fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations;

• engages in any activity or enters into any association that is unsuitable because it poses an unreasonable threat to the control of gaming in Nevada, reflects or tends to reflect, discredit or disrepute upon the State of Nevada or gaming in Nevada, or is contrary to the gaming policies of Nevada;

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• engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees; or

• employs, contracts with or associates with a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of unsuitability.

Federal Registration

The Federal Gambling Devices Act of 1962, the “Johnson Act,” makes it unlawful for a person to manufacture, transport, or receive gambling machines, gambling devices or components across interstate lines unless that person has first registered with the United States Attorney General. We have complied with the registration requirements of the Johnson Act. Gambling devices must also be identified and we must keep certain records in accordance with the Johnson Act’s requirements. If we violate the Johnson Act, our equipment may be seized or forfeited and we may be subject to other penalties.

Tribal Gaming Regulation

When contracting with tribal owned or controlled gaming establishments, we become subject to tribal laws and regulations that may differ materially from the non-tribal laws and regulations under which we generally operate. In addition to tribal gaming regulations that may require us to provide disclosures or obtain licenses or permits to conduct our business on tribal lands, we may also become subject to tribal laws that govern our contracts. These tribal governing laws may not provide us with processes, procedures and remedies that enable us to enforce our rights as effectively and advantageously as the processes, procedures and remedies that would be afforded to us under non- tribal laws, or to enforce our rights at all, and may expose us to an increased risk of contract repudiation as compared to that inherent in dealing with non-tribal customers. Many tribal laws permit redress to a tribal adjudicatory body to resolve disputes; however, such redress is largely untested in our experience. We may be precluded from enforcing our rights against a tribal body under the legal doctrine of sovereign immunity.

Gaming on tribal lands, including the terms and conditions under which gaming equipment can be sold or leased to tribal users, is governed by federal law, tribal-state compacts and tribal gaming regulations. The Indian Gaming Regulatory Act of 1988, or IGRA, provides the framework for federal and state control over all gaming on tribal lands and is administered by the National Indian Gaming Commission and the Secretary of the United States Department of the Interior. IGRA requires that the tribe and the state enter into a written agreement, a tribal-state compact that governs the terms of certain types of gaming activities. We are not aware of any state in which a tribal-state compact seeks to regulate bingo.

The regulations and ordinances adopted by tribal authorities vary but generally impose standards and technical requirements on gaming hardware and software, and may impose registration, licensing and background check requirements on gaming equipment suppliers and their officers, directors and stockholders similar to typical requirements imposed by Nevada gaming authorities.

Traditional Casino Game Regulation

Traditional casino games, such as poker, keno and video slots, are regulated much more stringently than bingo games. The number of jurisdictions in which traditional casino games are currently permitted is relatively small in comparison to the number of jurisdictions in which bingo is permitted. The State of California just entered into compacts with a large number of tribal authorities. The evolution of the regulation of traditional casino games is very difficult to predict, and no assurance can be provided that our planned entrance into the traditional casino game market with mobile gaming platforms will be successful.

Employees

As of December 31, 2007, we had employed 56 employees, including 28 employees in the manufacturing and service departments, 19 employees in the engineering and programming departments and 9 employees in the administration and sales departments. None of our employees are covered by collective bargaining agreements. We consider our employee relations to be good.

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ITEM 1A.    RISK FACTORS

Risks Relating to Our Business

Our failure to obtain approvals under the regulations promulgated under the Nevada Mobile Gaming Law will negatively impact our growth strategy.

Notwithstanding our receipt of an Operator of Mobile Gaming Systems license by the Nevada Gaming Commission, the regulations promulgated under the Nevada Mobile Gaming Law require us to obtain specific approval of our mobile gaming devices for use in Nevada casinos. If we are unable to obtain or maintain approval of our mobile gaming platform as required by the regulations, we will be unable to manufacture, distribute and operate wireless player terminals that enable casino players to play casino games in public areas of gaming establishments as permitted by the Nevada Mobile Gaming Law which would have a material adverse affect on our business and operations.

Our inability to comply fully, or at all, with the mobile gaming regulations may result in substantial additional development costs and preclude us from executing our growth strategy.

The regulations require that our mobile gaming systems be approved by the Nevada Gaming Lab before we may distribute these systems to Nevada casinos. The Nevada Gaming Lab may impose significant requirements on the functionality or design of mobile gaming systems that may be manufactured, distributed or operated in Nevada. To the extent that our existing mobile gaming platform may not comply with such requirements, we would need to undertake additional research and development activities that may be costly, time consuming or require the procurement of components that are scarce in supply. Despite undertaking additional research and development activities, we may not be able to design or develop a mobile gaming platform that complies with the standards adopted by the Nevada Gaming Lab, in which case we would be unable to manufacture, distribute or operate wireless player terminals that enable casino players to play traditional casino games in the public areas of gaming establishments permitted under the Nevada Mobile Gaming Law, and therefore be unable to fully execute our growth strategy.

Our failure to maintain our current licenses and regulatory approvals or failure to maintain or obtain licenses or approvals for our gaming devices in any jurisdiction will prevent us from operating in that jurisdiction and possibly other jurisdictions, leading to reduced overall revenue.

As a manufacturer, distributor and operator of gaming platforms, we currently hold licenses in a number of jurisdictions, including Nevada. Our officers, including our major stockholder, Yuri Itkis, are required to obtain and maintain licenses, permits and other forms of approval in certain jurisdictions. Our CFO, Kevin Karo, has applied for, but has not yet received, a finding of suitability as a corporate officer with various gaming authorities. We are under continuous scrutiny by the applicable regulatory authorities.  Our officers’ current regulatory approvals may be revoked, suspended or curtailed at any time.  Our officers’ failure to obtain or maintain regulatory approval in any jurisdiction may prevent us from obtaining or maintaining regulatory approval in other jurisdictions. The failure to maintain a license in a single jurisdiction or a denial of a license by any new jurisdiction may cause a negative “domino effect” in which the loss of a license in one jurisdiction could lead to regulatory investigation and possible loss of a license in other jurisdictions.

Some jurisdictions also require licenses, permits or other forms of approval for specific gaming devices. If other jurisdictions adopt mobile gaming laws, these approval requirements may vary from jurisdiction to jurisdiction and the license, permit and approval process may be costly and more difficult to obtain that the licenses we have obtained in Nevada pursuant to the Nevada Mobile Gaming Law. As a general matter, the regulatory approval of devices involving traditional casino games is more difficult to obtain than those for bingo products. Some jurisdictions require the regulatory approval of entities and individuals before the pursuit of regulatory approval of specific gaming devices, but other jurisdictions allow the pursuit of such regulatory approvals concurrently. Although we and the individuals associated with us may obtain regulatory approval in a particular jurisdiction, we may not be able to manufacture, distribute or operate our mobile gaming platforms in that jurisdiction without separate and specific regulatory approval of our mobile gaming platform. Any failure of our gaming platform to meet the requirements for approval or to obtain the approval in any jurisdiction will cause us to not be able to distribute our gaming platforms in the jurisdiction which would have a material adverse affect upon our business and operations.

If we are unable to retain our senior employees or attract other key personnel our operations may suffer.

Our future success depends to a significant degree on the skills, experience and efforts of our key personnel. We depend heavily on the ability and experience of a small number of senior executives who have experience with our operations and the electronic

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gaming device industry, including Yuri Itkis, our CEO and Chairman of the board of directors; Kevin A. Karo, our CFO; Jack Coronel, our CMO and Director of Compliance and Strategic Development; and Boris Itkis, our CTO, Vice President of Engineering and member of the Company’s board of directors. The loss of any of these senior executives or the failure of any of these senior executives to obtain or maintain the requisite regulatory licenses, permits or determination of suitability may have a material adverse effect on our business and operations.

Changes in licensed positions must be reported to the Nevada gaming authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada gaming authorities may disapprove a change in a corporate position, such as a change in job title or substantive job responsibilities. Any such disapproval would prevent us from redeploying our senior executive talent in new functional roles even if management desires to do so.  A loss of one of our senior executives due to a finding of disapproval from the Nevada gaming authorities could have a material adverse effect on our business and operations.

Our future success depends upon our ability to attract, train and retain key marketing personnel and key managers as we further develop our products and as we enter new markets and expand in existing markets. In connection with the audit of our financial statements for 2006 and 2007, our independent registered public accounting firm identified a significant deficiency in our internal control over financial reporting arising from the current level of staffing in our accounting department; to augment our staffing with qualified individuals on a timely basis may not remediate this significant deficiency. Due to licensing requirements of these personnel that may be imposed by gaming authorities, our pool of potential employees may be more limited than in other industries. Competition for individuals with the skills required is intense, and we may not be successful in recruiting such personnel. In addition, we may not be able to retain such individuals as they may leave our company and go to work for our competitors. If we are unable to attract or retain key personnel, our business, financial condition and operating results could be materially adversely affected.   We rely heavily on a corporate culture of lean staffing.  While helpful to our efforts to contain our costs, our lean staffing exposes us to increased risks of internal control deficiencies and increased harm upon employee departures.

Our failure to retain and extend our existing contracts with customers and to win new customers would negatively impact our operations.

All of our lease contracts relate to our electronic bingo products. In 2007 we derived 99% of our revenues and cash flow from our portfolio of contracts to lease electronic bingo products to gaming establishments, such as casinos, and bingo halls. Our contracts are typically for a term ranging from one to three years in duration and several are on a month-to-month basis. Not all of our contracts preclude our customers from using bingo devices of our competitors. Upon the expiration of one of our contracts, a gaming establishment may award a contract through a competitive procurement process, in which we may be unsuccessful in winning the new contract or forced to reduce the price that we charge the gaming establishment in order to renew our contract. In addition, some of our contracts permit gaming establishments to terminate the contract at any time for our failure to perform and for other specified reasons. The termination of or failure to renew or extend one or more of our contracts, or the renewal or extension of one or more of our contracts on materially altered terms could, depending upon the circumstances, have a material adverse effect on our business, financial condition, results and prospects.

We derive a substantial portion of our revenue from direct sales to our customers, or house accounts, which we service ourselves, without any involvement of outside distributors. Although such accounts typically involve higher profit margins, the competition for these accounts is very keen. We typically negotiate one to three year, automatically renewable leases for our bingo units with our direct customers. The house account contracts tend to be challenging to maintain and enforce, especially those with tribal gaming operators, and therefore, we may not be able to retain lucrative house accounts indefinitely. A loss of any such account may have a severe negative impact on our revenue.

Losing any of our small number of independent distributors upon whom we depend for a significant portion of our revenue, or losing the business of a significant number of customers of those distributors, would negatively impact our operations.

We are dependent upon a small number of independent distributors to market and sell our products to casinos and bingo halls. For the fiscal year ended December 31, 2007, approximately 55% of our revenues were derived through seven distributors. During the same period, we derived approximately 34% of our revenue from our single largest distributor. Due to our payment of commissions to distributors, our customer contracts derived from distributors generate lower profit margins than our contracts derived from direct sales, or house accounts. Because we do not directly control our distributors or their customer intake practices, contracts with customers derived from distributors may be susceptible to higher default rates and lower profit margins than our house accounts.

Some of our distributors are not contractually prohibited from marketing or selling products of our competitors. Our contracts with our distributors typically cover one to three year terms and are automatically renewed for one year unless terminated upon the expiration of the then current term. Upon the expiration of a contract term, we may not be able to renew any of these contracts on terms that are favorable to us, or at all. Our competitors may provide incentives to our distributors to market and sell their products in addition to or in lieu of ours. The loss of any of our

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distributors or the loss of business from any customer of any of our distributors may result in a material reduction in our revenue, resulting in a material adverse effect on our business, financial condition and results of operations.  Towards the end of 2007 and at the beginning of 2008, we lost a significant number of charitable bingo hall customer locations that were serviced through one of our distributors, and it is expected, based on 2007 revenues, that our revenues attributable to sales generated through this distributor for 2008 will be reduced by approximately $1,500,000.

If other gaming jurisdictions do not adopt mobile gaming legislation similar to the Nevada Mobile Gaming Law, or on any terms at all, we will be unable to implement our growth strategy outside of Nevada.

Our ability to execute fully our growth strategy in jurisdictions other than Nevada depends upon other gaming jurisdictions adopting mobile gaming legislation involving traditional casino games. Currently, Nevada is the first and the only state to enact legislation authorizing mobile gaming for traditional casino games. Although we are not aware of any tribal gaming authority that has specifically prohibited mobile casino gaming involving traditional casino games, we are also not aware of any that have approved it, even though many tribal gaming authorities in practice allow mobile bingo gaming. The adoption of gaming legislation can be affected by a variety of political, social and public policy forces and gaming jurisdictions other than Nevada may not adopt mobile gaming legislation involving traditional casino games in the foreseeable future. To the extent that other jurisdictions do adopt mobile gaming legislation involving traditional casino games, we may not be able to comply fully with the legislation without incurring substantial additional development costs, or at all. If we are required to modify our mobile gaming platform to comply with such potential legislation, we may suffer the increased costs of maintaining multiple variants of our mobile gaming platform to comply with the differing legislation of different jurisdictions. If other gaming jurisdictions fail to adopt mobile gaming legislation involving traditional casino games or we are unable to comply with such legislation without substantial additional costs, we may be unable to execute our growth strategy.

Our failure to obtain gaming licenses or other regulatory approvals in other jurisdictions would preclude us from expanding our operations into and generating revenue from these jurisdictions.

The manufacture and distribution of gaming devices are subject to extensive federal, state, local and tribal regulation. Some jurisdictions require licenses, permits and other forms of approval for gaming devices. Most jurisdictions require licenses, permits or other forms of approval of the manufacturers, distributors and operators of gaming devices, including evidence of financial stability, and of the suitability of their officers, directors, major stockholders and key employees. The regulatory agencies conduct in-depth investigations of gaming device manufacturer licensees as well as detailed personal background checks of key employees and major stockholders of the licensees. Obtaining requisite approvals of state and tribal gaming authorities is a time-consuming and costly process. Even after incurring significant time and expense in seeking regulatory approvals, we may not be able to obtain them. Our failure or the failure of our officers, directors, major stockholders or key personnel to obtain regulatory approval in any jurisdiction will prevent us from distributing our products and generating revenue in that jurisdiction.

We operate in a highly competitive industry and expect the market for mobile gaming devices to become increasingly competitive, which may negatively affect our operations and our ability to maintain relationships with gaming establishments.

The market for gaming devices generally is intensely competitive, and we expect competition to increase and intensify as the market for mobile gaming devices develops. We currently compete with other providers of electronic bingo products, such as VKGS, LLC, or Video King, formerly a division of BK Entertainment Corp., GameTech International, Inc., the recently merged Planet Bingo, LLC and Melange Computer Services, Inc., Blue Dog, Inc. Electronic Game Solutions, Inc. and California Concepts, Inc. in the marketing of our BingoStar wireless bingo systems. Although none of our competitors that manufacture mobile bingo devices is currently licensed in Nevada other than GameTech International, Inc., we may face competition from these providers in the market for mobile gaming devices in the future. Given the market penetration, name recognition, marketing resources and familiarity with the gaming device industry generally, traditional casino game device manufacturers could be a significant competitive threat to us. We expect fierce competition from multiple large competitors dominating their respective markets in our expansion efforts, such as Aristocrat Leisure, Ltd., International Game Technology, Alliance Gaming Corporation, WMS Gaming Inc. and Shuffle Master, Inc., that may enter the market for mobile gaming devices. In addition, we may in the future face potential competition from new entrants into the gaming device market, such as Cantor Fitzgerald LP, a large financial services company that already offers wireless sports betting in the United Kingdom, and at least two other gaming technology companies, Chimera Technology Corp. and Diamond I, Inc. Finally, traditional casino operators, most of whom are much larger than us, may attempt to enter the emerging mobile gaming market. Some of our competitors and potential competitors have significant advantages over us, including greater name recognition, longer operating histories, pre-existing relationships with current or potential customers, proprietary technology, significantly greater financial, marketing and other resources and more readily available access to capital that could allow them to respond more quickly to new or changing opportunities.

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Other providers of electronic bingo products have in the past reduced, and may in the future continue to reduce, the prices of their products to gaming establishments in order to win those gaming establishments as customers and to gain market share. To the extent that competitive pressures force us to reduce our prices or provide other incentives to establish or maintain relationships with gaming establishments, our business and operating results could be adversely affected.

A material reduction in the yield on our investment of the proceeds of our initial public offering and our retained earnings could materially and adversely affect our net income and earnings per share.

Because we have not yet begun full-scale production of mobile gaming devices under the Nevada Mobile Gaming Law, we have invested the bulk of the proceeds of our initial public offering and retained earnings. Our net income and earnings per share for the year ended December 31, 2007 depended substantially on the yield that we achieved on these investments. Approximately 10% of our income before tax during 2007 resulted from these investments.

Our primary investment objective is to preserve principal while maximizing yield without significantly increasing our risk. Our investments consist of non taxable auction rate securities, or ARS. Our investments totaled $25,125,000 at December 31, 2007.

The ARS that we purchase consist of municipal bonds with maturities greater than five years and have credit ratings of at least AAA, and do not include mortgage-backed instruments. The auction process for ARS is intended, in part, to provide a liquid market for these securities.  In the event of an auction failure, the interest rate on the security is reset according to the contractual terms in the underlying indenture.  The funds associated with failed auctions will not be accessible until a successful auction occurs, the issuer calls or restructures the underlying security, the underlying security matures and is paid or a buyer outside the auction process emerges. The auction process for some of our ARS began to deteriorate during 2007, and during the first quarter of 2008, we began to reduce the principal amount of ARS in our portfolio. Although we did not suffer any auction failures of our ARS during 2007, a few of the ARS we hold experienced auction failures during the first quarter of 2008. As a result, when we attempted to liquidate some of our ARS through auction, we were unable to do so.   We believe that the failed auctions that we have experienced during the first quarter of 2008 are not a result of the deterioration of the underlying credit quality of these securities, although valuation of them is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. We believe that any unrealized gain or loss associated with these securities will be temporary and will be recorded in accumulated other comprehensive income (loss) in our financial statements.

The credit and capital markets have continued to deteriorate in 2008. Continuation or acceleration of instability in these markets and/or deterioration in the ratings of our investments may affect our ability to liquidate these securities, and therefore may affect our financial condition, and cash flows. We believe that, based on our cash and cash equivalents balances in the first quarter of 2008, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flows, financial flexibility or ability to fund our obligations.

We continue to monitor the market for our ARS and consider its impact (if any) on the fair market value of our investments. If the market conditions of the first quarter of 2008 continue, in which some auctions for ARS fail, or the anticipated recovery in market values does not occur, we may be required to record unrealized losses or impairment charges in 2008. As auctions have closed successfully in 2008, we have converted our investments in ARS to money market funds. We believe we will have the ability to hold any ARS for which auctions fail until the market recovers. We do not anticipate having to sell these securities in order to operate our business.

Although we have invested these proceeds in relatively conservative investments, based on the current market conditions, there can be no assurance that we will continue to enjoy the same yields on our investments as we did during 2007. Moreover, there can be no assurance that these investments will continue to generate a positive yield. Assuming no other changes in our sources of revenues, any decrease in the yield on these investments, and any loss on these investments, would directly reduce our revenues.

Difficulties with the limited number of manufacturers and suppliers upon whom we rely for components of our products would negatively impact our production capacity, customer relationships and operations.

We purchase most of the parts, components and subassemblies necessary for the manufacture of our products from outside sources. We assemble these parts, components and subassemblies into finished products in our manufacturing facility. While most of the parts, components and subassemblies are produced by more than one manufacturer and can be purchased through more than one supplier, we currently rely upon approximately 12 vendors from whom we purchase substantially all of our components. We currently obtain the touch screens for our wireless gaming terminals from a single supplier. While changing suppliers for this component is not impossible, doing so would require significant time and effort on the part of our engineering and management teams and may cause us to miss revenue generating opportunities until we are

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able to obtain touch screen monitors from a new supplier. In addition, the supplies of the central processing units, memory and peripheral drives for our mobile gaming platforms are often uncertain and subject to significant backlogs from time to time due to spikes in general demand for such products. We compete with other companies for the production capacity of third party manufacturers and suppliers of these and other components. Certain of these competing companies have substantially greater financial and other resources than we have and thus we may be at a competitive disadvantage in seeking to procure production capacity.

To procure certain parts, components and subassemblies, we sometimes commit to supply contracts in which we commit to purchase large quantities over extended periods of time. By doing so, we are exposed to a number of risks. If the market prices of these components drop below the prices at which we are committed to purchase them, our purchase commitments may preclude us from taking advantage of reductions in market prices. If the components are surpassed by superior technology that becomes available after we make our purchase commitments, our purchase commitments may preclude us from taking advantage of technological advancements. If a change in the design or specifications of our products results in a substitution or elimination of a component, we may be forced to write off a substantial quantity of obsolete inventory of components or to sell such components in the open market at a loss.

Our inability to contract with third-party manufacturers and suppliers to provide a sufficient supply of our components on acceptable terms and on a timely basis could negatively impact our relationships with customers and materially and adversely harm our business. For those components that we procure under supply contracts, if any of such supply contracts were to be terminated or breached, we may not be able to procure an alternate supply on terms as favorable to us in time, or at all. We may suffer lengthy delays in our manufacturing process while we seek to procure an alternate supply. A delay in our ability to manufacture products may adversely affect our goodwill with customers, expose us to liability to customers and result in the loss of business opportunities. Any alternate supply of parts, components or subassemblies may be more expensive to us or may require us to undertake additional engineering activities to integrate the alternate supply into our products or manufacturing process.

Certain parts, components and subassemblies for our products are manufactured outside of the United States, which exposes us to the risks of foreign currency fluctuations, political and economic instability and limited protection of intellectual property.

If our wireless gaming terminals do not achieve and maintain widespread acceptance by gaming establishments and casino game players as a means to play traditional casino games, our business operations will not grow as anticipated.

Our current business depends on the preferences of gaming establishment players that play bingo games, and our growth strategy depends on the preferences of gaming establishment players that play traditional casino games, such as poker, keno and slots. The tastes and preferences of players of bingo and traditional casino games are known to change over time. If the bingo games or traditional casino games that we enable gaming establishment players to play using our wireless gaming terminals do not appeal to players to the degree anticipated, our mobile gaming platforms will not be fully utilized and our business will suffer.

The success of our growth strategy will depend to a large extent on broad market acceptance of our wireless gaming terminals among casinos and their players who play traditional casino games. The only market acceptance that our wireless gaming terminals currently enjoy is as a means to play bingo games electronically. Even if we are successful in deploying mobile gaming platforms that enable casino players to play traditional casino games, gaming establishments and their players may still not use our wireless gaming terminals for a number of reasons, including preference for live dealers, preference to play casino games in a traditional environment using traditional equipment, mistrust of technology and perceived lack of reliability. We believe that the acceptance of our wireless gaming terminals by gaming establishments and their players will depend on our ability to demonstrate the economic and other benefits of our products to gaming establishments, casino players becoming comfortable with using our wireless gaming terminals, the attractiveness of the casino games that players can play using our wireless gaming terminals, ease of use, and the reliability of the hardware and software that comprise our mobile gaming platforms.

Initially, we intend to offer our customers equipment lease agreements under which we will lease our wireless gaming terminals and the associated equipment. However, if and when market acceptance of our wireless gaming platforms has been established, we may be required to sell wireless gaming platforms to customers rather than lease them because of the prevailing practices of casino operators to purchase rather than lease equipment. However, if our wireless gaming terminals fail to quickly achieve market acceptance as a means to play traditional casino games, our customers may not renew their leases or may not purchase our mobile gaming platforms, which would have a material adverse effect on our business, financial condition and results of operation.

Any change in our business model from the lease of wireless gaming terminals to the sale of gaming terminals may result in an eventual reduction of our revenues.

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We currently derive substantially all of our revenues by leasing our wireless gaming terminals and associated equipment to our gaming establishment customers. If and when market acceptance of our wireless gaming terminals is established, our gaming establishment customers may prefer to purchase our wireless gaming terminals rather than lease them. If we sell our wireless gaming terminals in the future, we must price them in a manner that reflects the ongoing lease revenues that leasing them generates. If we are unable to sell our wireless gaming terminals for a sales price in excess of the lease revenues that we would otherwise receive, our revenues may eventually decline.

Our failure to comply with tribal regulation and tribal laws would preclude us from operating in tribal jurisdictions and deriving revenue there from.

We are required to obtain licenses and approvals from tribal authorities in order to operate in tribal jurisdictions. When seeking approvals from or licensing with tribal-owned or tribal-controlled gaming establishments, we become subject to tribal laws and regulations. These laws and regulations may differ materially from the non-tribal laws and regulations under which we generally operate. A change in tribal laws and regulations or our inability to obtain required licenses of our gaming platforms or licenses to operate on tribal lands could have a material adverse effect on our business, financial condition and operating results.

We may not be able to enforce our contractual rights against tribal governments or agencies, which may negatively impact our operations.

In addition to tribal gaming regulations that may require us to provide disclosures or obtain licenses or permits to conduct our business on tribal lands, we may also become subject to tribal laws that govern our contracts. These tribal governing laws may not provide us with processes, procedures and remedies that enable us to enforce our rights as effectively and advantageously as the processes, procedures and remedies that would be afforded to us under non-tribal laws, or to enforce our rights at all. Many tribal laws permit redress to a tribal adjudicatory body to resolve disputes; however, such redress is largely untested in our experience and tribal judiciaries are not always independent. We may be precluded from enforcing our rights against a tribal body under the legal doctrine of sovereign immunity. Our inability to enforce our contract rights under tribal law could negatively impact our operations.

Disrupted operation of our server-based gaming systems caused by the network infrastructure of the casinos in which they are installed would cause dissatisfaction among customers and gaming establishments and may harm our operating results.

We expect to enter into agreements with customers that operate casinos and bingo halls in more than one location. In such cases, we anticipate that our agreements with such customers will provide that the customer will be responsible for providing, at its expense, a dedicated high-speed computer network connection between our server-based gaming systems in the various locations operated by the customer to a remote central gaming server supporting such systems. Failures or disruptions of a customer’s dedicated high-speed connection that result in the stoppage of play or in reduced performance of our server-based gaming system could disrupt players’ gaming experience, adversely affect the casinos’ or bingo halls’ satisfaction with our gaming devices, delay market acceptance of our mobile gaming platforms and harm our reputation, business, operating results and financial condition. In addition, our customers have to reserve, for our exclusive use, certain RF channels of adequate capacity to accommodate reliable and expedient wireless communication between our wireless player terminals and central game file servers.

We expect to spend substantial amounts on research and development, but these efforts may fail or lead to operational problems that could negatively impact our operations.

In order to compete effectively in an era of technological changes, we must continuously enhance our existing products and develop, introduce and market new products and services. As a result, we expect, as needed, to continue to make a significant investment in product development. Our development of products is dependent on factors such as assessing market trends and demands and obtaining requisite governmental approvals. Although we are pursuing and will continue to pursue product development opportunities, we may fail to develop any new products or services or enhancements to existing products. Even if new products or services are developed, these products or services may not prove to be commercially viable, or we may not be able to obtain the various gaming licenses and approvals necessary to manufacture and distribute these products or provide these services to our customers. We may experience operational problems with such products after commercial introduction that could delay or defeat the ability of such products to generate revenue or operating profits. Future operational problems could increase our costs, delay our plans or adversely affect our reputation or our sales of other products, which, in turn, could materially adversely affect our success. We cannot predict which of the many possible future products will meet evolving industry standards and casino or player demands.

Changes in technology may make our inventory obsolete and cause significant losses.

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Future technological advances in the gaming equipment market may result in the availability of new products or increase the efficiency of existing products. We may not be able to adapt to such technological changes. If a technology becomes available that is more cost-effective or creates a superior product, we may be unable to access such technology or its use may involve substantial capital expenditures that we may be unable to finance. Existing, proposed or as yet undeveloped technologies may render our technology less viable, less profitable or obsolete. We may not have available the financial and other resources to compete effectively against companies possessing such technologies. If we were to fail to develop our product and service offerings to take advantage of technological developments, we may fall behind our competitors and our business, financial condition, results and prospects could suffer. If technological advances render our current inventory of products obsolete, we may suffer significant revenue losses and write-downs of our assets.

Defects in, and fraudulent manipulation of, our gaming platforms could reduce our revenue, increase our costs, burden our engineering and marketing resources, involve us in litigation and adversely affect our gaming licenses.

The real and perceived integrity and security of mobile gaming is critical to its ability to attract players. We strive to set exacting standards of system security for the systems that we provide to gaming establishments, and our reputation in this regard is an important factor in our business dealings with our customers and regulators, such as the Nevada Gaming Commission and other governmental agencies. For this reason, an actual or alleged system security defect or failure attributable to us could have a material adverse effect upon our business, financial condition, results and prospects, including our ability to retain existing contracts or obtain new contracts.

Our success will depend on our ability to avoid, detect and correct software and hardware defects and prevent fraudulent manipulation of our mobile gaming platforms. Although our mobile gaming platforms are subject to rigorous internal testing and will be subject to additional testing by regulators in certain gaming jurisdictions, we may not be able to build and maintain products that are free from defects or manipulations and that satisfy these tests. Although we have taken rigorous steps to prevent defects and manipulations, our gaming platforms could suffer from such defects and manipulation after they are put into operation.

Although we do not believe it is likely, it is possible that an individual could breach the security systems of a casino or bingo hall, gain access to the central game file server on which our server-based mobile gaming platform operates and fraudulently manipulate its operations. The occurrence of such fraudulent manipulation or of defects or malfunctions could result in financial losses for our customers and, in turn, termination of leases, cancellation of orders, product returns and diversion of our resources. Even if our customers do not suffer financial losses, casinos and bingo halls may replace our gaming platforms if they do not perform according to expectations. Any of these occurrences could also result in the loss of or delay in market acceptance of our server-based gaming platform and loss of licenses, leases and sales.

In addition, the occurrence of defects in, or fraudulent manipulation of, our gaming platforms may give rise to claims for lost revenue and related litigation by our gaming establishment customers and may subject us to investigation or other disciplinary action by regulatory authorities that could include suspension or revocation of our regulatory approvals.

Improper conduct of our employees could harm our reputation and adversely affect our business operations.

The real and perceived integrity and security of mobile gaming is critical to its ability to attract players. We strive to set exacting standards of personal integrity for our employees and reliable security for the gaming platforms that we provide to our customers, and our reputation in this regard is an important factor in our business dealings with Nevada Gaming Commission and other governmental agencies. For this reason, any allegation or a finding of improper conduct on our part, or on the part of one or more of our employees, or an actual or alleged security defect with our gaming platform or failure attributable to us, could have a material adverse effect upon our business, financial condition, results and prospects, including our ability to retain existing contracts or obtain new or renewal contracts, or the loss of gaming licenses or other regulatory approvals.

Our failure to properly manage growth would adversely affect our business operations.

In order to implement our business strategy, we must effectively manage rapid growth in our manufacturing, sales and customer support operations. This rapid growth will strain our existing management, financial and other resources. To manage any future growth effectively, we will have to expand our management team, integrate new personnel and augment our marketing and production capabilities. To rapidly produce large volumes of wireless gaming terminals, we will have to formulate and implement design, production planning, manufacturing and quality assurance plans that are unlike those we have used in the past. These plans may strain our manufacturing and industrial engineering capabilities and resources. Rapid growth would also require us to improve our financial, accounting and operational systems and controls. Expansion into new

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geographic areas would further strain our limited operational and marketing resources. If we are unable to effectively manage our growth, we may fail to execute our business strategy and our operations and financial results may be adversely affected.

Possible future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.

As part of our business strategy, we may seek to acquire businesses, services and technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with valuable customer contacts or otherwise offer growth opportunities. If we fail to achieve the anticipated benefits of any acquisitions we may complete, our business, operating results, financial condition and prospects may be impaired. Acquisitions and investments involve numerous risks, including:

· 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;

· Potential loss of key employees;

· Inability to generate sufficient revenues to offset acquisition or investment costs; and

· Potential write-offs of acquired assets.

Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted. Such dilution could adversely affect the market price of our stock. It is also possible that at some point in the future we may decide to enter new markets, thus subjecting ourselves to new risks associated with those markets.

Our patents and proprietary rights may not be enforceable, may not be cost effective to enforce or may not provide significant competitive advantage, which could negatively impact our operations.

Our success depends to a significant degree upon protecting our intellectual property rights. We have three United States patents relating to our products and corresponding patents in certain foreign countries. Of the three patents, two expire in 2010 and one expires in 2012. The patents that we own now or in the future may not provide us with significant competitive advantages or may be impaired by challenges to the validity or enforceability of such patents. For example, in the past the validity of one of our patents has been repeatedly challenged. Others may independently develop similar or more advanced technologies or products or design around aspects of our technology that may be patented.

It is possible that third parties may copy or otherwise obtain and use our information and proprietary technology without our authorization or otherwise infringe on our intellectual property rights. We may have to rely on litigation to enforce our intellectual property rights and contractual rights. For example, we are pursuing a patent infringement action against Planet Bingo, LLC and Melange Computer Services, Inc. to discontinue what we believe to be their infringement of our rights arising under our patents. Both defendants have counterclaimed that our patents are invalid and Planet Bingo, LLC has alleged that our operations infringe one of its patents. See “Item 3. Legal Proceedings” for a more detailed discussion of this litigation. If these counterclaims are successful, our patents may be invalidated or limited in scope or we may be forced to modify or discontinue our operations or pay substantial damages. If litigation that we initiate is unsuccessful, including the litigation described above, we may not be able to protect the value of our intellectual property and our business could be adversely affected.

We have patent applications that are currently pending before the United States Patent and Trademark Office. These patent applications may not result in any patents being issued. If these patent applications do not become issued patents, our competitors would not be prevented from using these inventions described in the applications.

In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If a claim of infringement against us is successful, we may be required to pay royalties to use technology or other intellectual property rights that we had been using or we may be required to enter into a license agreement and pay license fees, or we may be required to stop using the technology or other intellectual property rights that we had been using. We may be unable to obtain necessary

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licenses from third parties at a reasonable cost or within a reasonable time. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to the Company and divert our resources which may have a material adverse effect on our growth initiatives.

In addition, we may not be able to deter current and former employees, consultants, and other parties from breaching confidentiality agreements with us and misappropriating proprietary information from us. If we are unable to adequately protect our intellectual property, it could have a material adverse effect on the value of our intellectual property, our reputation, our business and our operating results.

We may not be able to obtain additional financing if required, which could harm our operations and ability to generate revenue.

Our ability to manufacture our gaming platforms on a large scale may require us to obtain additional financing necessary for the manufacture of such hardware components and expansion of our inventory. The net proceeds that we have received from the sale of the shares of common stock in our initial public offering together with revenue that we generate from operations may not be sufficient to execute our growth strategy.

If we are unable to generate sufficient revenue or if our working capital and manufacturing capacity is not capable of keeping up with demand, we will need to seek additional equity or debt financing to provide the capital required to maintain or expand our production capabilities. We may not be able to obtain needed additional equity or debt financing on terms that are favorable to us, or at all. If we are able to obtain such financing, existing stockholders may suffer dilution and the equity or debt securities issued to raise such financing may have rights, preferences and privileges senior to those of existing stockholders. If we require, but are unable to obtain, sufficient additional financing in the future we may be unable to implement our business plan, respond to changing business or economic conditions, withstand adverse operating results and compete effectively. More importantly, if we are unable to raise further financing when and if required, our continued operations may have to be scaled down or even ceased and our ability to generate revenues would be materially impaired.

Our inability to lease suitable facilities may harm, delay or prevent our operations.

The long term lease for our Las Vegas, Nevada facility, which is our only facility, expires in December 2010. This facility provides us with a convenient central location from which to service our customers. We may not be able to extend the lease on its current terms or, if required, locate new adequate manufacturing facilities on commercially reasonable terms or at all.

Risks Relating to Our Industry

A decline in the popularity of gaming could reduce the demand for our products.

We provide mobile gaming platforms to gaming establishments to enable players to play bingo in several jurisdictions, including Nevada, and traditional casino games on cruise lines. When legally permitted, we intend to provide mobile gaming platforms to enable players to play traditional casino games using our wireless player terminals in Nevada. As a result, our business depends on consumer demand for the games that we enable. Gaming is a discretionary leisure activity, and participation in discretionary leisure activities has in the past, and may in the future, decline during economic downturns because consumers have less disposable income. Therefore, during periods of economic contraction, our revenue may decrease while some of our costs remain fixed, resulting in decreased earnings. Gaming activity may also decline based on changes in consumer confidence related to general economic conditions or outlook, fears of war, future acts of terrorism, or other factors. A reduction in tourism could also result in a decline in gaming activity. Finally, a legislature or regulatory authority may prohibit all or some gaming activities all together in its jurisdiction. A decline in gaming activity as a result of these or any other factors would have a material adverse effect on our business and operating results.

Changes in consumer preferences could also harm our business. Gaming competes with other leisure activities as a form of consumer entertainment, and may lose popularity as new leisure activities arise or as other leisure activities become more popular. In addition, gaming in traditional gaming establishments competes with Internet-based gaming for gaming players, and we do not serve the Internet gaming market. The popularity and acceptance of gaming is also influenced by the prevailing social mores, and changes in social mores could result in reduced acceptance of gaming as a leisure activity. To the extent that the popularity of gaming in traditional gaming establishments declines as a result of either of these factors, the demand for our gaming platforms may decline and our business may be adversely affected.

Expansion of the gaming industry faces opposition that could limit our access to some markets and impair our growth.

We expect a substantial portion of our future growth to result from the general expansion of the gaming industry. The expansion of gaming activities in new markets can be very controversial and may depend heavily on the support of national, local and tribal governments. Changes in

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government leadership, failure to obtain requisite voter support in referenda, failure of legislators to enact enabling legislation and limitations on the volume of gaming activity that is permitted in particular jurisdictions may prevent us from expanding our operations into new markets. A failure by the gaming industry to expand at the rate that we expect could have a material adverse effect on our business, growth rates, financial condition and operating results.

Gaming opponents continue to persist in efforts to curtail the expansion of legalized gaming. Unfavorable public referendums, anti-gaming legislation or unfavorable legislation affecting or directed at manufacturers or operators of gaming products may materially and adversely impair our business and growth prospects. Gaming opponents may be successful in preventing the legalization of mobile gaming in jurisdictions where mobile gaming may be presently prohibited or in limiting the expansion of mobile gaming where it is currently permitted, in either case to the detriment of our business, financial condition, results and prospects.

Future acts of terrorism, as well as other factors affecting discretionary consumer spending and air travel, may impact our industry and may harm our operating results.

Future terrorist attacks similar to those of September 11, 2001, may have a significant impact on the travel and tourism industries upon which the gaming industry, and we in turn, depend. In general, our Nevada-based gaming establishment customers are adversely affected by disruptions in air travel, regardless of cause. Although, our gaming establishment customers in markets outside of Nevada, which are not as dependent on air travel, may not experience as much business disruption, the potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations. Future acts of terror in the United States or an outbreak of hostilities involving the United States may reduce players’ willingness to travel, with the result that our operations will suffer. The amounts that our customers pay to us are based on usage of our devices. Accordingly, reduced usage results in reduced payments to us. Although the revenue we generate from our gaming devices may decline as a result of reductions in air travel or consumer spending, our contracts do not generally provide our customers with the right to terminate their contracts with us as a result of reductions in air travel or consumer spending.

We operate our business in regions subject to natural disasters and other severe catastrophic events, including hurricanes. We have suffered casualty losses as a result of natural disasters (e.g. Hurricane Katrina), and any disruption to our business resulting from natural disasters will adversely affect our revenue and results of operations.

The strength and profitability of our business depends on player demand for our products at gaming establishments. The impact of natural disasters, the outbreak of infectious diseases and other factors affecting discretionary consumer spending could negatively affect gaming activity and consequently, the demand for and use of our products at affected gaming establishments. Disruptions of gaming establishment operations, as a result of natural disasters and other catastrophic events beyond our control, would also reduce the number of gaming establishments that offer our products.

We operate our business primarily through gaming platforms, including wireless and stationary player terminals, cashier-based POS terminals and self-service POS kiosks, used by players at gaming establishments and bingo halls. Accordingly, a substantial portion of our physical assets are in locations beyond our direct control, including areas of Louisiana that sustained major damage as a result of Hurricane Katrina. Generally, our business may also be adversely affected by any damage to or loss of equipment that we install at gaming establishments resulting from theft, vandalism, terrorism, flood, fire or any other natural disaster. Our insurance may not be adequate to recover our losses from these events. The amounts that our customers pay to us are based on usage of our devices. Accordingly, reduced usage results in reduced payments to us. Although the revenue we generate from our gaming devices may decline as a result of a natural disaster, our contracts do not generally provide our customers with the right to terminate their contracts with us as a result of a natural disaster.

Beneficial holders of our securities are subject to regulation by the Nevada gaming authorities, which may result in required applications for license, findings of suitability and mandatory redemption of shares.

Because we are a registered company under the Nevada Gaming Control Act, any person who acquires five percent or more of any class of our voting securities is required to report the acquisition to the Nevada Gaming Commission. The Nevada Gaming Control Act requires any person who acquires 10 percent or more of our voting securities to apply to the Nevada Gaming Commission for a finding of suitability within 30 days after the Chairman of the Nevada Gaming Control Board mails a written notice requiring the filing. If such person fails or refuses to apply for a finding of suitability or license within 30 days after being ordered to do so by the Nevada gaming authorities, or if such person refuses or fails to pay the investigative costs incurred by the Nevada gaming authorities in connection with such person’s application, the person may be found unsuitable. The same restrictions apply to the owner of record if the owner of record, after request, fails to identify the beneficial owner. Any person found

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unsuitable and who holds any voting security may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to hold an equity interest or to have any other relationship with us, we:

· pay that person any dividend upon any voting securities;

· allow that person to exercise, directly or indirectly, any voting right relating to us held by the person;

· pay remuneration in any form to that person for services rendered or otherwise; or

· fail to pursue all lawful efforts to require the unsuitable person to relinquish such person’s voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

Our Amended and Restated Articles of Incorporation provide that persons who acquire five percent or more of the beneficial ownership of our outstanding capital stock notify us and consent to any background investigation or other requirements imposed by any gaming authority. Our Amended and Restated Articles of Incorporation also provide for mandatory redemption of its shares if the beneficial owner fails to comply with any applicable gaming law requirements.

Certain Nevada statutes have potential anti-takeover effects that could delay or prevent a change in control of our company and depress the price of our common stock.

Nevada statutes regulating business combinations, takeovers and control share acquisitions may hinder or delay a change in control of our company. In addition, under Nevada law, any change of control of our company must also be approved by the Nevada gaming authorities. Other jurisdictions may have similar requirements. These statutes could limit the price that investors might be willing to pay in the future for shares of our common stock and may limit our stockholders’ ability to receive a premium on their shares by discouraging takeovers and tender offer bids, even if such events could be viewed as beneficial by our stockholders.

ITEM 2.   PROPERTIES

We conduct our operations at our facility located at 2950 South Highland Drive, Suite C, Las Vegas, Nevada, 89109. This facility is approximately 22,000 square feet and is utilized for our administrative office, product showroom, research and development and manufacturing functions. The lease for this facility expires in December 2010. Although we believe that our current facility is adequate for manufacturing a sufficient volume of mobile gaming products to satisfy the anticipated demand through the existing lease term, we may be forced to lease additional manufacturing space if demand for our expanded line products should exceed our capability to manufacture the products in our currently leased facility.

ITEM 3.   LEGAL PROCEEDINGS

In 2007, the Company settled a patent infringement lawsuit against Planet Bingo, LLC and its subsidiary, Melange Computer Services, Inc. However, terms of the settlement have not been finalized.

Currently, the Company is the plaintiff in a civil lawsuit filed in the United States Federal Court, District of Nevada under the federal Racketeer Influenced Corrupt Organization, or RICO, law against GameTech International Incorporated and its wholly owned subsidiary, GameTech Arizona Corporation.

     The Company believes that the final resolution of pending litigations,, is not likely to have a material adverse effect on the Company’s business, cash flow, results of operations or financial position.

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ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market  Information

Since our initial public offering on January 31, 2006, our common stock has traded on the Nasdaq Global Market (formerly the Nasdaq National Market) under the symbol “FNET”. Prior to that time, there was no public market for our stock.

The following table sets forth, for the indicated periods, the high and low closing sale prices of our common stock:

Year Ended December 31, 2006	High		Low
First Quarter (commencing January 31, 2006)	$	15.03	$	9.05
Second Quarter		24.65		14.54
Third Quarter		15.90		6.84
Fourth Quarter		11.45		8.04
Year Ended December 31, 2007	High		Low
First Quarter	$	10.67	$	7.30
Second Quarter		10.77		7.92
Third Quarter		10.74		7.26
Fourth Quarter		9.89		7.25

On March 17, 2008, the closing sale price of our common stock on the Nasdaq Global Market was $6.16.

Holders of Common Stock

As of December 31, 2007, our stock was held by approximately 10 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.

Dividends

During 2005, which was prior to our initial public offering, we paid dividends to holders of our common stock on a quarterly basis. The dividends paid during 2005 were $2,370,000 in the aggregate. Since becoming a publicly traded entity in 2006 we have paid no dividends. We do not foresee paying any dividends on our common stock in the future.  We plan on retaining our future earnings, if any, to finance our business and for general corporate purposes. As long as there are funds legally available to do so, any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon earnings, financial condition, operating results, capital requirements, any contractual restrictions and other factors that our board of directors deems relevant. The terms of any future debt or credit facility may preclude us from paying dividends on our common stock.

Use of Proceeds

We completed an initial public offering of our common stock during the first quarter of 2006. Our registration statement on Form S-1 under the Securities Act (File No. 333-128391) was declared effective on January 30, 2006. The aggregate net proceeds to us were approximately $23,728,995.

We have invested all of the net proceeds from our initial public offering in short-term interest bearing investment grade securities. We may utilize a significant amount of proceeds from our initial public offering to acquire parts and components for the manufacture of our gaming products. However, we do not intend to commence procuring any significant amount of component parts for manufacture of our gaming products until we are

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more able to determine  the duration of the currently ongoing reviewing process of our mobile gaming systems by the Nevada gaming authorities. We may also utilize a substantial portion, if not most, of the proceeds from this offering to acquire one or more businesses.

ITEM 6.   SELECTED FINANCIAL DATA

This Annual Report does not include information described under Item 6 of Form 10-K pursuant to the rules of the Securities and Exchange Commission that permit “smaller reporting companies” to omit such information.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

We are an established and profitable manufacturer of multi-game and multi-player server-based gaming platforms. Our gaming platforms include networks of both wireless and stationary player terminals, cashier-based point-of-sale terminals, self-service point-of-sale kiosks and game file servers that conduct and control bingo games. Our gaming platforms have been adapted to conduct traditional casino games, such as keno, poker and slots, in addition to bingo.

We believe that the research and developments efforts that we undertook in 2007 have made our field-proven mobile gaming platform compliant with the wireless gaming regulations promulgated by the Nevada Gaming Commission to date.  We submitted our mobile gaming platform for review by Nevada gaming authorities in 2006. Our gaming platforms currently enable patrons to play bingo using either our wireless or our stationary player terminals. In addition, our gaming platforms currently enable patrons to play traditional casino games using our stationary player terminals. We have also successfully completed the field testing of our wireless player terminals that enable patrons to play traditional casino games on a limited basis on cruise lines. If our wireless gaming devices are approved by the Nevada gaming authorities, Nevada casino patrons will be able to play traditional casino games using our wireless player terminals. However, there can be no assurance that we will obtain such approval in the foreseeable future or at all.

We continue to focus on research and development and have recently introduced our fourth generation wireless player terminals for our gaming platform that enable patrons to play bingo and has been adapted to conduct traditional casino games in casino public areas. In addition to adapting our wireless gaming platform to comply with the newly promulgated Nevada gaming regulations for mobile gaming devices, we have developed and begun deliveries of super-bright multicolor LED bingo flashboards that not only display the called bingo numbers but also verify bingo cards. We have filed a United States patent application regarding certain aspects of this product.

We currently generate revenue by placing electronic bingo systems in bingo halls under contracts based on (a) a fixed fee per use per session; (b) a fixed weekly fee per terminal; or (c) a percentage of the revenue generated by each terminal. Our revenue growth is affected by player acceptance of electronic bingo as an addition or an alternative to paper bingo in our existing client establishments, our ability to expand operations into new markets and our ability to increase our market share. Our stationary bingo player terminals generate greater revenue per player terminal than our wireless bingo player terminals, but also require a greater initial capital investment. As our customer base changes from period to period through the addition of new customers or the occasional loss of existing customers, we experience an increase in sales revenue due to the addition of customers and a decrease in sales revenue due to the loss of customers. Our sales revenue is also affected from period to period as a result of changes in operations at our existing customer locations that result from numerous factors over which we have little or no control.

We typically install our electronic bingo systems at no charge to our customers and we capitalize all direct costs. We record depreciation of bingo equipment over a five-year estimated useful life using the straight-line method of depreciation.

We anticipate that at some point in time, we may begin selling our gaming platforms for use in conducting traditional casino games, instead of entering into lease contracts as we do now. At that time, our revenue may include product revenue from sales of equipment, in addition to our leasing revenue. At such time, our product revenue will be influenced by the then current price for our products and our unit-volume sales.

We envision that if we develop product revenue sales, we will also see a recurring revenue component for both software upgrades and maintenance of the software components of our sold products.

Our expenses currently consist of:

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(a) cost of revenue, depreciation of bingo terminals and other capitalized equipment under lease to customers, maintenance, repair and refurbishment of bingo terminals and related support equipment, and cost of shipping. Installation costs and initial shipment expenses associated with new customer lease contracts are expensed as cost of revenue in the period in which the equipment is deployed. Expenses related to maintenance, repair and refurbishment of our existing equipment that has been deployed at customer locations are expensed as cost of revenue in the period in which the maintenance, repair or refurbishment is performed. These expenses are incurred to, among other things, maintain our existing equipment in working order, provide our customers with updated equipment, fix software bugs, if any, provide new functionality and minimize the number of different installation configurations that we must support. We are not obligated to perform maintenance, repair or refurbishment under the terms of our rental agreements with our customers, but do so in order to improve the quality and reliability of our products;

(b) general and administrative costs, consisting of activities associated with management of our company and related support, which includes all payroll and benefits other than payroll in connection with research and development activities, amortization of our non-competition agreements, travel, professional fees, facility expenses and bad debt expense reserves;

(c) sales and marketing costs, consisting primarily of commissions paid to distributors for promoting and supporting our products and related marketing costs; and

(d) research and development costs associated with the internal research and development activities geared to the further development of our gaming platform, including labor and hardware and software testing, prototyping and development.

We envision that the development of our product revenue may require us to record cost of products sold (rather than leased) revenue that include materials, labor, and direct and indirect manufacturing costs and associated warranty costs.

Millennium, our wholly owned subsidiary, distributes our bingo products in selected territories in the United States. All of our other operations, including the operation and maintenance of our bingo products and the exclusive distribution of our bingo products in Nevada, Texas and Washington, are conducted by FortuNet. Prior to November 2003, Yuri Itkis held approximately 72% of the voting control over Millennium. In November 2003 Millennium purchased its outstanding shares held by stockholders other than Yuri Itkis. In January 2004, we became the 100% owner of Millennium through Yuri Itkis’ contribution to us of the remaining outstanding shares. This enabled us to consolidate our worldwide distribution rights and enabled significant expense reduction in our overall distribution and operational costs.

In 2007, we incurred $406,489 in legal and professional fees as compared to $952,187 in 2006; the decrease in legal and professional fees was the result of (a) a reduction of expenses related to the litigations against defendants Planet Bingo, LLC, Melange Computer Services, Inc., and Gametech International, Inc., and (b) the completion of our initial public offering in 2006.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with United States 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 reporting date 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 unit depreciation and litigation. We base our estimates and judgments on historical experience and on various other factors that 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

Revenue is currently recognized for bingo terminals placed in bingo halls under lease contracts based on (a) a fixed weekly fee per terminal available for bingo (even though our contracts are generally on a month to month basis); (b) a fixed fee per usage per bingo session; or (c) a percentage of the revenue generated by each terminal for bingo sessions played. We do not enter into any financing leases or sales type contracts with our customers. Our platform provides reports of daily usage for billing and reporting purposes for the latter two types of contracts. We bill our customers on a weekly and monthly basis for these revenues and recognize the revenue for the period the units are used or prorate for weekly

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fees. Existing revenue recognition is a key component of our results of operations, and determines the timing of certain expenses, such as commissions, which are reported in the same period when related revenues are recognized. We recognize revenue in accordance with accounting principles generally accepted in the United States when all of the following factors exist: (a) evidence of an arrangement with the customer; (b) installation of our gaming platform; (c) a fixed or determinable fee; and (d) collectibility is reasonably assured. We exercise judgment in assessing the credit worthiness of our customers and therefore in our determination of whether collectibility is reasonably assured. Should changes in conditions cause us to determine these criteria are not met for future transactions, revenue recognized for future reporting periods could be adversely affected.

Allowance for Doubtful Accounts

We estimate the possible losses resulting from non-payment of outstanding accounts receivable. 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. In determining these percentages, we review historical write-offs of our receivables, payment trends and other available information. While such estimates have been within our expectations and the provisions established, a change in financial condition of specific customers or in overall trends experienced may result in future adjustments of our estimates of recoverability of our receivables.

Depreciation

The declining balance method of depreciation is used for furniture and fixtures, machinery and equipment and vehicles with a useful life of five to seven years. This method was selected because the productive usefulness of those assets decline at a rate more rapid than straight line. Leasehold improvements are depreciated over the life of the lease. Our rental assets are depreciated over five years using the straight line method. The straight line method is used because we believe this method most accurately matches the costs with the revenues over the useful life of the product. We annually assess whether there is a possible impairment of the assets and equipment and to date have concluded that no impairments exist.

Income Taxes

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes , or FIN No. 48, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial position or results of operations.  We believe it is reasonably possible that the total amount of previously unrecognized tax benefits may decrease within twelve months of the reporting date.

Software Development Cost Policy

We have capitalized software development costs since  the achievement of the technological feasibility of our mobile gaming system. We have recorded these costs in accordance with the Statement of Financial Accounting Standards No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”

Internal Control Deficiencies

In connection with the audit of our 2007 financial statements, our CEO and CFO have concluded that there was a significant deficiency in the area of financial controls. As a result of the resignation of our former CFO William Jacques Jr. on January 5, 2008, there was a lack of segregation of duties in the preparation of the 2007 financial statements.

The significant deficiency was the result of insufficient quantity of personnel in the accounting department to perform the necessary checks and balances for daily and year-end procedures.  Our independent registered public accounting firm has recommended that we promptly hire an additional employee with the background and skills to perform the duties typical of a controller. We have recently made that hire and the individual is a Certified Public Accountant.

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Legal Contingencies

We are currently involved in various legal claims and legal proceedings. We have not accrued any liability for estimated losses related to legal contingencies at this time. In management’s opinion, these matters are not expected to have a significant effect on our financial position or results of operations. 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 consolidated results of operations and financial position.

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Results of Operations

The following table sets forth our results of operations as a percentage of revenue for each of the periods indicated:

Consolidated Income Statement

	Years Ended December 31,
	2006			2007
Revenue		100.00	%	100.00	%
Cost of revenue		13.00	%	14.90	%
Gross profit		87.00	%	85.10	%
Operating expenses:
General and administrative		39.20	%	28.00	%
Sales and marketing		32.20	%	29.90	%
Research and development		3.90	%	3.20	%
Total operating expenses		75.30	%	61.20	%
Income from operations		11.70	%	23.90	%
Interest expense		(0.10	)%	(0.10	)%
Other income		5.40	%	9.60	%
Income before income taxes		17.00	%	33.40	%
Provision for income taxes		4.70	%	9.40	%
Net income		12.30	%	24.00	%

Years Ended December 31, 2007 and December 31, 2006

Sales revenue. Sales revenue was $16,488,565 in the year ended December 31, 2007, compared to $16,460,462 in the year ended December 31, 2006. The slight increase of  $28,103, or 0.2%, was primarily attributed to the overall increase in revenue of  $242,528 resulting from the change in the customer base. The increase however was offset by a decrease of $181,923 in revenues as a result of changes in operations at our existing customer locations.

Towards the end of 2007 and at the beginning of 2008, we lost a significant number of charitable bingo hall customer locations that were serviced through one of our distributors, and it is expected, based on 2007 revenues, that our revenues attributable to sales generated through this distributor for 2008 will be reduced by approximately $1,500,000.

Cost of revenue. The cost of revenue was $2,456,557 or 14.9% of revenue in 2007, compared to $2,132,702 or 13% of revenue in 2006, an increase of $323,855, or 15.2%. The increase in cost of revenue was the result of  (a) an increase in the depreciation cost from $1,740,858 in 2006 to $1,784,027 in 2007, as new units deployed in the previous and current years continue to depreciate, and (b) the increase in the cost associated with installation and maintenance from $391,844 for 2006 to $672,530 for 2007, an increase of $280,686  or 71.6%; these costs included the shipping, installation, repairs and upgrades of  the deployed units.  As a result of this overall increase in costs, our gross margin slightly decreased from 87.0% in 2006 to 85.1% in 2007.

General and administrative. The general and administrative expenses were $4,623,322 or 28.0% of revenue in 2007, as compared to $6,459,210, or 39.2% of revenue in 2006, a decrease of $1,835,888 or 28.4%. This decrease was primarily the result of a reduction in cost associated with our past transition from a private company to a publicly traded entity in 2006, including the discontinued consulting services formerly provided by Spiegel Partners LLC with a cost of $611,540, and the costs associated with the stock grants to certain of our executives in the amount of $677,881 and also the overall reduction in  legal and professional cost in the amount of $545,698.

Sales and marketing. The sales and marketing expenses were $4,930,823, or 29.9% of revenue in 2007, as compared to $5,301,332 or 32.2% of revenue in 2006, a decrease of $370,508, or 7.0%. This decrease was primarily attributable to the reduction of commissions paid to distributors.

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Research and development. The research and development expenses were $533,149 or 3.2% of revenue in 2007, compared to $648,463, or 3.9% of revenue in 2006, a decrease of $115,314 or 17.8%. The decrease in research and development expenses was primarily the result of our compliance with the provisions of FASB SFAS No. 86, because we achieved the stage of technological feasibility in the development of our mobile gaming system in the beginning of the second quarter of 2006 at which time we began to capitalize the corresponding research and development expenses.  In 2007, we capitalized a full twelve (12) months worth of research and development expenses related to mobile gaming systems, as compared to capitalizing only eight (8) months worth of  such expenses in 2006.  We anticipate continuing to capitalize costs related to research and development of our gaming platform until the field deployment of our mobile gaming system is achieved.

Other income and expense. Other income was $1,578,189, or 5.4% of revenue in 2007, as compared to $898,414, or 5.5% of 2006 revenue, an increase of $679,775. The increase in other income was primarily due to the interest earned through our investment of funds raised in our initial public offering and additional liquid funds accumulated since the initial public offering.

Provision for income taxes. An income tax provision of $1,555,895 with an effective tax rate of 29.7% was recorded in 2007, as compared to $776,183 with an effective tax rate of 27.7% in 2006, an increase of $779,712 or 100.5%. The increase in the provision for income taxes was primarily due to an increase in taxable income in 2007 as compared to fiscal year 2006.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily with revenue generated from the leasing of our bingo products. At December 31, 2007, our principal sources of liquidity were cash, cash equivalents and marketable securities of $29,638,935 and accounts receivable (net of allowance for doubtful accounts) of $1,431,721. We anticipate that our leasing revenue, which is our principal source of revenue today, will be sufficient to fund our operating expenses in the short term. Long term cash is expected to be generated from existing operations and potentially, also through selling or leasing of our products in new markets.

We expect to incur significant additional expenses in connection with the procurement of equipment and components and the manufacture of additional stationary and wireless player terminals to take advantage of business opportunities. We anticipate that these expenses will consume a substantial portion, if not all, of our recurring lease revenues. Except to the extent we become obligated under supply contracts that we enter into to procure equipment and components, our fixed payment commitments are limited to our facilities lease.

We believe that our cash flow from operations will be adequate to meet our anticipated future requirements for working capital and capital expenditures for the next 12 months and for the foreseeable future. Although no additional capital raise is currently being contemplated, we may seek, if necessary or otherwise advisable, additional financing through bank borrowings or public or private debt or equity financings. Additional financing, if needed, may not be available to us, or, if available, the financing may not be on terms favorable to us. The terms of any financing that we may obtain in the future could impose additional limitations on our operations and management structure. Our estimates of our anticipated liquidity needs may not be accurate or new business development opportunities or other unforeseen events may occur, resulting in the need to raise additional funds.

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Summary of Combined and Consolidated Statements of Cash Flow

	Years Ended December 31,
	2006			2007
Net cash provided by operating activities	$	5,489,602		$	6,543,103
Net cash (used in) investing activities		(26,385,533	)		(5,522,976	)
Net cash(used in) provided by financing activities		23,878,222			-----
Net increase in cash and cash equivalents		2,982,291			1,020,127
Cash and cash equivalents, beginning		511,517			3,493,808
Cash and cash equivalents, ending	$	3,493,808		$	4,513,935

Operating Activities

For fiscal year ended December 31, 2007, the net cash of $6,543,103 provided by our operating activities was primarily due to the net income of $3,947,548, depreciation and amortization of $1,905,730, the issuing of common stock for certain services of $164,614 and the change in operating assets and liabilities of $525,211. In comparison, for the year 2006, the net cash of $5,489,602 provided by operating activities was primarily due to the net income of $2,027,660, depreciation and amortization of  $2,263,676, the issuing of common stock for certain services of $1,132,140 and the change in operating assets and liabilities of $66,126. The overall increase of $1,053,501 in the net cash provided by operating activities in 2007 as compared to 2006, was primarily due to the increase in the net income in 2007 as compared to 2006.

Investing Activities

For 2007, $5,522,976 of net cash was used for investing activities, with $3,372,976 being used to fund the manufacture of equipment for lease to our customers and $2,150,000 was used to invest in marketable securities

For 2006, $26,385,533 of net cash was used for investing activities, with $3,410,533 being used to fund the manufacture of additional equipment for lease to our customers and $22,975,000 was used to invest in marketable securities.

Financing Activities

For the year 2007, no cash was generated or used for financing activities.

For the year 2006, $23,878,222 of net cash was raised through financing activities associated with $24,710,625 raised as a result of the sale of our stock in our initial public offering less cost of issuing stock of $981,630 of which $685,722 was used for costs incurred in 2005, with $536,495 used for payments of a long term debt obligation incurred as a result of our acquiring 100% ownership of Millennium.

Off-Balance Sheet Arrangements

As of December 31, 2007, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

Contractual Obligations

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2007:

	Payments Due By Period
	Less Than 1 Year		1 to 3 Years			3 to 5 Years			More Than 5 Years		Total
Location lease	$	—	$	125,799	$		249,818	$		—	$	375,617
Total	$	—	$	125,799	$		249,818	$		—	$	375,617

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Recent Accounting Pronouncements

SFAS 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In January 2008, the FASB deferred the effective date for one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is still evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 157 will have a material effect on its financial condition, results of operations or cash flows.

SFAS 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115.” Under SFAS No. 159, the Company may elect to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. The decision to measure items at fair value is made at specific election dates on an irrevocable instrument-by-instrument basis and requires recognition of the changes in fair value in earnings and expensing upfront costs and fees associated with the item for which the fair value option is elected. Fair value instruments for which the fair value option has been elected and similar instruments measured using another measurement attribute are to be distinguished on the face of the statement of financial position. SFAS No. 159 is effective for financial statements beginning after November 15, 2007. The Company is still evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 159 will have a material effect on its financial condition, results of operations or cash flows.

SFAS 141R

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141R requires an acquirer to recognize the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is in the process of evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 141R will have a material effect on its financial condition, results of operations or cash flows.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements.  SFAS 160 recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity.  SFAS 160 is effective January 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.  The Company does not expect the adoption of SFAS No. 160 to have a material effect on its financial condition, results of operations or cash flows.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 This Annual Report does not include information described under Item 7A of Form 10-K pursuant to the rules of the Securities and Exchange Commission that permit “smaller reporting companies” to omit such information.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

36

CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		38
Consolidated Balance Sheets as of December 31, 2007 and 2006		39
Consolidated Statements of Income for the years ended December 31, 2007 and 2006		40
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007 and 2006		41
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006		42
Notes to Consolidated Financial Statements		43

___________________________

37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FortuNet, Inc.

Las Vegas, Nevada

We have audited the accompanying consolidated balance sheet of FortuNet, Inc and subsidiary as of December 31, 2007 and 2006 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FortuNet, Inc and subsidiary as of December 31, 2007 and 2006 and the results of its operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 6 to the consolidated financial statements, as of January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation 48, Accounting for the Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.

/s/ Schechter Dokken Kanter Andrews & Selcer Ltd.

Minneapolis, Minnesota

March 25, 2008

38

FORTUNET, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007		2006
Assets:
Current assets:
Cash and cash equivalents	$	4,513,935	$	3,493,808
Marketable securities		25,125,000		22,975,000
Accounts receivable, net of
allowance for doubtful accounts		1,431,721		1,436,599
Income tax receivable		156,031
Inventories		1,200,512		1,333,970
Prepaid expenses		313,414		668,536
Deferred tax asset		135,858		112,716
Total current assets		32,876,471		30,020,629
Property and equipment, net of
accumulated depreciation		8,203,860		6,642,372
Other assets, net of accumulated amortization		54,307		76,723
Deferred tax asset		780,454		860,711
Total assets	$	41,915,092	$	37,600,435
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	499,201	$	136,341
Commissions payable		178,060		294,609
Accrued expenses		349,944		231,195
Income tax payable		102,400		335,208
Total current liabilities		1,129,605		997,353
Stockholders’ equity:
Common stock
.001 par value 150,000,000 shares authorized, 11,341,612
Issued and outstanding at December 31, 2006 and  11,351,279
Shares issued and outstanding at December 31, 2007		11,351		11,342
Additional paid in capital		29,855,678		29,620,830
Retained earnings		10,918,458		6,970,910
Total stockholders’ equity		40,785,487		36,603,082
Total liabilities and
stockholders’ equity	$	41,915,092	$	37,600,435

See notes to consolidated financial statements.

39

FORTUNET, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Years ended
	December 31,
	2007		2006
Revenue	$	16,488,565	$	16,460,462
Cost of revenue		2,456,557		2,132,702
Gross profit		14,032,008		14,327,760
Operating expenses:
General and administrative		4,623,322		6,459,210
Sales and marketing		4,930,823		5,301,331
Research and development		533,149		648,463
Total operating expenses		10,087,294		12,409,004
Income from operations		3,944,714		1,918,756
Interest income, net		1,087,809		885,087
Other income		470,920		--
Income before income taxes		5,503,443		2,803,843
Provision for income taxes		1,555,895		776,183
Net income	$	3,947,548	$	2,027,660
Weighted average shares – basic		11,345,849		11,037,511
Earnings per share – basic		.35		.18
Weighted average shares – diluted		11,349,096		11,067,301
Earnings per share – diluted		.35		.18

See notes to consolidated financial statements.

40

FORTUNET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

					Additional				Total
	Outstanding		Common		Paid in		Retained		Stockholders'
	Shares		Stock		Capital		Earnings		Equity
Balance January 1, 2006		8,350,000	$	8,350	$	4,702,039	$	4,943,250	$	9,653,639
Stock sale, net of $981,630 of offering costs (IPO)		2,875,000		2,875		23,726,120				23,728,995
Stock issued for services		116,612		117		1,049,391				1,049,508
Stock options granted						143,280				143,280
Net income								2,027,660		2,027,660
Balance, December 31, 2006		11,341,612	$	11,342	$	29,620,830	$	6,970,910	$	36,603,082
Stock issued for services		9,667		9		77,843				77,852
Stock option cost						157,005				157,005
Net income								3,947,548		3,947,548
Balance, December 31, 2007		11,351,279	$	11,351	$	29,855,678	$	10,918,458	$	40,785,487

See notes to consolidated financial statements.

41

FORTUNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended December 31,
	2007			2006
Cash flows from operating activities:
Net income	$	3,947,548		$	2,027,660
An  adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,784,027			1,845,382
Amortization		121,703			418,294
Stock for services		164,614			1,132,140
Deferred taxes		57,115			(169,868	)
Change in operating assets and liabilities:
Accounts receivable		4,878			(124,750	)
Inventories		133,458			(63,525	)
Prepaid expenses		355,122			289,353
Income tax refund receivable		(156,031	)		----
Other assets		(1,584	)		(4,068	)
Accounts payable		362,860			(194,223	)
Accrued expenses		118,750			46,699
Commissions payable		(116,549	)		109,746
Income taxes payable		(232,808	)		176,762
Net cash provided by operating activities		6,543,103			5,489,602
Cash flows from investing activities:
Purchase of property and equipment		(3,372,976	)		(3,410,533	)
Purchase of marketable securities		(12,100,000	)		(26,050,000	)
Sale of marketable securities		9,950,000			3,075,000
Net cash used in investing activities		(5,522,976	)		(26,385,533	)
Cash flows from financing activities:
Sale of stock, net of issuance costs		---			24,414,717
Dividends		---			---
Payments on notes payable		---			(536,495	)
Net cash provided by financing activities		---			23,878,222
Net increase in cash and cash equivalents		1,020,127			2,982,291
Cash and cash equivalents, beginning		3,493,808			511,517
Cash and cash equivalents, ending	$	4,513,935		$	3,493,808
Supplemental cash flow information:
Cash paid for:
Interest	$	19,459		$	15,377
Income taxes	$	1,904,543		$	776,530
Non-cash investing and financing activities:
IPO cost adjust to equity	$	--		$	685,722
Stock options capitalized	$	70,243		$	60,648

See notes to consolidated financial statements.

42

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of business and summary of significant accounting policies:

Nature of business:

FortuNet, Inc. (FortuNet) and its wholly-owned subsidiary, Millennium Games (Millennium) (collectively the Company) was incorporated in 1989 in Nevada. FortuNet is engaged primarily in the business of designing, manufacturing,  field maintenance and leasing electronic gaming and entertainment systems throughout North America.

The Company derives substantially all revenues from the gaming industry in the United States and Canada. Changes in laws and regulations related to gaming in each state or province can affect the Company’s revenues in any given state or province.

Principles of consolidation:

The consolidated financial statements for 2007 and 2006 include the accounts of FortuNet and its wholly-owned subsidiary. All inter company transactions have been eliminated for all periods presented.

Cash and cash equivalents:

The Company considers all highly liquid investments which have maturities of three months or less, when acquired, to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Cash and cash equivalents subject the Company to concentrations of credit risk. At December 31, 2006 and 2007, the Company had invested approximately $2.5 million and $3.0 million respectively, in cash equivalents in the form of money market funds with four major investment companies and held approximately $1.0 million and $1.5 million, respectively, in a single commercial bank.

Marketable Securities:

In accordance with Statement of Financial Accounting Standards No.115, “Accounting for Certain Debt and Equity Securities,” investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. In computing realized gains and losses, the Company computes the cost of its investments on a specific identification basis.  The fair value of marketable securities has been estimated based on quoted market prices. Interest and dividends on securities classified as available-for-sale are included in interest income.

At December 31, 2006 and 2007, the Company’s investment in marketable securities in the current assets section of the consolidated balance sheets included $22.9 million and $25.1 million, respectively, of Auction Rate Securities (“ARS”). The Company’s investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual maturities, in the past the Company had the ability to quickly liquidate these securities. As a result, the Company had no cumulative gross unrealized holding gains (or losses) or gross realized gains (or losses) from these securities in the periods presented. All income generated from these current investments was recorded as interest income.

The auction process for ARS historically provided a liquid market for these securities. In the second half of 2007, however, this process began to deteriorate. During the first quarter of 2008, the Company began to reduce the principal amount of ARS in its portfolio. While its portfolio was not affected by the auction process deterioration in 2007, some of the ARS the Company holds experienced auction failures during the first quarter of 2008. As a result, when the Company attempted to liquidate them through auction, it was unable to do so. In the event of an auction failure, the interest rate on the security is reset according to the contractual terms in the underlying indenture. As of March 20, 2008, the Company has received all scheduled interest payments associated with these securities.

43

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The funds associated with failed auctions will not be accessible until a successful auction occurs, the issuer calls or restructures the underlying security, the underlying security matures and is paid or a buyer outside the auction process emerges. The Company believes that the failed auctions experienced to date are not a result of the deterioration of the underlying credit quality of these securities, although valuation of them is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company believes that any unrealized gain or loss associated with these securities will be temporary and will be recorded in accumulated other comprehensive income (loss) in its financial statements.

The credit and capital markets have continued to deteriorate in 2008. Continuation or acceleration of the current instability in these markets and/or deterioration in the ratings of the Company’s investments may affect its ability to liquidate these securities, and therefore may affect its financial condition, cash flows and earnings. The Company believes that based on its current cash and cash equivalents balances of $4.5 million at December 31, 2007, the current lack of liquidity in the credit and capital markets will not have a material impact on its liquidity, cash flows, financial flexibility or ability to fund its obligations.

The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of its investments. If the current market conditions continue, in which some auctions for ARS fail, or the anticipated recovery in market values does not occur, the Company may be required to record unrealized losses or impairment charges in 2008. As auctions have closed successfully, the Company has converted its investments in ARS to money market funds. The Company believes it will have the ability to hold any auction rate securities for which auctions fail until the market recovers. It does not anticipate having to sell these securities in order to operate its business.

Inventories:

Inventories, consisting primarily of parts and components to be used for assembly and installation of products to be leased or sold, are valued at the lower of cost or market, as determined by the first-in, first-out basis. Also classified as inventories are Work In Process (WIP) components for installs that are being produced for a future period. The following schedule details inventory between parts and assemblies  and work in process:

	2007		2006
Parts and assemblies	$	1,103,612	$	1,222,107
WIP		96,900		111,863
	$	1,200,512	$	1,333,970

Prepaid expenses:

Prepaid expenses include various prepaid operating items and deposits for inventory parts to be purchased.

Property and equipment:

Property and equipment are stated at cost. Depreciation is provided using the declining balance method except for rental assets for which the straight line method is used. Estimated lives used for depreciation are as follows:

Rental assets	5 years
Furniture and fixtures	5-7 years
Machinery and equipment	5 years
Vehicles	5 years
Improvements	2-7 years

44

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically reviews the carrying amount of property and equipment for events or changes in circumstances that indicate that their carrying value may not be recoverable.

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Software development capitalization:

The Company capitalizes internally developed software costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalization of development costs of software products begins once the technological feasibility of the product is established. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. Starting in April 2006 through December 2007 the Mobile Gaming System internal software development costs have been capitalized as technological feasibility of the product was established in April 2006.

Revenue recognition:

The Company leases its products, using operating leases directly to gaming facilities and through several regional distributors. The agreements generally require lessees to pay rent for player terminals only when they are actually used based upon an automated reporting system whereby each day’s usage by customer is reported to the Company or a self-reporting system where the customer submits sales information to the Company which is used as the basis for determining revenue. The Company recognizes revenue as the devices are used in accordance with each lease agreement. Most leases are on a per-use arrangement with some lease payments being determined as a percentage of revenue that the devices generates for the lessee and some devices are leased at a flat weekly amount. The terms range from one to three years duration with annually renewable leases; and month-to-month rentals. There are no significant leases with terms greater than one year. The Company recognizes revenue as the devices are used based upon the automated reporting system or self-reporting system described above.

Cost of revenue:

The cost of revenue includes depreciation of our capitalized leased equipment and the cost of shipping to and installation of equipment in the field as well as the cost of subsequent repairs and upgrades of installed equipment. Repairs are expensed as incurred upon the return of the malfunctioning and/or damaged equipment from the field subsequent to the re-deployment of equipment back to the field. Upgrades either for the hardware or the software components of our systems that have been deployed at customer locations are expensed in the period in which the upgrades are actually performed. Installation costs allocated with the new lease contracts are expensed in the period in which the equipment is deployed in the field.

We do not provide any product warranties to any of our customers. However, it is in our best interest to maintain our equipment in good working order. We apply our best effort to promptly repair and/or replace equipment in good working order. We apply our best effort to promptly repair and/or replace equipment returned from customers. The cost of the repairs is expensed in the period incurred. Accordingly, no liability has been established by the Company for future costs to repair our products.

Accounts receivable and allowance for doubtful accounts:

The Company’s receivables are recorded when revenue is recognized in accordance with its revenue recognition policy and represent claims against third parties that will be settled in cash. Balances greater then ninety days old are considered past due and are considered when determining the allowance for doubtful accounts. The carrying value of the Company’s receivables, net of allowance for doubtful accounts, represents their estimated net realizable value.

The Company estimates the possible losses resulting from non-payment of outstanding accounts receivable. The Company evaluates the allowance for doubtful accounts using current year account activity, historical trend information and specific account identification. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Income taxes:

The Company classifies income tax-related penalties and interest if any, as part of income tax expense (Note 6).

45

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. The principal estimate is the 5 year life of rental assets. While actual results could differ from those estimates, management believes that the estimates are reasonable.  Management believes it is reasonable possible that its recorded liability for estimated unrecognized tax benefits (Note 6) will be subject to material adjustment in the next year.

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Net income per share:

In accordance with the provisions of SFAS No. 128, Earnings Per Share, earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The effect of basic and diluted earnings per share is the result of the stock given to the Company’s independent directors in 2007 and 2006.

	Years ended December 31,
	2007		2006
Net income	$	3,947,548	$	2,027,660
Weighted average shares – basic		11,345,849		11,037,511
Earnings per share – basic		.35		.18
Weighted average shares – diluted		11,349,096		11,067,301
Earnings per share – diluted		.35		.18

Fair value of financial instruments:

The carrying amount reflected in the balance sheets for cash and cash equivalents, accounts receivable, and notes payable approximate the respective fair values due to the short maturities of those instruments.

Stock based Compensation:

On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments” (“SFAS No. 123R”). Prior to 2006 the Company had not issued any employee stock options and , therefore, had not adopted any policy for accounting for them.  Accordingly, the adkoption of SFAS No. 123R was not an accounting change.

The outstanding stock options as of December 31, 2007 were all issued in 2006 and no stock options were issued in 2007. The fair value of the Company’s employee stock options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for all options granted:

		December 31, 2006
		Range	Average
Weighted	Expected volatility	59.67 - 78.4%	59.98%
Average	Expected dividend yield	0.00%	0.00%
Assumptions	Expected life(term)	3.5 years	3.5 years
	Risk-free interest rate	4.71%	4.71%

46

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The risk-free interest rate is based upon the U.S. Treasury yield curve at the time of the grant. The expected life of options was determined by using the simplified method of Staff Accounting Bulletin 107. Expected volatility of stock was calculated using historical and implied volatilities. The company applied an estimated forfeiture rate of 22% to the options granted in 2006, there were no options granted in 2007. This rate was calculated based upon is an estimate of granted shares not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future period.

Concentrations of credit risk:

Financial instruments which potentially subject the Company to a concentration of credit risk are cash and accounts receivable. The Company maintains its bank accounts at three financial institutions and in a money market fund. At times, bank balances exceed insured amounts. The Company has not experienced any losses as a result of this practice. The Company invests the majority of its available liquid assets in municipal bonds through accounts with investment bankers.

The Company’s accounts receivable are due from gaming establishments and gaming distributors. The Company does not require collateral to extend credit to their customers but perform ongoing credit evaluations of their customers’ financial condition. One customer made up 33%, and 34% of sales revenues in 2006 and 2007, respectively.  The loss of this customer, without replacing it, could have a significant impact on our revenues, earnings and cash flows.

Third-party assembler:

The Company depends on one third-party assembler for a majority of the subassemblies for the Company’s gaming systems. If this assembler were to cease doing business with the Company, a replacement assembler would need to be located. The Company believes that a number of other assemblers could be located to manufacturer the subassemblies for the Company’s gaming systems. However, the Company may not be able to substitute, or produce new gaming systems without interruption of the production line or a cost increase.

2. Property and equipment:

Property and equipment includes assets used in the daily operations of the Company and assets leased to the Company’s customers through operating leases. Rental Assets include player terminals and supporting equipment necessary to operate the system. Assets not yet place in service consists of equipment for additional revenue producing products and the capitalization of development costs capitalized pursuant to SFAS No. 86  related to our Mobile Gaming System. Property and equipment and rental assets and the related accumulated depreciation consist of the following:

	December 31,
	2007			2006
Furniture and fixtures	$	68,099		$	68,099
Machinery and equipment		392,191			325,117
Vehicles		100,905			86,698
Leasehold improvements		177,226			174,025
		738,421			653,939
Accumulated depreciation		(517,727	)		(435,736	)
		220,694			218,203
Rental assets		15,608,893			13,702,421
Accumulated depreciation		(10,879,113	)		(9,095,086	)
		4,729,780			4,607,335
Assets not yet placed in service		3,253,386			1,816,834
	$	8,203,860		$	6,642,372

47

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Marketable Securities:

The Company considers its marketable securities to be “available-for-sale,” as defined by Statement of Financial Accounting Standards No.115, “Accounting for Certain Investments in Debt and Equity Securities,” and, accordingly, unrealized holding gains and losses are excluded from operations and reported as a net amount in a separate component of stockholders’ equity. The following table summarizes the amortized cost basis, the aggregate fair value and gross unrealized holding gains and losses at December 31, 2006 and 2007:

	Amortized		Fair		Unrealized Holding
	Cost Basis		Value		Gains		(Losses)		Net
2006:
Maturities greater than five years:
Municipal Bonds (ARS)	$	22,975,000	$	22,975,000	$	----	$	----	$	----
2007:
Maturities greater than five years:
Municipal Bonds (ARS)	$	25,125,000	$	25,125,000	$	----	$	-----	$	-----

The Company computes the cost of its investments on a specific identification basis. Such cost includes the direct costs to acquire the securities, adjusted for the amortization of any discount or premium. The fair value of marketable securities has been estimated based on quoted market prices which is equal to their par value.

The auction process for ARS historically provided a liquid market for these securities. In the second half of 2007, however, this process began to deteriorate. During the first quarter of 2008, The Company began to reduce the principal amount of ARS in its portfolio. While its portfolio was not affected by the auction process deterioration in 2007, some of the ARS the Company holds experienced auction failures during the first quarter of 2008. As a result, when the Company attempted to liquidate them through auction, it was unable to do so. In the event of an auction failure, the interest rate on the security is reset according to the contractual terms in the underlying indenture. As of March 20, 2008, the Company has received all scheduled interest payments associated with these securities.

The funds associated with failed auctions will not be accessible until a successful auction occurs, the issuer calls or restructures the underlying security, the underlying security matures and is paid or a buyer outside the auction process emerges. The Company believes that the failed auctions experienced to date are not a result of the deterioration of the underlying credit quality of these securities, although valuation of them is subject to uncertainties that are difficult to predict, such as changes to credit ratings of the securities and/or the underlying assets supporting them, default rates applicable to the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company believes that any unrealized gain or loss associated with these securities will be temporary and will be recorded in accumulated other comprehensive income (loss) in its financial statements.

The credit and capital markets have continued to deteriorate in 2008. Continuation or acceleration of the current instability in these markets and/or deterioration in the ratings of the Company’s investments may affect its ability to liquidate these securities, and therefore may affect its financial condition, cash flows and earnings. The Company believes that based on its current cash and cash equivalents balances of $6.5 million at December 31, 2007, the current lack of liquidity in the credit and capital markets will not have a material impact on its liquidity, cash flows, financial flexibility or ability to fund its obligations.

               The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of its investments. If the current market conditions continue, in which some auctions for ARS fail, or the anticipated recovery in market values does not occur, the Company may be required to record unrealized losses or impairment charges in 2008. As auctions have closed successfully, the Company has converted its investments in ARS to money market funds. The Company believes it will have the ability to hold any auction rate securities for which auctions fail until the market recovers. It does not anticipate having to sell these securities in order to operate its business.

48

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

4.    Other assets:

Other assets include the cost and accumulated amortization of the non-compete agreement. Other assets also include a signing bonus the Company paid in accordance with the terms of a five year lease agreement to lease gaming devices to a customer. This signing bonus was paid to allow the lessee to prepare the location for the installation of our equipment. The signing bonus is being amortized over the initial lease period of 60 months, beginning in 2004 in the amount of $24,000 per year through 2007 and $8,000 for 2008.

If the lease, which expires in April 2008, is terminated prior to its expiration, a pro rata share of the payment will be returned to FortuNet.

	December 31,
	2007			2006
Non-compete agreement	$	1,290,417		$	1,290,417
Signing bonus		120,000			120,000
Other		46,307			44,723
Accumulated amortization		(1,402,417	)		(1,378,417	)
	$	54,307		$	76,723

 5.   Commitments and contingencies:

The Company  has an operating lease agreement for office space and production facility, which expires on December 31, 2010. The lease contains escalating rent payments. Minimum rental payments for the remainder of the term of the lease are as follows:

Year	Amount
2008	125,799
2009	129,577
2010	120,241
2011 and thereafter	--

Rent expense is recognized on a straight-line basis over the lease term. Rental expense was $135,413 and $145,764 in 2006 and 2007, respectively.

49

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

6.   Income taxes:

The income tax provisions consist of the following:

	2007		2006
Current:
Federal	$	1,287,143	$	802,606
State		211,637		143,445
Total current		1,498,780		946,051
Deferred:
Federal		49,050		(144,112	)
State		8,065		(25,756	)
Total deferred		57,115		(169,868	)
	$	1,555,895	$	776,183

The Company has revenues derived in Canada, but is not obligated to pay Canadian income tax per the Canada Exemption under the Canada-US Tax Convention whereby residents of the USA with no permanent establishment situated in Canada are only taxable in the USA.

The following are the principal components of deferred tax assets occurring as a result of transactions being reported in different years for financial and tax reporting:

	December 31,
	2007		2006
Deferred tax assets:
Allowance for doubtful accounts	$	12,544	$	13,059
Due to different tax and financial amortization lives		421,996		490,958
Inventories, principally due to capitalization for tax purposes		28,363		37,069
Property and equipment primarily due to differences in depreciation		358,458		369,753
Nondeductible accrued expenses		94,951		62,588
	$	916,312	$	973,427

Amounts recognized in the consolidated balance sheets consist of:

	December 31,
	2007		2006
Deferred tax asset:
Current	$	135,858	$	112,716
Long-term		780,454		860,711
	$	916,312	$	973,427

50

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

6.   Income taxes (continued):

Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

	Years ended December 31,
	2007			2006
Federal statutory tax rate		34.0	%	34.0	%
State income taxes, net of federal income tax benefit		4.2		4.2
Federal tax credit		----		(2.8
Municipal bond interest income		(6.9	)	(17.7
Basis difference for stock grants		0.6		7.8
Other		(2.2	)	2.2
Effective tax rate		29.7	%	27.7	%

As a result of the adoption of FIN 48, as amended by FIN 48-1, at the beginning of fiscal 2007we reclassified $102,000 to income tax payable (which would not significantly impact our effective tax rate if recognized). This liability for unrecognized tax benefits relates to state income taxes from prior years. At the end of 2007, $102,000 was our liability for unrecognized tax benefits, which included penalties and interest. If recognized, it would have a favorable impact on our tax expense. Our policy is to classify penalties and interest related to income tax uncertainties as income tax expense.

We operate in multiple tax jurisdictions within the United States of America and Canada and will have audits from various taxing authorities regarding the deductibility of certain expenses, state income tax nexus and other matters.

Although we do not believe that we are currently under examination in any of our major tax jurisdictions, we remain subject to examination in all of our tax jurisdictions until the applicable statues of limitation expire. As of December 31, 2007, a summary of the tax years that remain subject to examination in our major tax jurisdictions are:

United States – Federal	2004 and forward
United States – State	2002 and forward

Based on the expiration of the statutes of limitations and the conclusion of the tax examinations in several jurisdictions, we believe it is reasonably possible that the total amount of previously unrecognized tax benefits may decrease within twelve months of the reporting date.

7.   Research and development:

Research and development costs are primarily for costs of software and hardware development and continued enhancements for the electronic gaming systems that the Company leases to customers. Research and development costs relating principally to the design and development of products generating revenues are expensed as incurred. Hardware, tools and tooling that have an alternative future use, such as for manufacturing, are capitalized. Hand tools used in research and development, as well as special purpose fixtures are expensed when incurred. The total amount of research and development was $1,483,841 in 2006 and $1,494,724 in 2007. A portion of overall research and development costs totaling $835,378 and $961,575 were capitalized in 2006 and 2007, respectively in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.

8.   Retirement plan:

The Company sponsors a 401(k) plan in which employees may defer up to 15% of their earnings. The Company may make contributions at the discretion of the board of directors. The Company has made no contributions to the plan.

9.    Litigation:

The Company has settled a patent infringement lawsuit against Planet Bingo, LLC and its subsidiary, Melange Computer Services, Inc. in 2007, however terms of the settlement have not been finalized.

Currently, the Company is the plaintiff in a civil lawsuit in the United States Federal Court, District of Nevada under the federal Racketeer Influenced Corrupt Organization, or RICO, law against GameTech International Incorporated and its wholly owned subsidiary, GameTech Arizona Corporation.

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The Company believes that the final resolution of litigation, is not likely to have a material adverse effect on the Company’s business, cash flow, results of operations or financial position.

We received a one time collection payment on a prior legal settlement in the amount of $469,586 and is included in other income on the consolidated statements of income.

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

10.   Allowance for doubtful accounts:

	Balance at beginning of period		Additions charged to expenses		Other		Write-offs, net of collections		Balance at end of period
Allowance for doubtful accounts, deducted from accounts receivable, for the year ended December 31.
2006	$	34,366		--		--		--	$	34,366
2007	$	34,366		--		--		--		34,366

11.   Stock Based Compensation:

On October 21, 2005, the Company’s Board of Directors adopted two equity incentive plans, the 2005 Stock Incentive Plan and the 2005 Stock Incentive Plan for Independent Directors. The 2005 Stock Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, phantom stock rights, bonus stock and awards for employees or independent contractors. Participation in the 2005 Stock Incentive Plan for Independent Directors is limited to those individuals whom, on the date of issue of the award, are non-employee directors, as defined in Rule 16b-3 under the Securities Act. A total of 725,000 shares of common stock has been reserved for issuance under the 2005 Stock Incentive Plan and 100,000 shares has been reserved for issuance under the 2005 Stock Incentive Plan for Independent Directors.

The exercise price for each incentive stock option granted under the 2005 Stock Incentive Plan may not be less than 85% of the fair market value of the common stock on the date of the grant. The plans will terminate ten years after the date of its adoption, unless earlier terminated by the Board of Directors. Options have been granted during 2006 of 76,000 shares and no options granted in 2007. During 2006 and 2007, 15,000 and 11,000 options were forfeited, respectively, leaving a balance of 50,000 share options to purchase shares of our common stock

under these plans at December 31, 2007. All options granted in 2006 have a three year vesting period and a five year life. Option costs that were expensed were $82,632 and $85,853 and option cost capitalized $60,648 and $70,243 in 2006 and 2007, respectively.

On January 30, 2006, the Company issued 61,112 shares of restricted stock to two of its officers. On January 30, 2006, the Company issued 5,500 shares of restricted stock to independent members of the board of directors. All of these shares were vested at December 31, 2006. On March 3, 2007, the Company issued 10,000 shares of restricted stock to its’ independent members of the board of directors, 2,000 of these shares were forfeited by two members who were not re-elected to the Board of Directors. On May 9, 2007 2,667 shares were granted to a new board member, the 10,667 shares were vested at December 31, 2007.

Compensation cost for value related to restricted stock issued for the year ended December 31, 2006 and 2007, including costs referred to in Note 5, totaled $1,049,508 and 164,614, respectively. These expenses are included in general and administrative expenses.

A summary of the Company’s incentive stock option activity and related information for the years ended December 31, 2006 and 2007 is shown in the following table:

	Weighted Average					Aggregate
	Shares			Exercise Price		Intrinsic Value		Grant Date FV
Outstanding, January 1, 2006		-
Granted		76,000		$	15.44			$	7.53
Forfeited		(15,000	)	$	18.32			$	9.46
Exercised		-		$	-			$	-
Expired		-		$	-			$	-
Outstanding end of year, December 31, 2006		61,000		$	14.73	$	---	$	7.06
Vested		-		$	-			$	-
Non-vested		61,000		$	14.73	$	---	$	7.06
2007 Activity		-
Forfeited		(11,000	)	$	14.62			$	6.98
Outstanding end of year, December 31, 2007		50,000		$	14.73	$	---	$	7.06
Vested		16,667		$	14.73	$	---	$	7.06
Non-vested		33,333		$	14.73	$	---	$	7.06

52

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

At December 31, 2007, the range of exercise prices was $14.62 - $21.56 and the weighted-average remaining contractual life was 40 months.

As of December 31, 2007, the total compensation cost related to nonvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was $179,695. The cost will be amortized on a weighted average basis over the remaining vesting period of the stock options which was 27 months at December 31, 2007.

The aggregate intrinsic value represents the difference between the closing price of our common stock on December 31, 2007, which was $8.05, and the exercised price, multiplied by the number of stock options as of the same date. This represents the amount that would have been gain or lost by the stock option holders if they had all exercised their stock options on December 31, 2007, as the stock price was below the exercise price on December 31, 2007 and 2006 it is perceived that there would be no exercise and the aggregate intrinsic value is zero at each date. In future periods, this amount will change depending on fluctuations in our stock price.

12. Quarterly Financial Information (unaudited)

Summarized unaudited quarterly financial information for the years 2007 and 2006 are noted below:

	Year Ending December 31, 2007 (unaudited)
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Revenue	$	4,332,668	$	4,163,890	$	4,273,737	$	3,718,270
Gross Profit	$	3,785,132	$	3,532,418	$	3,686,346	$	3,028,112
Income from operations	$	1,032,150	$	999,403	$	1,287,518	$	625,637
Net Income	$	1,271,522	$	929,663	$	1,132,920	$	613,439
Net Income per share:	$	.11	$	.08	$	.10	$	.06

	Year Ending December 31, 2006 (unaudited)
	First		Second			Third		Fourth
	Quarter		Quarter			Quarter		Quarter
Revenue	$	3,978,783	$	3,994,553		$	4,075,618	$	4,411,508
Gross Profit	$	3,481,227	$	3,449,926		$	3,540,655	$	3,855,952
Income from operations	$	239,915	$	(192,879	)	$	668,695	$	1,203,025
Net Income	$	190,599	$	17,211		$	547,292	$	1,272,558
Net Income per share:	$	0.02	$	0.00		$	0.05	$	0.11

 The tax rate used during the first three quarters of 2006 was 40.5%. This rate was based on the effect of stock grants on income taxes. The actual effective tax rate on December 31, 2006 was 27.7%. This reduction in the effective tax rate was the result of the management’s decision to invest company’s liquid assets primarily into tax exempt municipal bonds yielding a 17.7% reduction in the effective tax rate. The credit to provisions for taxes in the fourth quarter increased quarterly earnings per share by $0.02 earnings.

53

13.   New accounting pronouncements:

SFAS 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In January 2008, the FASB deferred the effective date for one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is still evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 157 will have a material effect on its financial condition, results of operations or cash flows.

FORTUNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

13.   New accounting pronouncements (continued):

SFAS 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115.” Under SFAS No. 159, the Company may elect to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. The decision to measure items at fair value is made at specific election dates on an  irrevocable instrument-by-instrument basis and requires recognition of the changes in fair value in earnings and expensing upfront costs and fees associated with the item for which the fair value option is elected. Fair value instruments for which the fair value option has been elected and similar instruments measured using another measurement attribute are to be distinguished on the face of the statement of financial position. SFAS No. 159 is effective for financial statements beginning after November 15, 2007. The Company is still evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 159 will have a material effect on its financial condition, results of operations or cash flows.

SFAS 141R

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141R requires an acquirer to recognize the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is in the process of evaluating the impact of this standard; however, the Company does not expect the adoption of SFAS No. 141R will have a material effect on its financial condition, results of operations or cash flows.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements.  SFAS 160 recharacterizes minority interests as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity.  SFAS 160 is effective January 1, 2009 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.  The Company does not expect the adoption of SFAS No. 160 to have a material effect on its financial condition, results of operations or cash flows.

54

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We are required to maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our management, with the participation of our CEO and CFO, evaluated the design and operating effectiveness as of December 31, 2007 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act. Based on this evaluation our CEO and CFO concluded that, as of December 31, 2007, our disclosure controls and procedures were effective at the reasonable assurance level to enable the Company to record, process, summarize and report information required under the Securities and Exchange Commission’s rules in a timely fashion.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of an issuer’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Internal control over financial reporting includes policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer’s assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principals, and that an issuer’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.

As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our CEO and CFO, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2007. Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control over Financial Reporting —Guidance for Smaller Public Companies. Our assessment identified deficiencies that were determined to be significant deficiencies.

A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Because of the significant deficiencies described below, management concluded that our internal control over financial reporting was not effective as of December 31, 2007.

55

The specific significant deficiencies identified by management as of December 31, 2007 are described as follows:

• Ineffective controls related to staffing in finance and accounting: For the fiscal year ended December 31, 2007, our CFO prepared the financial statements, reconciled numerous accounts, prepared the tax accrual and the Form 10-K without review by another qualified person that has sufficient accounting knowledge, skills and understanding of the Company to detect errors and omissions.  Lack of review by an additional sufficiently knowledgeable person produces the potential for misstatement in the financial statements to occur and not be detected in a timely manner.  This deficiency could cause the financial statements and the underlying financial records to be misrepresented.  In addition it creates, the opportunity for possible irregularities, to exist and continue without detection in a timely basis.

• Ineffective controls related to accounting and access to cash receipts:  The control designed to ensure the timely and accurate receipt and deposit of cash for the fiscal year ended December 31, 2007 did not operate effectively as our CFO had the responsibility of opening the mail and delivering the cash receipts to the accountant to prepare for deposit.  Because the CFO had control over both the asset and accounting process, the failure to segregate both duties creates an opportunity for errors or misappropriation to occur undetected.

• Ineffective controls related to custody and authorization disbursements:  The control designed to ensure the timely and accurate disbursement of cash for the fiscal year ended December 31, 2007, did not operate effectively because the CFO had the ability to authorize and sign checks for disbursement.  Because the CFO had control over both the authorization and custodian duties related to our cash disbursements process, the failure to segregate both duties creates an opportunity for errors or misappropriation to occur undetected.

Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2007 and the significant deficiencies described above, we believe that the consolidated financial statements included in this Annual Report on Form 10-K correctly present in all material respects our financial position, results of operations and cash flows for the fiscal years covered therein.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to  temporary rules of the Securities Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

 Changes in Internal Controls Over Financial Reporting

We have not made any comprehensive changes in our internal controls over financial reporting as a result of our evaluation of our disclosure controls and procedures as of December 31, 2007.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding our executive officers and directors required by this Item is incorporated by reference to the section entitled “Proposal One — Election of Directors” in the Company’s Definitive Proxy Statement in connection with the 2008 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2007. Information required by Item 405 of Regulation S-K is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information required by 10A-3(d) of the Exchange Act is incorporated by reference to the section entitled “Board and Corporate Governance Matters” in the Proxy Statement.

We have adopted a Code of Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics is available in print to any stockholder upon request. Requests for a copy of our Code of Ethics may be may be made by contacting us at our corporate offices. We may revise these policies from time to time. If we grant any waiver from a provision of the Code of Ethics to our Chief Executive Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver on a Current Report on Form 8-K will be filed within 4 business days of the amendment or waiver.

We have filed, as an exhibit to this Annual Report on Form 10-K, the certification required by Section 302 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under regarding the quality of our public disclosure.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference to the section entitled “Executive Compensation” in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information regarding compensation plans and arrangements under which shares of the Company’s common stock may be issued, including compensation plans that were approved by the Company’s stockholders as well as compensation plans that were not approved by the Company’s stockholders. Information in the table is as of December 31, 2007.

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted- average Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders(1)	51,000	$14.73	697,721
Equity compensation plans not approved by stockholders	—	—	—
Total / Weighted Ave. / Total	51,000	$14.73	697,721

     (1) Represents 51,000 shares of the Company’s common stock issuable upon exercise of options outstanding under the Company’s 2005 Stock Incentive Plan.

57

We have two equity compensation plans: our 2005 Stock Incentive Plan and our 2005 Stock Incentive Plan for Independent Directors. A total of  725,000 shares of our common stock has been reserved for issuance under the 2005 Stock Incentive Plan and 100,000 shares have been reserved for issuance under the 2005 Stock Incentive Plan for Independent Directors. As of December 31, 2007, 61,112 shares of our common stock had been issued under our 2005 Stock Incentive Plan and 16,167 shares of our common stock had been issued under our 2005 Stock Incentive Plan for Independent Directors.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this Item is incorporated by reference to the sections entitled “Transactions with Related Persons” and “Director Independence” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated by reference to the sections entitled “Audit and Non-Audit Fees” and “Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” in the Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1.	Financial Statements
	Report of Schechter Dokken Kanter Andrews & Selcer Ltd., Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of December 31, 2007 and 2006
	Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2007
	Consolidated Statement of Stockholder’s Equity (Deficiency) for the three years ended December 31, 2007
	Consolidated Statements of Cash Flows for the three years ended December 31, 2007
	Notes to Consolidated Financial Statements
2.	Financial Statement Schedules
	All schedules have been omitted as they are either not required or not applicable or the required information is included in the consolidated financial statements or notes thereto.
3.	See Item 15(b)

(b) Exhibits:

58

Number		Description
3	.1	Amended and Restated Articles of Incorporation of FortuNet, Inc.(2)
3	.2	Amended and Restated Bylaws of FortuNet, Inc.(3)
4	.1	Form of Certificate Representing Common Stock, $.001 Par Value Per Share, of FortuNet, Inc.(2)
*10	.1	Exempt Employment Agreement between FortuNet, Inc. and Jack B. Coronel, dated as of September 9, 2002(1)
*10	.2	Amendment No. 1 to Exempt Employment Agreement between FortuNet, Inc. and Jack B. Coronel, dated as of September 9, 2002(1)
*10	.3	Exempt Employment Agreement between FortuNet, Inc. and William R. Jacques, Jr., dated as of January 10, 2005(1)
*10	.4	FortuNet, Inc. 2005 Stock Incentive Plan(2)
*10	.5	FortuNet, Inc. 2005 Stock Option Plan for Independent Directors(2)
10	.6	Standard Industrial/ Commercial Multi-Tenant Lease between FortuNet, Inc. and FKC Highland LLC, dated as of May 15, 2005(1)
10	.7	Capital Markets Consulting Agreement between FortuNet, Inc. and Spiegel Partners, LLC, dated as of July 5, 2005(1)
10	.8	Equipment Lease Agreement between K&B Sales, Inc., d/b/a Goodtime Bingo, and FortuNet, Inc., dated as of January 4, 1999(1)
*10	.9	Form of Stock Grant - FortuNet, Inc. 2005 Stock Incentive Plan (4)
*10	.10	Form of Stock Grant - FortuNet, Inc. 2005 Stock Incentive Plan for Independent Directors (4)
*10	.11	Letter from FortuNet, Inc. to Merle Berman dated January 20, 2006 regarding director compensation (4)
*10	.12	Letter from FortuNet, Inc. to Harlan W. Goodson dated January 20, 2006 regarding director compensation (4)
10	.13	Amendment to Capital Markets Consulting Agreement Between FortuNet, Inc. and Spiegel Partners, LLC dated as of January 30, 2006
*10	.14	Amendment No.3 to Exempt Employment Agreement between FortuNet, Inc. and Jack B. Coronel, dated as of April 1, 2007 (5)
*10	.15	Amendment No. 1 to Exempt Employment Agreement between FortuNet, Inc. and William R. Jacques, dated as of April 1, 2007 (5)
*10	.16	Exempt Employment Agreement between FortuNet, Inc and Kevin A. Karo, dated as of October 15, 2007(6)
*10	.17	Amendment No.1 to FortuNet, Inc. Exempt Employment Agreement, by and between FortuNet, Inc. and Kevin A. Karo, dated as of December 3, 2007(6)
21	.1	Subsidiaries of FortuNet, Inc.(1)
23	.1	Consent of Schechter Dokken Kanter Andrews & Selcer Ltd.
24	.1	Powers of Attorney (included on signature page hereto)
31	.1	Certification of Yuri Itkis, Chairman of the Board of Directors and Chief Executive Officer of FortuNet, Inc. dated March 21, 2008 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of Kevin A. Karo, Chief Financial Officer of FortuNet, Inc. dated March 21 2008 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Yuri Itkis, Chairman of the Board of Directors and Chief Executive Officer of FortuNet, Inc. dated March 21, 2008 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of Kevin A. Karo, Chief Financial Officer of FortuNet, Inc. dated March 21, 2008 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the Company’s Registration Statement filed on Form S-1 (File No. 333-128391) filed with the Commission on September 16, 2005.
(2)	Incorporated by reference to Amendment No.1 of the Company’s Registration Statement filed on Form S-1 (File No. 333-128391) filed with the Commission on October 27, 2005.

(3)	Incorporated by reference to Amendment No.3 of the Company’s Registration Statement filed on Form S-1 (File No. 333-128391) filed with the Commission on November 21, 2005.
(4)	Incorporated by reference to Amendment No.5 of the Company’s Registration Statement filed on Form S-1 (File No. 333-128391) filed with the Commission on January 24, 2006.
(5)	Incorporated by Reference to Form 8-K filed with the Commission on April 1, 2007.
(6)	Incorporated by Reference to Form 8-K filed with the Commission on December 6, 2007.

* Management contracts or compensatory plans or arrangements.

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SIGNATURES

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

FortuNet, Inc.
By	/s/ Yuri Itkis
	Yuri Itkis, Chief Executive Officer and
	Chairman of the Board
By	/s/ Kevin A. Karo
	Kevin A. Karo, Chief Financial Officer

Date: March 25, 2008

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POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yuri Itkis, Boris Itkis and Kevin A. Karo, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution fro him in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting onto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully and to all intent and purposes as he might or could do in person hereby ratifying and confirming all that such attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/ Yuri Itkis	Chief Executive Officer and Chairman of the Board	March 25, 2008
Yuri Itkis
/s/ Boris Itkis	Director, Director of Engineering and Chief Technical Officer	March 25, 2008
Boris Itkis
/s/ Merle Berman	Director	March 25, 2008
Merle Berman
/s/ Harlan W. Goodson	Director	March 25, 2008
Harlan W. Goodson
/s/ Darrel Johnson	Director	March 25, 2008
Darrel Johnson

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